KARACHI: Dr Shamshad Akhtar, Governor State Bank of Pakistan (SBP) has said that the Islamic financial services industry needs to consolidate itself to better compete with global players, through achieving efficiency and cost effectiveness, in addition to rapidly building its capacities to standardise regulation, supervision and accounting practices, besides strengthening the governance of the industry.
Delivering her keynote address on ‘Financial Globalisation and Islamic Financial Services Industry’ at the 5th Annual Summit of the Islamic Financial Services Board (IFSB) held in Amman, Jordan the other day, she said that Islamic Financial (IF) services industry had been transformed from being a peripheral activity to a sizeable industry which was attracting global interest.
She said that financial globalisation would foster IF services and given the inherent features and richness of Islamic principles, modalities and products’ growth in IF, would be beneficial for supporting the process of regional and global financial deepening.
“Although currently the size of IF is small relative to the global financial system, it has promising growth prospects. Well developed and integrated Islamic money, capital, and foreign exchange markets will not only be beneficial for borrowers and institutional investors, but can also further enhance the stability of IF institutions, providing them with improved portfolio, liquidity and risk management tools,” Dr Akhtar opined.
Referring to Sukuks, she said that the internationalisation of the Sukuk structure and its flotation, which was expected to hit the $100 billion mark soon, was helping to better integrate IF with the world of global finance. “This will not only meet the region’s massive infrastructure project financing requirement, but will also help diversify financial markets,” she asserted.
SBP Governor said that financial globalisation grew in size and scale and there was now a broad consensus that an effectively-managed financial globalisation had the potential to benefit from, and contribute to growing world trade integration, easing of investment and cross-border capital flows, as economic liberalisation gains momentum, development of interdependent production structures, that had evolved to maximize comparative advantage, and the revolution in information technology and institutional reforms.
However, she said that the recent financial market turmoil in the subprime mortgage market unfolded itself in an unprecedented global liquidity crunch, triggering huge financial and economic losses. She added that the world was now realising the stress of growing global imbalances that had for several months now manifested themselves in the rising global commodity prices, and had fuelled inflationary pressures.
Dr Akhtar said these events have again provoked debates regarding the pros and cons of financial globalisation, as its impact becomes incrementally visible resulting in, (i) slowdown of world economy and consequently in trade in selected products and markets, (ii) volatility in equity markets which in some cases generated losses, and (iii) easing of liquidity in a number of ways by the affected central banks, which was now compounding inflationary pressures otherwise building up because of the international rise in food and oil prices. Corrective actions are underway and lessons are being drawn from the unfolding events, she added.
However, she said the good news was that the IF industry had generally remained insulated from the recent episode. This was because Islamic banks’ transactions were backed by real economic transactions and risk management, benefiting from the application and compliance with Shariah principles and guidelines, wherein the banks and investors had to share the profit and losses in accordance with the risks taken. In conventional finance, risk-free capital encouraged over-leveraging and over-exposures by transferring transactions to off balance sheet conduits, whereas IF services drive their inherent strengths from the Shariah guidelines and principles. Notwithstanding, IF services, like all businesses, could be impacted if the global slowdown deepens, she added.
Dr Akhtar said that although the IF industry had the potential to grow by 20 per cent, there are concerns that it was fraught with diversity, fragmentation and heterogeneity.
To foster IF to integrally benefit from and contribute to financial globalisation, there is a need for countries to launch a coherent, coordinated and synchronized development programme of the IF industry at national levels, which feeds into and reinforces the implementation of IF strategy, approved by the Council of Governors of IFSB last year.
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