DailyTimes | Islamic finance  

Islamic finance  

Islamic finance   

In recently released guidelines from the IMF headquarters in Washington, the lending agency has iterated the need for establishing a policy framework and environment to promote financial stability and sound development of Islamic banking. The guidelines noted that it is especially important to develop such a framework in the countries where Islamic banking has become systemically important. In its first executive discussion on the Islamic banking, the IMF noted Islamic banking continues to grow rapidly, in size and complexity, contributing to financial deepening and inclusion in many countries but this growth also poses a challenge to supervisory authorities and central banks.

While accounting for a small share of global financial assets, Islamic banking has established a presence in more than 60 countries and has become systemically important in 14 jurisdictions. Islamic banking involves operations, balance sheet structures, and risks that differ from their conventional banking counterparts. The IMF executive directors concurred that Islamic banking presents an opportunity for many member countries to enhance financial intermediation and inclusion and mobilise funding for economic development.

Although Pakistan finished the International Monterey Fund’s (IMF) loan programme last year, there are still numerous reforms that need to be undertaken to improve the economy of Pakistan. Other than asking Pakistan to privatise the loss-making public entities as well as governance reforms, the financial inclusion has also been one of the major recommendations of the global lender.

Pakistan has been trying to increase the financial inclusion of people, which is a major step in documenting the economy. A major hindrance towards the adoption of the system has been the interest based system. For that purpose, the Islamic banking is an excellent alternative and government should make efforts its adoption. In recent years, the State Bank of Pakistan (SBP) has made efforts for the promotion of Islamic banking, but no real effort has been made by the private sector and the government. The growth of Islamic banking and its complexities pose new challenges and unique risks for regulatory and supervisory authorities. Against this background, IMF has proposed support for staff’s proposed approach to developing and providing policy advice on Islamic banking-related issues in the context of fund surveillance, programme design, and capacity development activities.

The IMF has the necessary experience for the promotion of Islamic finance and both SBP and IMF should work together for this purpose as the agency has been providing technical advice to member countries on Islamic banking issues for the past 20 years and has been cooperating with relevant standards setters and international organisations on efforts to develop supplementary standards for Islamic banking in areas that are not covered by existing international standards. *