Turkey is on track to becoming the next hub for Islamic banking and finance. Given the Ottoman legacy, the last seat of the Islamic viceregency, the government of Turkey was only required to show its commitment to Islamic finance before other players in the industry were going to join her in building a vibrant Islamic banking and finance industry.
The recent successful dollar-denominated $1.5 billion sovereign Sukuk issue, followed by a lira-denominated $900 million sovereign Sukuk have put the country on the global platform of Islamic banking and finance. It is expected that many Middle Eastern Islamic banks and financial institutions will enter the Turkish market in the future.
Kuwait Finance House (KFH) entered Turkey in 1989 well before an explicit commitment came from the then government that had been rather hostile towards any non-secular developments. It preceded KFH’s move into other markets like Malaysia, Bahrain and Jordan over several years.
Despite personal encouragement by then governor of State Bank of Pakistan (SBP), Dr Ishrat Husain, KFH did not enter the Pakistan market and remains reluctant. On the other hand, Albaraka Bank set up a participation bank (a Turkish term used to describe Islamic banks) in 1984, well before it entered the Pakistani market in 1991.
It will not be surprising if Turkey starts posing competitive threats to Pakistan, in terms of becoming a destination of preference for many Middle Eastern investors who currently invest in Pakistan and Malaysia, as for many institutions in the Middle East it makes more logistic sense to do business in Turkey rather than travelling to the Far East.
Pakistan presents the most Shariah authentic model of Islamic banking in the world. Being a predominantly Hanafi – a stricter school of Islamic jurisprudence in matters related to business and finance – country, Turkey can also achieve the kind of Shariah authenticity that Malaysia has yet to develop, if she attempts to learn from the Shariah governance regime developed by the SBP. Hence, a Turkey-Pakistan alliance will not only help to promote Islamic banking in Turkey, but is also expected to bring a new juristic approach to product development and structuring.
It is important for Pakistan to show more commitment to Islamic banking and finance and use it as a strategic tool to seek help from Turkey in order to raise funding for a number of infrastructural projects that need external financing. Through adopting a leadership role in Islamic banking and finance, Pakistan can regain its lost standing in the Organisation of Islamic Cooperation (OIC) block. A number of OIC-level projects came to Pakistan, eg International Islamic Chamber of Commerce and Industry, which either failed or moved to other countries because of lack of support and commitment from the government.
It is now a good opportunity for Pakistan to strike a deal with Turkey to share her expertise in the field of Islamic banking and finance. While the likes of Malaysia have invested millions of dollars to set up institutions like INCEIF to develop required human resources for Islamic banking, Pakistan can develop a state-of-the-art centre of excellence for Islamic finance by investing a small amount in Darul Uloom Karachi, developing it into a teaching and research university specialising in Islamic banking and finance.
If Turkey can play a role in this project, it would be a fantastic way of starting an everlasting collaboration in Islamic banking and finance between the two countries.
The Darul Uloom model of education is certainly more cost effective as compared with INCEIF, which has a huge annual budget. Close cooperation between Pakistan and Turkey can prove to be an efficient way of producing talent for the global Islamic financial services industry if right channels are created and maintained between respective parties.
THE WRITER IS AN ECONOMIST AND A PHD FROM CAMBRIDGE UNIVERSITY
Published in The Express Tribune, October 15th, 2012.