Pakistan Islamic Banks Join Hands

Pakistan’s six Islamic banks are going to set up an Islamic inter-bank price market in order to stop relying on interest-based conventional banks in meeting their short-term funds requirements.

"Things are almost finalized and an official announcement in this regard will soon be made," Ahmed Ali Siddiqui, head of Product Development Shari`ah Compliance at Meezan Islamic Bank, Pakistan's first full-fledged Islamic bank, told IslamOnline.net on Monday, June 29.

There is already a conventional inter-bank price market for interest-based conventional banks in the South Asian Muslim country.

"Though, the exiting inter-bank price market is not completely haram, our customers and religious scholars feel awkward about that because of the involvement of interest-based banking sector," Siddiqui said.

"Therefore, the Shari`ah advisory boards of the six Islamic banks sat together a few months back and decided to set up their own interest-free price market," he added.

"The major thrust of the proposed market is that the Islamic banks should not depend on the conventional banking sector in order to meet short-term funds requirement, which is unavoidable in this field," Siddiqui explained.

"Therefore, we have decided to meet our respective funds requirements through each other. We believe that the Islamic banks have sufficient funds to meet each others’ funds requirements."

Dr Shahid Hasan Siddiqui, a Karachi-based veteran economist, welcomed the Islamic inter-bank price market plan.

"This is a very timely decision because the Islamic banks have been depending on interest-based banks to meet their short-term funds requirement, which confuses their customers," he told IOL.

"There is no doubt about its viability. It will work Inshaullah."

Pakistan has six Islamic banks, Meezan Bank, Bank-al-Islami, Global Islamic Bank, Al-Barka Bank, Dawood Islamic Bank and Global Emirates Islamic Bank.

They have around 500,000 customers in consumer financing and deposits sectors and hold 5 percent share in the overall banking sector in the country.

Meezan is the first full-fledged Islamic bank in Pakistan and was issued license by the State Bank of Pakistan in 1997.

The banks decision is the latest sign of the boom in Islamic finance in Pakistan.

"This is a major step which we are going to take vis-à-vis expansion of Islamic banking in Pakistan," said Siddiqui.

He asserted that Islamic banking has gained a boom during the last few years, especially after the simmering global financial crunch.

"We have witnessed a growth rate (in Islamic Banking) in three figures during the last year. And we are targeting 12 percent share in the overall banking sector by 2012."

Siddiqui says the current global financial crisis has diverted more and more Pakistanis towards Islamic banks.

"We have not received any direct impact of the global financial crisis because our investments are assets-based rather than speculations."

Islamic finance is already one of the fastest growing sectors in the global financial industry.

The Islamic banking industry, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

Rs50m Seed Capital For Islamic Banking Divisions

The State Bank of Pakistan has told heads of Islamic Banking Divisions of conventional banks to maintain a minimum Islamic Banking Fund of Rs 50 million as seed capital.

They have also been directed to maintain Capital Adequacy Ratio (CAR) as applicable on Bank-wide basis, prescribed by SBP from time to time.

Islamic Banks Find Alternative To KLIBOR

Islamic banks have recently achieved a major milestone towards development of an interbank market for Islamic banks.

Meezan Bank recently hosted a meeting of Shariah advisors and product development experts of all full-fledged Islamic banks to decide upon the mechanism for inter-bank placement amongst Islamic banks and to move towards the development of an Islamic inter-bank market.

After careful deliberation, standardized agreements – namely Interbank Musharaka and Interbank Wakala Agreements – were finalized and it was agreed that henceforth only these standard contracts would be used by the Islamic banking industry.

This achievement is an important milestone towards development of inter-bank market for Islamic banks and will pave the way for the long awaited Islamic benchmark rate as an alternative to KLIBOR. The meeting was attended by Shariah advisors / product development heads of Meezan Bank, Bank Islami, Dubai Islamic Bank, Emirates Global Islamic Bank and First Dawood Islamic Bank.