Making Pakistan a centre of excellence for Islamic finance

Given the growth of Islamic banking, Pakistan should develop an international centre of excellence for Islamic finance


Dr Humayon Dar July 28, 2014

Before the financial crisis ensued in 2007, there was an explosion of interest from a number of countries in becoming hubs for Islamic finance. These countries included Malaysia, Singapore and Hong Kong in the East; United Kingdom, France, Italy, Luxembourg and Ireland in the West; and Bahrain, Qatar and the UAE in the Middle East. Even countries like Japan and South Korea showed serious interest in Islamic finance in those pre-crisis days. Many of these countries, however, went cold on their claims during the financial crisis, leaving Malaysia as the most important global player in Islamic banking and finance (IBF).

Malaysia’s global leadership role is now once again being challenged by the likes of the UAE and Qatar, where the governments are actively supporting the promotion of the IBF. According to the Islamic Finance Country Index (IFCI), published annually by Edbiz Consulting, Iran ranks number one in the global Islamic financial services industry. Malaysia and Saudi Arabia are second and third. Pakistan ranks ninth on the list. The current PML-N led government is the first democratically-elected government in the country which seems serious about promoting the IBF in Pakistan. The appointment of a dedicated deputy governor at the State Bank of Pakistan (SBP), with a focus on promotion of Islamic banking alludes to this fact. Apart from the developments at the central bank, advocacy of the IBF in Pakistan remains rather limited. The SBP has recently initiated a project to promote quality education in the IBF, by committing to invest in Pakistani universities and institutions of higher learning and develop them into centres of excellence.

In Malaysia, the prime minister himself keeps himself abreast of with new developments in the IBF. In the UAE, the ruler of Dubai is directly behind its initiative of making Dubai a centre of excellence for the global Islamic economy. In Pakistan, such a central leadership role has yet to emerge. Given the ongoing military operation in North Waziristan, political noise created by the likes of Imran Khan and Tahirul Qadri, and numerous other important engagements, the prime minister has not been able to embrace IBF fully. The finance minister also has a full plate and so has the secretary of finance. In such circumstances, there is a need that a full-time advisor be appointed to the prime minister, who should have multiple roles, including but not limited to, advocacy of IBF in Pakistan and overseas, liaison between different government departments (Ministry of Finance, Planning Commission, and SBP, etc) and international bodies like Islamic Financial Services Board and Accounting and Auditing Organisation of Islamic Financial Institutions for the promotion and development of IBF in the country, devising a national strategy on promotion of the IBF, developing a framework for enhancing the role of Pakistan as a global leader in the IBF and more specifically, preparing recommendations for the government to create a centre of excellence for the IBF in Pakistan.

It is absolutely imperative for Pakistan to work towards a leadership role in the global Islamic financial services industry to fully benefit from an industry that is fast approaching the important psychological mark of $2 trillion under management worldwide. This can be done by advocating the IBF nationally and by being involved in the decision-making of international forums related to Islamic finance. It should also look into hosting an international body related to Islamic finance. There are a number of other bodies that work for the promotion of IBF, including but not limited to the International Sharia Research Academy (ISRA) for Islamic Finance and International Islamic Liquidity Management Corporation IILM — both hosted by Malaysia. The World Islamic Economic Forum (WIEF), supported by the Malaysian government, is also very active in advocating IBF. The Dubai Centre of Excellence for Islamic Banking and Finance is another body trying to pitch Dubai as the capital of the global Islamic economy. Pakistan, on the other hand, lags behind all these countries in such endeavours, despite having contributed significantly to the amount and quality of human capital to the global Islamic financial services industry.

There are a number of reasons behind this indifference to promoting and projecting Pakistan as a global leader in the IBF. First, the ongoing war on terror, and the law and order situation in the country did not allow the authorities to focus on this strategic area of paramount importance for the national economy. Second, the previous governments (the military government led by General (retd) Pervez Musharraf and the PPP-led government) shied away from anything Islamic, primarily due to the apologetic view of the Musharraf regime, and the aversion of the PPP government to be seen as promoting or backing any Islamic phenomena. Third, the lack of talent available in Pakistan was also responsible for not giving confidence to it to vie for a global role in the IBF. Finally, in the absence of a political push, the bureaucracy in the country has never considered the IBF with sympathy.

Despite all these obstacles, the share of Islamic banking in the banking sector has exceeded 10 per cent, and its growth is almost double of what conventional banking has witnessed in the last five years. Given this, it is recommended that Pakistan should now develop an international centre of excellence for Islamic finance, similar to the Dubai International Financial Centre (DIFC) and Qatar Financial Centre (QFC). These two centres are not exclusively for Islamic finance but are certainly engaged in the promotion of the IBF. The Malaysian International Islamic Financial Centre (MIFC), on the other hand, follows a different model to the DIFC and QFC, and is a virtual body connecting Ministry of Finance, Bank Negara Malaysia (the central bank), the Securities Commission Malaysia, other bodies in the government and international organisations. Pakistan should start with this model, eventually setting up a physical centre of excellence exclusively for IBF. This centre could be hosted on the outskirts of Islamabad as a ring-fenced financial centre like DIFC and QFC. The proposed special adviser to the prime minister on IBF should be given the task of developing a framework for setting up such a centre, among other things listed above.

Published in The Express Tribune, July 29th, 2014.

Like Opinion & Editorial on Facebook, follow @ETOpEd on Twitter to receive all updates on all our daily pieces.

COMMENTS (25)

Logique | 7 years ago | Reply

@3rdRockFromTheSun: The difference is that one is Islamic and one is not. Why can't you see the logics?

Also: My advices is for Pakistan to become a centers of excellences in Islam, not just Islamics bankings. All elses will follows.

3rdRockFromTheSun | 7 years ago | Reply

Rebuttal - ET pls publish @atanu and awa : I have nothing against the word 'Islamic'. But religion has its place, which is different from economics or science - that is my point.

Care to name the "countries that have introduced it"? Of these, name ONE country that uses ONLY the Islamic financial system in its economy and has completely done away with the traditional financial system!

The truth is that those countries use two financial systems - one Islamic and one traditional. If a country wants to be a part of global economy, it cannot afford to do away with the traditional system.

My arguments are very simple : Lets say I take a loan of Rs.1200 - and have to pay it back over 12 months. A traditional bank makes me pay Rs110 each month, so over the 12 months - I have paid an additional Rs 120 - which this bank calls 'Interest'.

An Islamic bank will ask me to pay the same Rs 110 per month, and call that additional Rs 120 'Profit'.

What is the difference?

VIEW MORE COMMENTS
Replying to X

Comments are moderated and generally will be posted if they are on-topic and not abusive.

For more information, please see our Comments FAQ

E-Publications

Most Read