State Bank of Pakistan (SBP) Deputy Governor Yaseen Anwar has said there is a dearth of Shariah-compliant hedging products for mitigating risks arising out of genuine business transactions which put Islamic banking institutions (IBIs) at a disadvantage compared to their conventional counterparts.
Inaugurating a workshop on ‘Hedging in Islamic finance and master hedging agreement’, organised by International Islamic Financial Market (IIFM) in collaboration with SBP here on Thursday, Anwar stressed the need for developing a robust risk management infrastructure in the Islamic banking industry which would enable both Islamic banks and their clients to mitigate genuine business risks.
He, however, said conventional banks had access to a variety of sophisticated risk management and hedging instruments.
Describing the pace of growth and development of the Islamic banking industry as encouraging, he said at present it constituted over seven per cent of the country’s banking system. Given the healthy growth for the past several years, the enabling regulatory and Shariah compliance framework, the growing human resource capacity of IBIs and increasing awareness of Islamic banking among people, the share of the industry was likely to increase manifold in the future, he added.
However, he said, “the industry still faces numerous challenges, including development of a robust risk management infrastructure. Moreover, the absence of standardised documentation invariably results in significantly higher transaction costs.”
He said hedging instruments should cover genuine risks arising due to real business and economic transactions and should in no way allow transactions for speculative motives.
Published in The Express Tribune, June 24th, 2011.