Muhammad Arif : Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan.

Developing Islamic Money Market in Pakistan


Members of International Task Force wherein Muhammad Arif Chairman CAIF was its member

The Islamic money market is integral to the functioning of the Islamic banking and financial system, firstly, in providing the Islamic financial institutions with the facility for funding and adjusting portfolios over the short-term, and secondly, serving as a channel for the transmission of monetary policy. Financial instruments and interbank investments allow surplus banks to channel funds to deficit banks, thereby maintaining the funding and liquidity mechanism necessary to promote stability in the system. MM is limited to 12 month period so basically it reflects liquidity management from one day to 365 days. 

This market is still in infancy. But some Central Banks have moved towards its making like Bank Negara Malaysia.

The Kuala Lumpur-based Islamic Financial Services Board (IFSB) has released guidance on liquidity management for Islamic banks and a new standard for regulatory supervision, as the industry body tightens oversight of banking practices.

IFSB guidelines allow national financial regulators to have the final say on how they apply standards, but its prescriptive approach is gradually helping to harmonize practices across the industry’s core centers in the Middle East and Southeast Asia.

Islamic banks face uncertainty over how regulators will treat their deposits, compounded by a lack of well-developed Islamic securities markets.

The IFSB’s guidance note on liquidity management aims to clarify the accounting treatment of Islamic deposits and defines the types of high quality liquid assets (HQLA) that Islamic banks can hold to meet regulatory requirements under the Basel III banking standards now being phased in around the world.

HQLA can range from cash and central bank reserves to sukuk (Islamic bonds) issued by both sovereigns and corporate, subject to various haircuts, the IFSB says.

Given the shortage of such instruments, the IFSB outlines three other actions which regulators can take to facilitate the industry: liquidity facilities from central banks, allowing banks to hold HQLA in international currencies, and widening HQLA criteria.

This would help Islamic banks to meet Basel III liquidity coverage ratios that are being phased in from 2015 to 2019; a net stable funding requirement will be implemented in 2018.

Regulators will have to determine the rights of bank customers to withdraw their Islamic deposits to define the weights, or run-off rates that apply to these the IFSB says. It adds that developing sharia-compliant deposit insurance schemes is required if deposits were to be considered “stable” under Basel rules.

Regulators must also decide on the treatment of Islamic deposit holders, who must be classified as investors, as a liability to the bank, or as a mix that is partly risk- absorbent, the IFSB says.

The IFSB has also published standards on core principles for regulation and supervision of the industry, which has come into effect from January 2016.

They broadly mirror the Basel core principles, while addressing other issues such as the treatment of Islamic window operations, which are sections of conventional banks that operate according to Islamic religious principles.

The standards require windows to have a minimum amount of funding from the conventional parent, and makes sharia supervision comparable to that of full-fledged Islamic banks.

Now coming to Pakistan, there is no other opinion that Islamic Banking is still standing on perception and not on innovations and new techniques. The main responsibility in this regard lies on SBP. For Islamic Money Market development the main emphasis should be on Research and Sharia Compliant side. It has been seen that most of the Treasurers in Islamic Banks use conventional methods for their liquidity management. This is absolutely wrong. Secondly SBP should focus on bringing complete legislation for Islamic banking. Moreover Hybrid instruments (mix of debt and non-debt based instruments) with short term period be brought in. Pakistan does have an experience of Short term Federal Bonds for 3, 6 and 12 months floated in some period of 1990-2000 where markup was allowed on par value. The same model can be adopted. For liquidity injection Musharkah model can be adopted being used in Export Refinance Schemes. One must remember that in Indonesia and Malaysia they work with Islamic and conventional Banks on clean basis i.e. without collateral, but in Pakistan, SBP work on collateral basis. So we have to change our techniques a lot in case of Pakistan.

For these steps SBP need to redefine its objectives through Islamic Banking, BPRD, and Banking Inspection Departments. Suitable persons in this respect can be selected from within the SBP and not from the market as that creates conflict of interest.

Era of free market is now over and world over controls from regulators and governments are now coming in . This is how markets developments are now going to take place. In Pakistan we cannot refrain from this fact.


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