‘Financial globalisation can reinforce Islamic finance’

KARACHI: Dr Shamshad Akhtar, Governor, State Bank of Pakistan (SBP), has said the Islamic financial services industry needs to consolidate itself to be able to better compete with global players through achieving scale efficiency and cost effectiveness in addition to rapidly building its capacities to standardise regulation, supervision and accounting practices, while strengthening the governance of the industry.

Delivering her keynote address as the Chairperson of the Islamic Financial Services Board (IFSB) on “Financial Globalization and Islamic Financial Services Industry” at the 5th Annual Summit of the IFSB held in Amman, Jordan, Dr Akhtar said the Islamic financial services industry has been transformed from being a peripheral activity to a sizeable industry which is attracting global interest.

She said financial globalization would foster this industry and given the inherent features and richness of Islamic principles, modalities and products’ growth, it would be beneficial for supporting the process of regional and global financial deepening. Although currently the size of the industry is small relative to the global financial system, it has promising growth prospects, she added.

“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 Islamic financial institutions, providing them with improved portfolio, liquidity and risk management tools,” Dr Akhtar opined. Referring to Sukuks, she said the internationalization of the Sukuk structure and its flotation, which was expected to hit $100 billion mark soon, was helping to better integrate Islamic financial industry with the world of global finance.

She said recent financial market turmoil in the subprime mortgage market has unfolded itself in an unprecedented global liquidity crunch, triggering huge financial and economic losses. She added that the world was now realizing the stress of growing global imbalances that have for several months now manifested themselves in the rising global commodity prices and have fuelled inflationary pressures.

Dr Akhtar said these events have again provoked debates regarding the pros and cons of financial globalization, 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 is now compounding inflationary pressures otherwise building up because of the international rise in food and oil prices.

However, she said the good news is that the Islamic financial industry has generally remained insulated from the recent episode and this is because Islamic banks’ transactions are backed by real economic transactions and risk management benefiting from the application of and compliance with Shariah principles and guidelines, wherein the banks and investors have to share the profit and losses in accordance with the risks taken.

While in conventional finance risk-free capital encouraged over-leveraging and over-exposures by transferring transactions to off balance sheet conduits, Islamic financial services derive their inherent strengths from the Shariah guidelines and principles. Notwithstanding, Islamic financial services, like all businesses, could be impacted if the global slowdown deepens, she added.

She said the financial globalization has the potential to promote and reinforce Islamic financial industry by ensuring its conformity with conventional finance by fostering newer and better linkages with the regional and global financial markets.

“Islamic financial industry in turn can reinforce and support globalization by bringing to it financial innovation and stability, provided it is properly nurtured and developed in conformity with the internationally well accepted and tested financial sector prudential and regulatory frameworks,” she said, and added that in order to achieve deeper and sustainable impact, Islamic financial industry would benefit by aligning and positioning itself in a way that it takes full advantage of financial globalization. Dr Akhtar said although the IF industry has the potential to grow by 20 to 30 percent, there were concerns that it was fraught with fragmentation and heterogeneity.

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Filed under Capital markets, capitalism, finance, Globalization, Pakistan

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