State Bank of Pakistan : prods Islamic banks to diversify products

August 11, 2010

Acting Governor State Bank of Pakistan Yaseen Anwar says Islamic Financial System has potential to provide better banking and financial services than conventional system provided it capitalizes on its own inherent strengths and avoids following conventional system.
Inaugurating Islamic Financial News Roadshow on Islamic Banking Thursday at SBP, he said current Islamic banking paradigm, both in Pakistan and elsewhere, is based on replication of conventional banking products. ‘’While replication of conventional products to make them Shariah compliant does pass Shariah permissibility test, it is insufficient to achieve larger objectives of Islamic financial system, particularly broad-based and equitable distribution of economic gains.’’ He said total reliance of Islamic banks on debt-based fixed income products and minimizing risks to almost close to those of conventional system is not only blurring distinction between Islamic and conventional finance but also making Islamic banks relatively less efficient than their conventional counterparts.
To sustain growth momentum, industry will have to diversify its products mix by focusing on areas where it has comparative advantage rather than blindly following conventional system, he observed.
Anwar said 67pc of Islamic banks financing in Pakistan is concentrated in corporate sector through Murabaha, Ijarah, Diminishing Musharaka. With most of corporates having banking relationships with conventional banks, Islamic banks have to offer significant price discounts to attract corporate clients. While this improves quality of their financing portfolio, it reduces profit margins and inhibits their ability to offer better returns to depositors, he emphasized. It also restricts access to finance to well established businesses and corporates, leaves SMEs and start up businesses financially excluded. This is contrary to natural business model of Islamic finance, which promotes risk and reward sharing and encourages financing to promising start ups that is critically important for promoting entrepreneurial culture, he added.
SBP Acting Governor said present scope of Islamic banks business model is confined to that of conventional banks which generally caters to short term financing needs of real economy through interest bearing instruments, facilities. While this scope is in line with business model and deposit streams of conventional banks, it is not sufficient for Islamic banks which were originally conceived for catering to genuine financing needs of real economy through risk and reward sharing instruments.