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Introduction of Facilitator
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Issues / Challenges facing
Islamic banking industry
Today, more than 500 Islamic Financial
Institutions are operating throughout the
world. Western banks are also doing Islamic
banking, through their Islamic Units in U.K,
Germany, Switzerland, Luxembourg and
other countries. The industry is growing at a
rate of roughly 15 percent per year, and
could serve 40 to 50 percent of the world's
Muslim population within a decade.
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Islamic Finance is the outcome of CSR derived
from religion and applied to banking
Accountability to
God
Ethical profits
“More-than-profit”
mentality
(rather than
“profits-at-anycosts”)
Business ethics
Shari`a “code of ethics”
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In all, the Islamic finance industry is
developing a global reach…
Growth Engine
Awakening
Ripe for
Growth
Future Markets
Source: Standard and Poor’s “The Globalization of Islamic
Finance”
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The development of the Islamic finance industry has
been fuelled by pioneering institutions and industry
building organizations
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Growth and drive is being led by
customer demand
Government driven
Sudan
Iran
 Islamic Finance was not
established by a royal
decree or a presidential
announcement, but it
was the will of the
people which created
Malaysia
Bahrain
Pakistan
Brunei
UK
Singapore
USA
Japan
China
Kuwait UAE
Bangladesh
Qatar
Sri Lanka
Indonesia
Egypt Turkey
Source: Central Bank, Reports, industry estimates
Saudi Arabia
the industry.
 Growth in the GCC
Islamic banking
markets are primarily
driven by customer
demand
 Malaysia presents a near
ideal regulatory and
market-driven model
for Islamic business
Key: Bubbles indicate illustrative size of Islamic banking
assets
Market driven
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THE NEED FOR INTERNATIONAL FINANCIAL
REFORM
 INTERNATIONAL FINANCIAL CRISES
 HOW TO PREVENT SUCH CRISES FROM
TAKING PLACE IN THE FUTURE?
 CALL FOR A “NEW ARCHITECTURE” FOR THE
FINANCIAL SYSTEM
 BASLE COMMITTEE ON BANKING
SUPERVISION (BCBS)
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Islamic Banking Risk
 Does Islamic banking risk differ from
Conventional banking risk?
 Not different - just a very special case
 Trade credit ?
 Asset backed Secured or unsecured ?
 Debt or equity ?
 Leasing / Ijara
 Repos / Murabaha ?
 Fund management ?
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THE 1988 BASLE CAPITAL ACCORD
 BCBS,
INTERNATIONAL
CONVERGENCE
OF
CAPITAL
MEASUREMENT AND CAPITAL STANDARDS (1988)
 A SIMPLE STANDARDIZED APPROACH FOR ESTABLISHING
MINIMUM CAPITAL REQUIREMENTS – BANKS TO MAINTAIN
CAPITAL ON THE BASIS OF FIVE CLASSES OF BORROWERS
(0%, 10%, 20%, 50% AND 100%)
 DID NOT DISTINGUISH BETWEEN THE RELATIVE DEGREES
OF CREDITWORTHINESS AMONG INDIVIDUAL BORROWERS
 APPLIED INITIALLY TO INTERNATIONALLY ACTIVE BANKS IN
THE G10 COUNTRIES
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BASLE II - 1996
 GREATER FOCUS ON RISK
MEASUREMENT AND CONTROL
 THE “THREE PILLARS”
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BASLE II (1)
“PILLAR 1”: CAPITAL ADEQUACY
 RISK
ADJUSTED CAPITAL
REQUIREMENTS
 THREE
OPTIONS
EXTERNAL-RATINGS
BASED
INTERNAL-RATINGS
BASED
MODELS-BASED
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BASLE II (2)
“PILLAR 2”: SUPERVISORY REVIEW
TO EVALUATE THE RISK PROFILES OF
INDIVIDUAL BANKS
SPECIFY THE NEED FOR REMEDIAL
MEASURES
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BASLE II (3)
“PILLAR 3”: MARKET DISCIPLINE
 ENHANCING
THE
TRANSPARENCY
REPORTING
IN
DEGREE
BANKS’
OF
PUBLIC
AND THE DISCLOSURES
THEY MUST MAKE TO LEND GREATER
INSIGHT INTO THE ADEQUACY OF THEIR
CAPITALIZATION
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THE CORE PRINCIPLES (1997)
BCBS, CORE PRINCIPLES FOR
EFFECTIVE BANKING SUPERVISION
(1997)
SETS OUT 25 BASIC PRINCIPLES THAT
ARE REQUIRED FOR AN EFFECTIVE
SUPERVISORY SYSTEM
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THE CORE PRINCIPLES (1)
PRINCIPLES 1-5 : LICENSING AND STRUCTURE
PRINCIPLES6-15: PRUDENTIAL REGULATIONS
AND REQUIREMENTS
PRINCIPLES 16-20: METHODS OF ONGOING
BANKING SUPERVISION
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REGULATION AND SUPERVISION OF
ISLAMIC FINANCIAL INSTITUTIONS (1)
 TWO RESPONSIBILITIES:
TO
APPLY
THE
INTERNATIONAL
STANDARDS
TO COMPLY WITH THE SHARI‘AH
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ISSUES INVOLVED
CAPITAL ADEQUACY
EVALUATION AND CONTROL OF RISKS IN
THE DIFFERENT ISLAMIC MODES OF
FINANCE:

CREDIT RISK, MARKET RISK, LIQUIDITY RISK,
INTEREST RATE RISK AND OPERATIONAL RISK

MUDARABAH,
MUSHARAKAH,
MURABAHAH,
SALAM, IJARAH, AND ISTISNA‘
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ACCOUNTING STANDARDS
INTERNAL CONTROLS AND EXTERNAL
AUDIT
GREATER TRANSPARENCY
DEPOSIT INSURANCE
SHARI‘AH AUDIT
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 SHORT‐TERM LIQUIDITY MANAGEMENT
 REGULATORY AND TAX REFORMS
STAMP DUTIES
II. TAX INCENTIVES FOR INVESTORS
III. REGULATORY RESERVES AND CAPITAL
REQUIREMENTS
 HUMAN CAPITAL
 INVESTMENT AVENUES
 STANDARDIZATION OF CONTRACTS
 PERCEPTION OF USERS
 BENCHMARK
I.
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 Dedicated R & D efforts to develop viable short term
liquidity products for the industry
 Dedicated learning centers at University level to train
and develop competent workforce and Shariah
Scholars
 Collective mass awareness campaign by Islamic banks
 State Bank should take measures for uniformity of
Islamic banking contracts and products
 Dedicated research and product development teams
should be developed at all Islamic Financial
Institutions.
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Conclusion
Islamic banking risk issues
 Liquidity – under developed money market
 Interest rate Risk
 Commodity Risk
 Communication Risk
 Equity risk – fund management or banking?
 Operational risk
 Religious – Hallal or Haram?
 Language Risk - English, Arabic, Malay or Urdu
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SBP “Strategic Plan for- Islamic Banking
Industry of Pakistan 2014 – 2018”
To augment the existing growth momentum and to lead
the industry to the higher level of professionalism
The plan focuses on initiatives necessary for improving
public perception of Islamic banking
Promoting it as a distinct and viable system to address
the financial services need of the public in general and
business community in particular
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FOCUS ON KEY AREAS
• Enabling
Policy
Environment
• Shariah
Governance
&
Compliance
• Awareness
and
Capacity
Building
• Market
Development
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Legal
Liquidity
management
framework
Regulatory
Taxation regime
Supervisory
Financial
accounting &
reporting
framework
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B. SHARIAH GOVERNANCE & COMPLIANCE
 The focus in this area will remain on
standardization and harmonization of Shariah
practices, as well as on creating distinct Islamic
banking products and services.
C. AWARENESS & CAPACITY BUILDING
 Efforts will be made for coordination and
collaboration amongst internal and external
stakeholders, enhancing awareness about Islamic
finance, and building capacity of the stakeholders
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D. MARKET DEVELOPMENT
Initiatives will be undertaken for
product diversification and financial
inclusion with the collaboration of
stakeholders.
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A. ENABLING POLICY ENVIRONMENT
Legal Framework
 Separate chapter in Banking Company Ordinance(BCO)
1962
 Necessary changes in SBP Act 1956
 Recovery of Finance Ordinance 2001
 Microfinance Institutions Ordinance 2001
 Engagement in Real trade Real Estate Commodities
 Investment banking Business
 Act as Modarba Management Company
 Reaching on consenses of necessary initiation in Legal
and Regulatory Frame work during next 5 years.
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Alternate Dispute Resolution
mechanism
 By devising customized dispute resolution mechanism
 Regulations and Guidelines
 Prudential Standards
 Guidelines for Development Finance Institutions (DFIs)
 Rationalization of Minimum Capital Requirement
(MCR)
 On-site Inspection Manual
 Liquidity Management Framework
 Tax Neutrality
 Financial Accounting & Reporting
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SHARIAH GOVERNANCE &
COMPLIANCE
 Adoption of Accounting & Auditing Organisation
for Islamic Financial Institutions (AAOIFI)
Shariah Standards
 Issuance of Comprehensive Shariah
Governance Framework
 Product Standardization and Harmonization
 Guidelines for Treasury Operations/Products
of IBIs
 Restricted use of “Agency”, “Hiba” & “Waad”
in Islamic Banking Transactions
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AWARENESS AND CAPACITY
BUILDING
Coordination and Collaboration amongst Stakeholders
 Building of stakeholders, to make Islamic banking industry distinct and acceptable by
masses, following initiatives are identified as major components of Strategic Plan.
 Given the evolving nature of Islamic finance and multi-faced issues faced by the
industry, effective collaboration and co-operation mechanism amongst all the key
stakeholders is critically important for sustaining the growth momentum. The plan thus
envisages constitution of an Islamic Banking and Finance Consultative Group (IBFCG)
under the lead of SBP with representation of IBIs, Securities & Exchange Commission of
Pakistan (SECP), Institute of Chartered Accountants of Pakistan (ICAP), etc. This group
will be responsible for developing and implementing strategies for development of
Islamic Banking & Finance in the country.
 Moreover, for the sustainable growth of Islamic Banking and Financial Industry, an
active and efficient Islamic capital market and Takaful industry are essential
components. The joint forum of SBP and SECP on Islamic banking and finance will be
actively utilized for collaboration between the two financial sector regulators to
synergize their efforts for facilitating development of the industry on sound footings.
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 Similarly the cooperation and collaboration with
International Islamic Infrastructure Institutions like Islamic
Financial Services Board (IFSB), IIFM, AAOIFI, and Islamic
Research and Training Institute (IRTI) will be strengthened
for improving the policy and business environment and
capacity building of the industry.
 Further, being an important and active player of global
Islamic finance having ample technical expertise and
resources in this field, technical and intellectual assistance
will be extended to the countries who are new entrants into
Islamic banking & finance. SBP in collaboration with NIBAF
will also design and offer customized training programs for
international participants from central and Islamic banks of
other countries, especially GCC and Central Asian countries.
Efforts will also be made to market NIBAF’s Islamic Banking
Certification Course (IBCC) as an internationally recognized
certification for Islamic banking professionals.
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MARKET DEVELOPMENT
 Product Diversification
 Financial Inclusion
 Agriculture Financing
 Small and Medium Enterprises (SMEs) Financing
 Low Income Housing
 Islamic Microfinance (MF)
 Refinance Schemes
 Market Share
 Alternate Delivery Channels (ADC)
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Way Forward
Enabling Policy Environment
Legal, Regulatory and Supervisory Framework
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Liquidity Management Framework
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Taxation Regime
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Financial Accounting and
Reporting Framework
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Shariah Governance and
Compliance
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Awareness and Capacity
Building
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Awareness Enhancement
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Capacity Building
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Market Development
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