Time to improve efficiency, reduce transaction costs in Islamic finance
IFSB

Pakistan’s former bank governor says Islamic nance should promote long-term investment

By HABHAJAN SINGH

How to move Islamic finance to the next stage of development and reinforce its robustness in a more challenging, dynamic socio-economic and technology-oriented environment?

This was one of the questions raised at the Islamic Financial Services Board’s (IFSB) public lecture series held alongside its annual meeting in Kuwait last week.

Dr Ishrat Husain, a former governor of Pakistan’s central bank with an active presence in Islamic finance, recommended the strengthening of the financial system by developing a supportive legal, administrative and regulatory environment.

In his presentation at IFSB’s 10th Public Lecture on Financial Policy and Stability, he also called for improving the industry’s efficiency and reducing its transaction costs, through the harmonisation and standardisation of Shariah interpretations across countries.

In his lecture, according to an IFSB statement, Ishrat said the strengths of Islamic finance are in using real assets versus paper-based, financially-engineered products commonly used in conventional banking.

He also noted the existing funding gap to achieve the United Nations’ Sustainable Development Goals, drawing attention to the benefits of long-term investments in providing support during economic downturns.

He said Islamic finance should promote long-term investment mainly for infrastructure finance, as well as financing for small and medium enterprises, agriculture and low-cost housing.

These initiatives will increase productivity, which will lead to higher income and rise in living standards of the economies embracing Islamic finance, he said in his lecture.

Ishrat — who chairs the Accounting and Auditing Organisation for Islamic Financial Institutions’ board of governance and ethics — is credited to introducing Islamic banking in Pakistan in its present form in consultation with Shariah scholars, bankers and academics.

The first IFSB lecture, themed “Financial Stability and Islamic Finance”, was delivered by Dr Monzer Kahf, professor of Islamic finance and Islamic economics at the Qatar-based Hamad Bin Khalifa University.

In an earlier lecture entitled “An Agenda for Reviving Islamic Finance” in Karachi, Pakistan, in 2013, Ishrat had listed out five “main gaps” requiring bridging before the robustness of Islamic finance can be improved.

They included serious misconceptions, misunderstandings and misplaced notions as to what Islamic finance is all about, as well as a trust gap between borrowers, depositors, investors and managers.

Another gap was that Islamic banks have been too obsessed with the tendency to replicate conventional banking, so much so that it seemed to many critics that Islamic banking was nothing more than bells and whistles wrapped around conventional banking assets and services.

“The most pinching and piercing effect felt throughout the Islamic financial services industry is the inadequate supply of qualified, skilled, well-trained and competent human resources,” he had said in the lecture.

The final gap was that the ethical values embedded in Islamic finance were not add-ons, as being practised in many parts of Europe.