Islamic bankers to diversify operations in Pakistan

Karachi: Islamic bankers globally will undertake a major diversification of their operations in order to expand and fulfil credit demand for a diversity of requirements. This was outcome of World Islamic Finance Summit 2011 held in Karachi and addressed by number of Islamic and conventional bankers from the region, Islamic states, scholars.

There was consensus that years of experience in operating Islamic banking, use of financial instruments and various modes have matured the system enough. Operations should now diversify to various fields to gain a speedy momentum, as demand from this system is growing fast.

“Islamic banks should now diversify their investment portfolios by enhancing financing to small and medium enterprises, farming, housing, and microfinance sectors,” Muhammad Kamran Shahzad, Deputy Governor State Bank of Pakistan SBP said. “Islamic banks should not only increase their depth and breadth, but also contribute to higher financial inclusion level by targeting these under-served sectors of economy.”

Summit feeling was business model of current paradigm of Islamic banking institutions, both in international and domestic areas, has “a relatively lower mix of participatory modes-including Mushaika & Modaraba. “Moving closer to these modes will help Islamic banking industry to bring into their fold clientele including small and medium enterprises. These have been ignored by conventional banks because of its relatively high risk perception,” Shahzad said.

Islamic financing funding to farming sector is below three percent of their entire operations. Countries, like Pakistan, where farming has biggest contribution to domestic production and GDP, Islamic banks can expand their market share by moving more actively into this sector.

SBP is working on diversification and broadening funding operations of Islamic modes. It set up a task force to encourage Islamic banking industry to move into participatory modes of financing. It includes all stakeholders, Islamic bankers, business community, scholars, accounting professionals. It is mandated to develop incentives package and framework to promote such products. Other objectives are to reduce issues if moral hazards, adverse selection, information asymmetries, trust deficit between Islamic banking institutions and entrepreneurs.”

SBP has prepared and circulated “model agreements” to encourage standardization within banking industry. Model agreements do not undermine element of innovation and banks are permitted enough flexibility in developing their individual products and instruments.

Over the last decade Islamic banking has grown to 7.5 per cent of Pakistan’s banking system. It has an asset base of close to Rs 560 billion, has 800 fully-fledged Islamic bank branches, and Islamic branches, operated by conventional banks.

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