Is govt really serious in making Islamic Banking the first choice?

Byline: Shabbir Kazmi

In Pakistan there exists two distinct, but opposite opinions about the growth of Islamic banking in the country. The proponents are jubilant and claim that now a little less than 15 percent of total assets of the banking sector are now Shariah compliant. However, the other group insists that the quantum is paltry; keeping in view that the overwhelming majority of the population is Muslim. Therefore, it is necessary to first review the situation dispassionately and then come up a new strategy.

After the judgment of the apex court that Pakistan's banking system was not Shariah compliant, the Government of Pakistan (GoP) came up with the proposal to introduce an Islamic banking system and let the conventional system run in parallel. A technical mistake was committed because no deadline was fixed for the elimination of Riba-based system. Therefore, the goals remained ambiguous; policies were imprudent and on top of all, implementation was not done in letter and spirit. The entire process shows lack of commitment on the part of the Government of Pakistan (GoP), I am sure those all the helm of affairs at the central bank will not subscribe to my analogy.

It is no secret that the GoP is the biggest borrower and also pays very handsome return on its risk free securities. Reportedly, foreign investment in the government's debt instruments, including Market Treasury Bills (T-Bills) and Pakistan Investment Bond (PIBs) has surged to US$2.26 billion during the current fiscal year (FY20). According to State Bank of Pakistan (SBP), foreign investment in T-Bills has recorded largest single day inflows of US$536 million on January 16, 2019 in Special Convertible Rupee Account (SCRA).

Analysts say that with some improvement in exchange rate and current account, foreign investors mainly from the US and the UK are taking interest in government securities and heavily investing in T-Bills and PIBs. Foreign Portfolio Investment (FPI) flowed into T-Bills and PIBs after a gap of over two years, as investors responded to the continued increase in reserves buffers; sustainability of the exchange rate regime and the comfort offered by the inception of the IMF US$6 billion Extended Fund Facility program to support Pakistan's balance of payment.

The SBP mentioned in a recent report that this investment was an outcome of the continued improvement in the country's balance of payment position and reserve buffers, sustainability of the exchange rate...

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