IBI's liquidity management: SBP working out alternative solutions: governor

Effective liquidity management is the key challenge for the Islamic Banking Industry (IBI) and the State Bank of Pakistan (SBP) in consultation with industry is working to develop alternative solutions for liquidity management.
Addressing as keynote speaker at the launching ceremony of Urdu version of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) "Shariah Standards" here on Wednesday, Tariq Bajwa Governor State Bank of Pakistan (SBP) said that effective liquidity management has gained more prominence owing to dearth of Shariah compliant investment opportunities, limited availability of Shariah compliant money market instruments and absence of Shariah compliant SBP standing facility.
However, he said that, housing finance is another attractive avenue for Islamic banks to address the liquidity management challenge. "There are also some new opportunities for the Islamic banking industry in this context as the newly elected PTI government has announced an imitative for construction of five million houses. Some Rs 15 to Rs 17 trillion will be required for the construction of five million houses in the next five years and the best product for this scheme will be Musharika instruments," he added.
In Pakistan, sovereign Sukuk being issued since 2008 provide the key liquidity management avenue to the domestic industry, however, demand for such instruments far surpasses their supply.
"Being a regulator State Bank believed that growth and development of other elements of Islamic finance ecosystem i.e. capital markets, mutual funds and Takaful, is essential not only for Islamic banking industry but also for the overall growth and development of the country", he added.
Governor SBP said that another major issue restraining Islamic banking from realizing its true potential is lack of qualified and trained Islamic bankers and lack of awareness among masses on demand side. As such a robust awareness campaign about Islamic banking is necessary for promoting Islamic banking. SBP is focusing on addressing these challenges through multipronged strategy, he added.
The inherent advantage of Islamic financial industry to fund projects on equity participation and profit sharing basis enables it to cater to the huge, unmet demands of underserved sectors such as agriculture and SMEs.
However, like conventional industry, Islamic banks are also not effectively serving these sectors. KAP (Knowledge, Attitude and Practices of Islamic Banking in Pakistan) survey based study of SBP, also indicates these areas as potential growth avenues for Islamic banking industry, Bajwa mentioned.
He said that against the backdrop of growth of Islamic banking globally, Pakistan's domestic industry is also demonstrating quite impressive headway. The industry has posted a healthy annual growth of over 20 percent during the last five years. Presently, the market share of Islamic banking industry stands at 13.6 percent in terms of banking assets and 14.7 percent in total deposits.
According to Financial Stability Report 2018 issued by Islamic Financial Services Board (IFSB), its asset base has grown by 8.3 percent to surpass $ 2 trillion mark. With expanding scope and size of Islamic finance, and emerging global challenges, it is gaining importance from financial stability perspective.
"Given the potential of Islamic finance to support broad based economic growth and our constitutional obligation to make available Islamic financial services in the country, Islamic banking has remained a priority area for State Bank", he maintained.
He said sound foundations of legal and regulatory environment laid down by the State Bank has played a key role in sustained high growth of Islamic banking in the country and Pakistan's Shariah compliance environment is considered amongst the best in the world.
The SBP is also regularly collaborating with the Securities and Exchange Commission of Pakistan (SECP), the capital market's regulator, to promote Islamic finance.
He said that the well thought out international standards issued by the global standard setting bodies like AAOIFI and IFSB facilitate in managing the challenges facing the Islamic finance and harmonizing the industry practices.
"Standardization in Islamic finance is essential for addressing various issues facing the Islamic finance in addition to promote disclosure, transparency and integration into global financial system, he said and added that rapid growth of Islamic banking and finance requires further strengthening of its financial infrastructure," Governor SBP said.
Highlight here the commendable role of AAOIFI, he said that AAOIFI has played in development and promotion of Shariah, accounting and governance standards to facilitate the growth of Islamic financial services industry.
"SBP has long standing association with AAOIFI and as a member of the AAOIFI's Board of Trustee, State Bank contributes in the overall oversight and supervision of its operations," he added.
He said so far the SBP has adopted 6 of the AAOIFI's standards while another 8 to 10 standards are in the final stages of implementation. In addition, SBP has advised the banks to refer the AAOIFI's standards for guidance in different areas of Islamic finance.
"I am optimistic that Islamic banking and finance is likely to maintain its positive growth trajectory. The growth of Islamic finance on its distinct strengths would bring more stability to the financial system, improve equitable distribution of economic gains, and support overall economic development", Bajwa said.
He reiterated that State Bank will continue to extend its full cooperation and play due role for achieving our shared vision of a vibrant and sustainable Islamic banking sector in Pakistan.
Talking about the book, he said that with this in perspective, translation of global standards into our national language is an important milestone, as it would remove language barriers to understand Shariah Standards.
"I believe this Urdu version of the Shariah Standards will be instrumental in improving awareness about Islamic finance especially amongst the Shariah scholars, academia and practitioners of Islamic finance. These scholars and all other experts involved in this project deserve great appreciation for their commendable role," he said.