SBP wins another award for promoting Islamic finance
Islamic Finance News (IFN), an arm of REDmoney Group, Malaysia, has announced State Bank of Pakistan (SBP) as the best Central Bank of 2021 across the world in promoting Islamic finance. The result was based on global voting. IFN Best Banks Poll is regarded as one of the prestigious accolades in the global Islamic finance space. Bank Negara Malaysia stood second while the Saudi Central Bank secured third position.
The category of the Best Central Bank in promoting Islamic Finance is one of the closest contested among regulators around the globe for establishing their supremacy through exceptional advances made during the year. SBP enjoys the honor to have won this prestigious award for the 5th time during last seven years. Previously, SBP was bestowed with this coveted award for the year 2015, 2017, 2018, and 2020.
IFN in its cover story while congratulating State Bank of Pakistan for yet another win as the Best Central Bank in Promoting Islamic Finance stated that they welcome back a leading light of the industry. In a closely fought contest, 2020 victor came roaring back to take the crown, said the IFN. IFN while announcing the poll result also stated that with its Governor, Dr Reza Baqir, recently promoted to be the new chairman of the Council of the IFSB, from his role as the Deputy Chairman in 2021, they can hopefully look forward to even stronger support and leadership from the central bank over the coming year.
The IFN Award to SBP as the best central bank is the global endorsement of its initiatives for promotion of Islamic banking in the country. The award reflects an international recognition of the strategic measures undertaken by SBP to put in place a robust policy environment for Islamic banking to prosper.
The State Bank of Pakistan has consistently promoted and encouraged Islamic finance within Pakistan, and has taken several significant steps. These include launch of 3rd five-year Strategic Plan for Islamic banking 2021-25, Shariah compliant standing ceiling facility and open market operations, strengthening of Shariah governance mechanism, Shariah compliant regulations for the lender of the last resort (LOLR) facility and licensing regime for digital banking covering the Islamic segment; besides taking initiatives for promoting better awareness amongst the masses, and strengthening international linkages. The Strategic plan 2021-25 envisages taking Islamic banking share of 30% in terms of assets and 35% in terms of deposits in the overall banking system.
Amidst the COVID-19 chaos throwing unforeseen challenges to the global financial market, Islamic banking industry in Pakistan continued to maintain its impressive growth trajectory and assets and deposits of Islamic banking industry grew on year-on-year basis by 28.2% and 26% respectively by September 30, 2021. The market share of Islamic banking assets and deposits stood at 17% and 18.6% respectively of the overall banking system in the country as of September 30, 2021.
The industry operates through an elaborate network of 3,651 branches and 1,579 Islamic banking windows (dedicated counters at conventional branches) steered by 22 Islamic Banking Institutions (IBIs) which include 5 full-fledged Islamic banks and 17 conventional banks having dedicated Islamic Banking Branches and windows. The industry is growing on the back of continued support by the Government of Pakistan which remains committed to provide an enabling platform for this industry to operate.
In line with its strategic plan to improve Liquidity Management Framework for Islamic banking industry and enhance the effectiveness of monetary policy implementation, SBP has introduced Shariah Compliant Standing Ceiling Facility and Open Market Operations (injections) for Islamic Banking Institutions (IBIs). As the size of the Islamic banking industry is increasing, SBP recognizes the need to introduce Shariah compliant liquidity facilities for IBIs.
With a view to bring IBIs at par vis-à-vis their conventional counterparts in terms of liquidity management avenues, and to enhance SBP’s tools for managing market’s liquidity as part of its monetary policy objective, SBP has introduced these facilities.
The structure and broad features of these facilities are as under:
1) Shariah Compliant Standing Ceiling Facility is a Mudarabah based Financing Facility (MFF) whereby SBP will provide financing to IBIs on an overnight basis against Shariah compliant collateral. IBIs shall place the funds received from SBP in a special pool consisting of high quality assets. The MFF will be offered at an ‘Expected Rate’ – equivalent to conventional overnight reverse repo rate – based on a Profit Sharing Ratio agreed between the SBP and IBI at the onset of the transaction.
2) For Shariah Compliant Open Market Operations (Injections), Mudarabah mode of financing will be used. It would be pertinent to mention here that this open market operations (OMO) facility will be available for ‘injection’ i.e. provision of liquidity purposes only. Similar to conventional OMOs, SBP will be conducting Shariah Compliant OMOs (Injections) based on market liquidity conditions through a multiple price competitive bidding process for tenors as announced by SBP from time to time, against collateral. Once the expected rate of return is finalized through a competitive bidding process, the funds provided by SBP shall be invested in a pool of high quality assets by the respective IBI. SBP and IBI shall agree a Profit Sharing ratio at the onset of the transaction.