July 10, 2006	Monday	Jumadi-ul-Sani 13, 1427

BASICALLY, three salient features of Islamic finance differentiate it from the conventional finance.

These are: (i) riba (interest) which is prevalent in conventional finance and is completely prohibited under Islamic law regardless of its form.

(ii) gharar (uncertainty) means that the subject matter of the transaction has to be clear and existing so as to avoid any future conflicts between the parties.

(iii) maisir (speculation) is gaining something by chance rather than by productive effort which is a common place in the conventional finance in the form of speculative activity but is prohibited under Islamic law.

Islamic banking system is a development of recent past as the first Islamic bank was established in 1962 in Egypt. After that, Islamic banking spread in different parts of the globe primarily in many Muslim countries. In fact, Islamic banking fortified its roots in Malaysia during the 1990s followed by many countries in the Middle East and now in the UK and Pakistan as well.

In Pakistan, this system of banking kick started after the Islamisation drive in the early 1980’s. Since then, despite a variety of challenges from the political and social quarters, Islamic banking has continuously flourished.

Presently, Islamic banking is mushrooming in many parts of the world including major financial centres of the world. Middle East has recently seen a phenomenal growth in the Islamic banking sector at the back of the funds pouring because of high oil prices.

Cutting edge and innovative shariah compliant financing structures are being used in the financing of high profile mega projects in the petrochemical, aviation, shipping, construction and infrastructure projects. Likewise in the UK shariah compliant mortgages and istisna construction financing is gaining momentum among the Muslim community.

Islamic finance in Pakistan now seems to be making its way towards providing the Islamic investors an adequate alternative to the conventional finance as the market share of the Islamic banks has now reached over two per cent of the total banking industry.

The number of Islamic banks licensed to conduct Islamic banking is now six. Some of these banks are already operating their Islamic banking services widely throughout the country. Additionally, 39 branches of eleven conventional banks are also providing exclusive Islamic banking service to their customers. Islamic banking is now available in sixteen cities of all the four provinces.

Following are some of the commonly used shariah compliant products available in the market with a great room for innovation and novelty:

Modaraba (participation or trust financing) is a specialist investment by a financial expert in which the bank and the customer share profits;

Musharaka (equity financing) is an investment partnership in which profit sharing terms are agreed in advance, and losses are pegged to the amount invested;

Ijarah (leasing) is a leasing agreement whereby the bank buys an item for a customer and then leases it back over a specific period. Commonly used in the leasing of machinery, equipment, buildings and other capital assets; and

Morabaha (cost-plus financing) is an arrangement in which the bank buys an item and then sells it on to the customer on a deferred basis.

Amongst some other Islamic finance products are Istisna (progressive financing) which is a contract of acquisition of goods by specification or order where the price is paid progressively in accordance with the progress of a job;

Salam (payment for future delivery) is a mode of advance payment for goods which are to be delivered later; and Sukuk (bond issue) essentially amounts to commercial paper that provides the subscriber with ownership or part ownership in the underlying asset.

Islamic banking is not without challenges in the face of fierce competition posed by its counterpart conventionally structured financial products. One of such challenges is less liquidity due to less availability of secondary market for the trading of the Islamic finance products and lack of consumer confidence therein. It is pretty natural that it would take some time for the Islamic finance products to develop its own secondary market.

Additionally, there is a dire need for the protection of consumers to ensure that the products available in the market comply with the threshold requirements set by the shariah committees of Islamic banks. The regulators need to ensure that the small and inarticulate investors’ money is not invested unethically.

Sometimes, it becomes difficult even for the financial regulators to identify products which are basically conventional finance products but are marketed in the garb of Islamic finance. Such type of malpractices could be detrimental for the future of Islamic banking and must be discouraged for building consumer confidence in Islamic finance.

It is important that the consumers of Islamic banking products be provided with all the necessary information about their investments to ascertain whether their money is invested in halal businesses and in conformity with shariah. This can only be ensured through making the Islamic banking industry transparent so that the consumers have full knowledge of the nature of the Islamic banking products and thus capable of making informed decisions.

Additionally, free competition in the banking sector very important to make Islamic banking viable. The consumers should be given a choice between the conventional banking and Islamic banking. Thus, ultimately the most efficient service providers should sustain in the market.

Another challenge countered by the Islamic finance industry is dearth of adequate human resources. Presently, the industry is facing acute shortage of skilled people as compared to the pace of its expansion.

A great responsibility falls on the financial regulators, Islamic banks and the academic institutions take adequate measures to cater to the needs of the rapidly growing Islamic banking industry. State Bank of Pakistan has, no doubt, expedited its efforts during the recent years for training people to handle the industry’s growing skill demand.

We would, of course, need more academic institutions to impart solid education in the field of Islamic law to meet the challenges of Islamic banking industry. International Islamic University Islamabad (IIUI) is arguably one of such institutions.

Despite its relatively short history, IIUI is capable of providing quality graduates in shariah, some of whom are already serving the industry in the Middle East and the UK.

Given the speed at which Islamic banking industry is expanding, its future is assured and underlying it is a great opportunity for those who are innovative to contribute in its development.