State Bank urges Islamic banks to diversify investment portfolios

Banking and Finance

KARACHI: The State Bank of Pakistan (SBP) has stressed upon the Islamic banks to diversify their investment portfolios by enhancing financing to Small and Medium Enterprises (SMEs), agriculture, housing finance and microfinance sectors of the economy.

Addressing as the chief guest at a two-day first World Islamic Finance Summit 2011 on Wednesday, SBP Deputy Governor Muhammad Kamran Shahzad said that Islamic banks cannot only increase their depth and breadth, but also contribute to higher financial inclusion levels in the country by targeting these underserved sectors of the economy.

The business model of the current paradigm of Islamic banking industry both at domestic and international levels has a relatively lower mix of participatory modes such as Musharka and Mudaraba, he said.

“Moving closer to these modes will help the Islamic banking industry to bring in their fold clientele such as SMEs that have been ignored by conventional finance industry because of its relatively high risk perception,” he added.

The deputy governor said with concern that the overall financing by Islamic banking industry in agriculture remains below three percent. “A country such as Pakistan where agriculture has the highest contribution in domestic production, Islamic banks can increase their market share by reaching out to this sector,” he said.

Shehzad said that to encourage the industry and to venture into participatory modes of financing, the central bank has constituted a task force having representation of Islamic banks, business community, academia and accounting professionals to develop an incentive framework for promotion of such products.

“This framework will be aimed at encouraging Islamic banks to offer participatory modes, while minimising the issues of moral hazard, adverse selection, information asymmetries and trust deficit between the Islamic banking institutions and entrepreneurs,” he said.

Highlighting the SBP’s role in promoting Islamic banking in the country, Shehzad said that the central bank had issued model agreements for encouraging standardisation within the industry and in order to ensure that this does not undermine the element of innovation, banks are allowed flexibility in developing products.

In Pakistan the sector has witnessed strong growth during the last decade and now constitutes around 7.5 percent of the country’s banking system with an asset base of nearly Rs560 billion and a network of around 800 branches of both full-fledged Islamic banks and conventional banks having Islamic banking branches, he said.

Former justice Muhammad Taqi Usmani, Vice President, Jamia Darul Uloom, appreciated the growth rate of the Islamic banking in the country.

He, however, said that some basic principles were ignored, while developing Islamic financial institutions.

Changes are required to implement true Islamic banking, which included money, finance and concept of trade and sale, he said.

Justice Usmani said that currency trading is the main cause of recent global economic crisis. He differentiated between currency and commodity trades. He also highlighted the concept of trade and said short selling is against the concept of trade.

Earlier, Syed Shahjahan Salahuddin, Managing Director, Conferences and New Initiatives, Publicitas Pvt Limited, welcomed the participants and said that the conference was aimed at providing a forum for the government and the private sector organisations to promote opportunities for investment in Islamic financial instruments and gain greater understanding of the challenges being faced by both the sectors.

Nisar A Memon, former federal information minister and Sirajuddin Aziz, Chief Executive Officer, Bank Alfalah Limited, also deliberated on the subject.

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