ISLAMABAD, 15 March 2004 — Pakistan will unroll a red carpet for new Islamic banks, and Islamic financial institutions, for which the central bank will freely issue licenses, according to the latest decision.

The domestic and foreign-based commercial banks have, over the last three years, been undergoing consolidation and merger as the country launched major financial sector reforms. The new policy to encourage banks operating under Islamic mode has just been unveiled by Dr. Ishrat Hussain, governor, State Bank of Pakistan (SBP).

Dr. Hussain said, “there already are too many of the conventional banks.

In fact, the central bank has been stressing for merger and consolidation of the smaller, or weaker banks with stronger ones.” There is only one Islamic bank at the moment, but “there is a growing need for more of these banks. SBP, in the recent past, has also allowed the commercial banks to open “Islamic Windows” to do business under the Islamic modes and instruments. But, the overall operations under these modes have not expanded as much as the SBP will wish.

SPB has now established a “Shariah Board” (SB) to supervise Pakistan’s financial system. Dr. Hussain, made this announcement in the presence of Sheikh Ebrahim ibn Khalifa Al-Khalifa, undersecretary, Bahrain’s Ministry of Finance and National Economy.

SBP governor also launched ‘Ijara Sukuk’, government bonds, based on ‘Shariah’ that will replace the present system of Treasury Bills (TBs) in the days to come. Formation of SB will help oversee banking and financial sectors and will provide a level playing field to the conventional commercial banks and Islamic banks.

Islamic bank, though partial, was introduced more than two decades ago, but still Meezan Bank is the only bank that is exclusively operated on Islamic modes.

Sheikh Ebrahim who is also chairman of the board of directors of Bahrain-based Meezan Bank, said in Karachi that “Islamic banking all over the globe is growing at over 15 percent a year.”

He said, the Association of Islamic Financial Institutions has developed more than 50 standards for Islamic banks, covering ‘Shariah’ auditing, accounting and ethics.” Sheikh Ebrahim said, “after starting ‘Ijara Sukuk’ by Bahrain, SBP also has taken the initiative and has launched the first issue of ‘Ijara Sukuk’ in Pakistan.”

Pakistan-based Muslim Commercial Bank (MCB) is now also establishing exclusive Islamic bank branches. The decision of MCB, the fourth biggest bank — to go into Islamic banking will increase the volume and turnover of Islamic banks in the country.

The growth of Islamic financial modes will also be substantially spurred by this week’s SBP decision to permit conventional commercial banks to establish ‘Shariah-compliant’ non banking finance companies (NBFCs) in the country.

The NBFCs will be regulated not by the central bank, but by the government’s capital market regulator— Security & Exchange Commission of Pakistan (SECP). It will also ensure competition between NBFCs and commercial banks. But NBFCs are not permitted to take deposits — a business they wish to share with the commercial banks.