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8/13/2019 3-41-Suleman Muhammad Ali -Issues and Challenges for Developing an Islamic Benchmark in Pakistan - Suleman
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Islamic Capital Markets and New Product Development - Establishing alternative pricingand valuation benchmarks and delinking from conventional benchmarks.
Issues and Challenges for developing an Islamic Inter-bank
!enchmark in Pakistan"
#uthor"s Name$ Suleman Muhammad Ali
#uthor"s current affiliation % position$Manager Product Structuring and Research; Product
Development & Shariah Compliance Meezan an! "imited#$
Email addresses of the author$ sulemanmuhammadali%gmail#com
&elephone number$'( )**(+,(,)(
#bout the #uthor$
Mr. 'uleman Muhammad #liholds an MA -.inance/ degree 0rom 1nstitute o0 usinessAdministration2 3arachi and is a Chartered 1slamic .inance Pro0essional -C1.P/ 0rom 14C51.2
3uala "umpur# Currentl6 he is the Manager7 Product Structuring & Research at Meezan an!
"imited leading the product structuring and Shariah compliance 0unction related to 1slamic
Structured 0inance2 Su!u! 1ssues2 8reasur6 and Corporate .inance# Mr# Ali is also a reputed1slamic 9an!ing trainer2 has conducted various corporate :or!shopsseminars across Pa!istan
and is a regular spea!er on the su9s 0irst ever short term 3APC? Su!u! andthe developmentpresentation o0 proposal regarding the launch o0Islamic Interbank Offered Rate
- Karachi (IIBOR - K)in Pa!istan to SP#
$Competing 1nterest@ Author>s emplo6ment :ith Meezan an!#"imited#
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#bstract
Purpose$8he purpose o0 this paper is to identi06 and discuss the issues and challenges involvedin developing an 1slamic inter9an! 9enchmar! in Pa!istan#
Design(approach$ 8o achieve this o9spersonal eperience and association :ith the industr6 including involvement in the development
o0 the proposed mechanism 0or 1slamic 9enchmar! in Pa!istan and various minutes o0 themeetings held 0or implementation and launch o0 the proposed 9enchmar!#
*indings % Practical implications$ 8he stud6 identi0ies the issues hampering the development
o0 a relia9le 1slamic 9enchmar! in Pa!istan and concludes that in the prevailing circumstancesthe 9enchmar! i0 launched :ill not 9e independent 0rom the conventional 9enchmar! unless
certain regulator6 and other measures are ta!en# 8he anal6sis conducted provides avenues 0or
0urther research and :ill 0acilitate regulators and industr6 pla6ers in 0ormulating strategies and
policies in pursuit o0 developing the 1slamic 9enchmar! in Pa!istan#
+e)words$ 3arachi 1nter79an! ?00ered Rate -31?R/; standardization; 9enchmar!2 mar!et
0orces; independence; 1slamic 1nter9an! ?00ered Rate 3arachi -11?R73/
,. Introduction
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A0ter the de9acle in the attempts to introduce 1slamic an!ing in the $'*s the industr6 sa: a
renaissance in Pa!istan :hen in (**( Meezan an! "imited -M"/ :as given the 0irst 0ull
0ledged 1slamic an!ing license in Pa!istan -M" Annual Report (*$*/# 8he progress during
the past $* 6ears has 9een phenomenal# .rom a meager Rs# n Deposits in (**) the industr6
has gro:n to a level o0 Rs#+*,n as on Decem9er (*$( -1slamic an!ing ulleting7State an!
o0 Pa!istan E17SPF Decem9er (*$(/# Similarl6 the 8otal Assets o0 the industr6 have gro:n
0rom Rs#$)n in (**) to Rs# )+ n during this period -17SP Decem9er (*$(/# Aided :ith
these 0igures the 1slamic an!ing industr6 has no: captured around '#+G share o0 the overall
9an!ing mar!et in terms o0 deposits -17SP Decem9er (*$(/# 8hese 0igures seem all the more
impressive given the 0act that the 1slamic an!s operate in an environment :hich is 0iercel6
dominated 96 conventional 9an!s operating in the countr6 0or the last ,H 6ears# =o:ever despite
these achievements the dominant conventional climate has led 1slamic 9an!s to 0ollo: the
0ootsteps o0 conventional 9an!s in matters ranging 0rom product design2 pac!aging2 pricing2
mar!eting2 customer service2 costing2 pro0it rates and other areas# 8his imitation o0 conventional
products in 0orm although does not necessaril6 result in Shariah non compliance o0 the 1slamic
0inancial products i0 the su9stance structure and operational eecution o0 the transaction is 9ased
on Shariah principles rather than the riba9ased Qardstructures o0 the conventional 9an!s; the
imitation in 0orm has 9ecome a 9one o0 contention in convincing the masses regarding the
Shariah compati9ilit6 o0 the current 1slamic 9an!ing s6stem and products in Pa!istan# =ence this
reputational road 9loc!; despite the gro:th in recent 6ears; has hindered 1slamic 9an!s to ma!e
an6 signi0icant inroads in areas untouched 96 conventional 9an!s so much so that :ith onl6 $*G
o0 the countr6>s population having a 0ormal 9an! account -Iorld an! (*$$2 JIorld an!
.inancial 1nclusion Data>/ the un9an!ed section o0 the countr6>s population still stands at a
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massive '*G# 8he 'hariah eputation iskis a uniBue 0eature 0aced 96 an 1slamic 0inancial
institution in addition to the reputational ris! related to the solvenc6 o0 the 0inancial institution#
Ihile 1slamic 0inancial institutions ma6 sustain the con0idence in the pu9lic regarding their
a9ilit6 to pa6 their de9ts as the6 0all due at the same time an6 dent in con0idence regarding the
level o0 Shariah compliance adhered to 96 these institution can also have disastrous e00ects
causing a 9an! run on deposits or dr6ing up o0 credit dis9ursements causing a liBuidit6 crises
:hich can in turn ultimatel6 lead to the insolvenc6 and de0ault o0 the institution#
Ihile the issue o0 imitation o0 conventional products in 0orm is a common phenomenon through
out the glo9al 1slamic 0inancial mar!ets; the issue is a serious threat in the contet o0 Pa!istan
given the cheBuered eperience o0 the pu9lic :ith the 1slamic 9an!ing eperiment o0 the $'*s
8he eperiment :as declared un71slamic 96 .ederal Shariat Court -.SC/ o0 Pa!istan in $''$ and
96 Shariah Appellate ench -SA/ o0 the Supreme Court o0 Pa!istan in $''' -Ksmani (**+/#
Similar apprehensions eist among the general pu9lic regarding the Shariah compati9ilit6 o0 the
current 1slamic 0inancial s6stem#
/. &he use of +I!0 as a benchmark$
1n Pa!istan the representative 9enchmar! used 96 commercial 9an!s to price their 0inancing
products is the 3arachi 1nter9an! ?00ered Rate -31?R/# 8he mechanism 0or calculating
31?R :ill 9e discussed in the later section; ho:ever the 31?R :as launched in Lanuar6 (**
and all the commercial 9an!s :ere reBuired; upon the instructions o0 SP -PD Circular4o#$2
($ Lanuar6 (**/; to price their corporate lending 9ased on 31?R# e0ore the launch o0
31?R the commercial 9an!s either used the prevailing rates o0 various tenors o0 the sovereign
8reasur6 ills issued 96 SP or the SP discount :indo: rates as the 9ase rates 0or pricing their
lending products# Iith the esta9lishment o0 Meezan an! "imited -M"/ as the 0irst
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commercial 1slamic 9an! in (**(; the 9an! also started to use the 8reasur6 ill rates as the 9ase
rate 0or pricing its products# Su9seBuentl6 :ith the incorporation o0 31?R the 9an! started to
price its products 9ased on this 9enchmar!# 8he use o0 interest 9ased 9enchmar!s is prevalent in
all the 1slamic 0inancial mar!et and is :idel6 9eing used 96 1slamic 9an!s 0or 0inancing their
products; the main reason 0or this is the a9sence o0 an6 :orth:hile mar!et representative 1slamic
0inancial 9enchmar!# 8he use o0 these 9enchmar!s has 9een allo:ed 96 1slamic scholars 9ased
on the 0act that i0 the underl6ing transaction is 9ased on the compensator6 contracts2 procedures
and principles allo:ed 96 Shariah rather than the contract o0 Qard -as is the case :ith
conventional 9an!s/ the mere usage o0 a conventional 9enchmar! 0or calculating the price or the
pro0it amount does not render the transaction haram or impermissi9le# Ksmani -$''2 p#$$'/
states@
10 a Mura9aha transaction 0ul0ills all the conditions enumerated in this chapter2 merel6 using
the interest rate as a 9enchmar! 0or determining the pro0it o0 mura9aha does not render the
transaction as invalid2 haram or prohi9ited 9ecause the deal itsel0 does not contain interest#
Similarl6 the
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1t is2 ho:ever true that the 1slamic 9an!s and 0inancial institutions should get rid o0 this
practice as soon as possi9le2 9ecause2 0irstl62 it ta!es the rate o0 interest as an ideal 0or a halal
9usiness :hich is not desira9le2 and secondl6 9ecause it does not advance the 9asicphilosoph6 o0 1slamic econom6 having no impact on the s6stem o0 distri9ution# 8here0ore the
1slamic 9an!s and 0inancial institutions should strive 0or developing their o:n 9enchmar!#
8he development o0 indigenous 1slamic 0inancial 9enchmar! in Pa!istan is not onl6 the desire o0
the countr6>s 1slamic 0inance scholars 9ut is also the reBuirement 0or the industr6 to ma!e 0urther
inroads into the countr6>s 0inancial landscape and even more so to 9ring the '*G un9an!ed
population in to 0inancial inclusion :hich has largel6 9een untouched 96 the conventional
s6stem 0or the last ,, 6ears#
1. &he ingredients of an Islamic benchmark$
Ihile commenting on the need 0or an 1slamic 9enchmar! the 0at:a o0 the Shariah 9oard o0 the
11R -(*$$/ states@
Since the Sharia o0 1slam insists on transacting :ith
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1t must 9e derived 0rom the value s6stem and contracts 9ased on the principles o0 Shariah
and 1slamic modes o0 0inancing#
8he 9enchmar! must 9e accepta9le to the industr6 participants to the etent that it used
0or their internal pricing and 0or pricing their :holesale2 retail and inter9an! 0inancing
transactions#
8he 9enchmar! must 9e a means o0 achieving the distri9utive on 3i9or (**'/ the contri9uting 9an!s contri9ute their t:o :a6 id and
As! rates dail6 96 $$@(* am -Pa!istan Standard 8ime/ to the Reuters 0or the tenors ranging 0rom
overnight to ) 6ears# 8he Reuters cancels out the highest and lo:est rates as outliers and
calculates the arithmetic mean o0 the remaining rates# 8he .MA also acts as the guardian o0 the
31?R setting process# 1nitiall6 rates o0 onl6 $7month2 )7month and ,7month tenors :ere
Buoted; the Buoted rates 0or various tenors have 9een etended over the 6ears# 8he ,7month and
the $76ear 31?R are the most :idel6 used rates 0or pricing long term and short term 0inancial
transactions#
Rules and Mechanism o0 31?R as per .MA -Master CommuniBuN on 3i9or (**'/@
All 31?R contri9utor 9an!s are reBuired to Buote their t:o :a6 prices 0or minimum
amount o0 P3R$**mn2 :ithin the allo:a9le maimum 9ido00er spreads 0or the relevant
tenor as indicated 9elo:@
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7 ?vernight $month H*9asis points
7 ) and , months (H 9asis points
7 ' months2 $( months2 ( & ) 6ears H* 9asis points
8he Buoted prices :ould remain valid 9et:een $$@)* am $$@H* am 0or all 31?R tenors#
31?R contri9uting 9an!s should have unsecured contri9uting limits 0or at least (HG o0
other 31?R contri9uting 9an!s# 1n cases :here unsecured lending limits 0or an6 particular
31?R contri9uting 9an! do not eist or are temporaril6 0ull2 the Buoting 9an! is reBuired to
honor its 31?R Buoted 9id price#
an!s :hich 0ail to su9mit 31?R rates to Reuters 0or usiness Da6s during an6 calendar
month :ould 9e suspended 0or the net $ month 0rom the list o0 31?R contri9utors# SP
:ill monitor this regularl6 and instruct the Reuters to compl6 :ith the said instructions under
advice to .MA
3. Proposed Mechanism of Islamic Interbank 0ffered ate 4 +arachi 5II!0-+6
1n this section :e loo! at the proposed mechanism o0 11?R 3 developed 96 Meezan an!
"imited and presented to the State an! o0 Pa!istan on thLune (*$*# As 0ar as the structure o0
the mechanism is concerned it is similar to the :a6 other 9enchmar!s li!e "1?R and 31?R
are derived; :ith 1slamic an!s and 1slamic an!ing Iindo:s o0 conventional 9an!s
contri9uting rates each da6 0or various tenors 9ased on their liBuidit6 position and their 0orecasts
0or the 0uture trend o0 the mar!et# 8he 0ollo:ing mechanism and speci0ic rules :ere outlined 0or
the 11?R 3 in the proposal put 0or:ard 9e0ore the SP@
$/ an!s that can contri9ute shall 9e 1slamic an!s -1s/ and 1slamic Iindo:s -1Is/# =o:ever
initiall6 onl6 the si 0ull70ledged 1slamic 9an!s shall 9e the contri9utors# 1slamic :indo:s
shall
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(/ All contri9utor 9an!s shall 9e reBuired to Buote their t:o :a6 epected pro0it rates on
1nter9an! Mudara9ahMushara!ahIa!ala Placements 0or the amount o0 P3R (H million2
:ithin the allo:a9le maimum 9ido00er spreads 0or the relevant tenor as indicated in 8a9le $
9elo:# 8he Buoted prices :ould remain valid 9et:een $$@Ham7$(@** pm Pa!istan Standard
8ime -PS8/ 0or all 11?R73arachi tenors# 1nitiall6 onl6 rates 0or $7:ee! to ,7months tenor
shall 9e Buoted#
)/ 10 the 9an! is hit on its 11?R73arachi price once in an6 tenor2 it can then change the price
0or an6 11?R73arachi tenor in a su9seBuent Buote# =o:ever2 the 9ido00er spread in case o0
an6 su9seBuent price must not 9e more than the allo:a9le 9ido00er spread as per 8a9le $#
Table 1
/ 11?R73arachi contri9utor 9an!s should have unsecured placement limits in place 0or at
least (HG o0 other 11?R73arachi contri9uting 9an!s# 1n cases :here unsecured placement
limits 0or an6 particular 11?R73arachi contri9uting 9an! do not eist or are temporaril6
0ull2 the Buoting 9an! is reBuired to honor its 11?R73arachi Buoted 9id price# an!s :hich
0ail to su9mit 11?R73arachi rates to Reuters 0or + usiness Da6s during an6 calendar
month :ould 9e suspended 0or the net $ month 0rom the list o0 11?R73arachi contri9utors#
H/ ?ther Miscellaneous Ouidelines
a/ All 11?R73arachi Contri9utors to su9mit their rates to Reuters latest 96 $$@)H am PS8#
9/ 8o calculate 11?R73arachi .iings2 Reuters :ill eclude highest and lo:est prices as
per 8a9le ( and calculate the arithmetic mean 0or the remaining values#
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1 week, 2 weeks and 1month 100 basis points
3 and 6 months50 asis
points
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c/ All 11?R73arachi inter9an! related deals should 9e mentioned properl6 in reporting
through mone6 mar!et Central Reporting S6stem -CRS/ to SP#
Table 2
Number ofContributing Banks Outlier ri!es to be"emo#ed
$ess than or %&ual to' NoneBetween 5 ( ) 1 highest ( 1 lowest*ore than ) 2 highest ( 2 lowest
7. #nal)sis and comparison of proposed II!0-+ mechanism with other benchmarks
8he mechanism 0or deriving 11?R 7 3 is Buite similar to the mechanism o0 other conventional
9enchmar!s and the 1slamic 1nter9an! enchmar! Rate -11R/; the onl6 1slamic 9an!ing
9enchmar! launched in 4ovem9er (*$$
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sho:s that there is a lac! o0 con0idence in 11R 9eing the true representative o0 the industr6#
Another ma/2 11?R73 is proposed to 9e a t:o :a6 rate
9ased on 9oth id and As! Buotes o0 the contri9uting 9an!s 0or various tenors# =ence the
11?R73 shall 9e Buoted in 0orm o0 a range rather than a single rate# 8o ensure that the range is
not epansive the proposed mechanism has restricted the maimum spread allo:ed :hen the
Buote is made# oth the 9enchmar!s are not 9ased on 0ied returns as is the case :ith
conventional interest 9ased 9enchmar!s 9ut are rather 9ased on epected rates; i#e# the
contri9utors are as!ed to su9mit the epected rates that the6 :ould 9e :illing to providedemand
0or certain amount o0 0unding# 8he reason 0or this is that :hile conventional rates are guaranteed
as an o9ligation on the o9ligor in a contract o0 qardor loan the underl6ing 1slamic inter9an!
transactions are 9ased on Mushara!ah2 Mudara9ah2 Ia!alah or Commodit6 Mura9aha under
:hich the returns are not guaranteed 9ut are to 9e earned 9ased on the actual underl6ing
per0ormance o0 investment or trade transaction# 8he mechanism o0 11?R73 also de0ines the
minimum amount o0 acceptance placement 0or :hich the rates are to 9e Buoted :hich is P3R
(Hmillion compared to the lot size reBuired under the rules o0 31?R; :hich is P3R $**million;
this amount seems paltr6 ho:ever the same has 9een !ept due to the industr6 d6namics as :ill
9e discussed in the later sections# 1n contrast the mechanism o0 11R does not outline an6 such
minimum lot size amount 0or ma!ing the Buote 9ut re0ers to the mar!et amount o0 KSD in the
Buestion as!ed to the contri9utors -8R (*$$2 J11R .act Sheet>/# 8his can 9e a pro9lem since the
contri9uting 9an!s to the 11R currentl6 range 0rom OCC region to Mala6sia :hile there are
plans to include more 1slamic 9an!s 0rom other regions; :ith each region having di00erent
standards and levels 0or mar!et amount o0 KSD this mechanism is 9ound to discourage actual
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cross 9order inter9an! transactions 9ased on the 9enchmar! ma!ing it at 9est a Buoted
9enchmar! rather than a traded one# 8o ma!e the 11?R73 a practical industr6 representative
9enchmar! and to avoid arti0icial Buotes 96 the contri9utor 9an!s certain provisions have 9een
9uilt in its mechanism including the rule that the contri9uted rates shall remain valid 0or $H
minutes 9et:een $$@Ham till $(@**pm and an6 9an! :hich is approached 0or its epected as!
rate during this time period 96 an6 other contri9uting 9an! :ill 9e reBuired to honor its
commitment and place 0unds :ith that investee 9an! provided the investor 9an! has su00icient
room in its inter9an! placement limits 0or that investee 9an!# "i!e:ise to ensure that there is
su00icient inter9an! 0lo: o0 0unds among 11?R73 contri9utors the rules also reBuire that each
contri9utor 9an! must haveunsecured placement limits in place 0or at least (HG o0 other 11?R7
3 contri9uting 9an!s# At the same time the rules ma!e it mandator6 0or the Buoting 9an!s to
accept 0unds at the Buoted epected 9id rate i0 it is approached during the de0ined time period 96
an6 other contri9uting 9an!# Similarl6 to !eep trac! o0 the deals at the Buoted rates the proposed
rules also reBuire the contri9uting 9an!s to speci0icall6 mention such inter9an! deals as 11?R7
3 related in the SP reporting s6stem# 4o such measures seem to have 9een incorporated in the
11R mechanism :hich :ould ensure that the 11R contri9uted rates are genuine and the rate
actuall6 9ecomes an industr6 representative practical 9enchmar!# =o:ever under the 11R
mechanism 8R is reBuired to carr6 out the audit and revie: o0 the contri9uted rates 9e0ore
calculating the average 11R rate 0or the da6# Along :ith this audit reBuirement the 11R is also
supervised 96 a supervisor6 and technical advisor6 committee !no:n as the 1slamic enchmar!
Committee -1C/ comprising o0 representatives o0 all the contri9uting 9an!s2 AA?1.12 8homson
Reuters2 1slamic Development an!2 etc# At 9est the 1C 9ased on the recommendations o0 8R
can include or eclude an6 contri9utor 9an! in case o0 persistent out o0 the mar!et non genuine
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Buotes or an6 other 9reach o0 the agreement 9et:een the contri9uting 9an!s -8R (*$$2 J11R
.act Sheet>/# =o:ever as 0ar as measures reBuired to ma!e the 9enchmar! practical and trada9le
is concerned the 11R seems to 9e de0icient in this regard :hen compared to the proposed
11?R73 mechanism# At the same time it is important to note that there is no provision o0 an6
supervisor6 9od6 0or the 11?R73 to # Despite these
promising developments in (*$* the launch o0 11?R 3 has 9een stalled to date due to
impeding issues and challenges :hich need to 9e conBuered 0or developing a trul6 relia9le and
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representative 1slamic 9enchmar! rate 0or the 1slamic 9an!ing industr6 in Pa!istan# 8hese issues
and challenges are discussed at length in the 0ollo:ing sections#
8., 'i9e of the industr)
Ih6 did the SP stress the need 0or including at least all the 1slamic 9an!s as contri9utors to the
rate 9e0ore the 0inal launch 8he ans:er lies in the small size o0 the industr6# Despite attaining
around $*G mar!et share the 1slamic 9an!ing industr6 in Pa!istan is still d:ar0ed 96 the
conventional 9an!ing s6stem o0 the countr6# As per the current 0igures -(*$( 6ear end/ there are
H 0ul0ledged 1slamic an!s and $) 1slamic an!ing :indo:s -17SP Decem9er (*$(/# 8his is
in star! contrast to the size o0 the conventional 9an!ing mar!et :hich has around )( commercial
9an!s# ?ut o0 these )* 9an!s; up to (* are contri9utors to 31?R 0or various tenors# 8hese
include top H commercial 9an!s !no:n as the ig H controlling H(G mar!et share o0 the 9an!ing
industr6 namel6 MC an!2 Knited an! "imited2 4ational an! o0 Pa!istan2 Allied an!
"imited and =a9i9 an! "imited -Annual Reports (*$$/# =ence the 31?R is determined 9ased
on contri9utions 0rom a ma
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-M" Annual Report (*$(/# 8he remaining num9ers are shared 96 1slamic 9an!s and $)
1slamic 9an!ing :indo:s# 1n terms o0 pro0ita9ilit6 M" ran!ed ' thin the :hole 9an!ing industr6
as per the results 0or the 6ear ended Decem9er (*$$ :ith a 9ottom line pro0it a0ter ta o0 P3R
)#)'( 9illion# Compared to this the rest o0 the 0ull70ledged 1slamic 9an!s in the industr6 managed
to secure a com9ined 9ottom line o0 P3R $#$$ 9illion; :ith an! 1slami "imited -1"/ and Al
ara!a an! Pa!istan "imited -AP"/ sho:ing earnings o0 P3R $* million each Du9ai
1slamic an! -D1/ ma!ing an earning o0 P3R$'$million :hile ur< an! "imited -"/ made
a net loss o0 P3R ( million# Iith this controlling sta!e in the mar!et other mar!et participants
are anious o0 9eing a partner contri9utor to an average industr6 9enchmar!# 8he relative
strength o0 M" in terms o0 pro0ita9ilit6 has ena9led the 9an! to invest heavil6 in its 9ranch
net:or! over the 6ears# Iith )$* 9ranches M" has the thlargest 9an! net:or! in the industr6
-M" Annual Report (*$(/2 the closest to M" among 1slamic 9an!s is 1" :ith a 9ranch
net:or! o0 $*( -1" Annual Report (*$(/# 8he total num9er o0 1slamic 9an!ing 9ranches in the
countr6 as o0 6ear ending Decem9er (*$( :as $*'+ 9ranches -17SP Decem9er (*$(/# 8his
:idespread 9ranch net:or! provides M" :ith an etensive outreach and higher sources o0
generating lo: cost retail liBuidit6# 8his has resulted in M" having the lo:est average cost o0
deposit rate o0 H#)G in the 1slamic 9an!ing industr6 -M" Annual Report (*$$/# 1n 0act :hen
loo!ing in terms o0 the :hole 9an!ing industr6 M" has the +thlo:est cost o0 deposits among
)( commercial 9an!s# As per the 6ear ended (*$$ the rest o0 the 1slamic 9an!s eperienced the
0ollo:ing costs o0 deposits -according to (*$$ annual reports/#
Name of !ank Cost of Deposits
an! 1slami "imited ,#)G
Du9ai 1slamic an! ,#G
ur< an! "imited #G
Al ara!a an! Pa!istan "imited #+G
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8he proportion o0 lo: cost Current Account and Saving Account -CASA/ deposits; an important
statistical per0ormance 9enchmar! in the industr6; o0 M" as o0 Decem9er (*$$ :as ,HG#
Comparativel6 other 1slamic 9an!s 0ared as per the 0ollo:ing ta9le -according to (*$$ annual
reports/#
Name of !ank Proportion of C#'#
an! 1slami "imited #HG
Du9ai 1slamic an! H)#G
ur< an! "imited #,G
Al ara!a an! Pa!istan "imited H#'G
1n terms o0 :holesale sources to 0unding M" due to its 9etter credit rating; as mentioned in the
0ollo:ing section; and strength o0 its 9alance sheet is a9le to have diverse lines :ith other
conventional 0inancial institutions to accept and place 0unding through the modes o0 8a:arruB
and commodit6 mura9aha# 8hese entire 0actors place M" into a ver6 strong position 96 a huge
margin compared to its 1slamic 9an!ing counterparts creating a perception that M" :ill 9e a9le
to control the 9enchmar! rates to its 9ene0it and to the detriment o0 other 9an!s# Such
perceptions ma6 seem unreal given the mechanism o0 11?R73 as stated a9ove :hich reBuires@
i/ the rates Buoted 96 each 9an! to 9e eecuta9le to control the rigging o0 the 9enchmar! and;
ii/ the average :ill 9e a trimmed average 96 discarding the highest and the lo:est prices#
=o:ever given the 0act that the rates o0 o00er9id :ill onl6 9e given 0or a meager P3R (H million
:hich :ill not have a huge impact on M" given the sheer size o0 its 9alance sheet and the 0act
that i0 the contri9utor 9an!s on an6 given da6 0all 9elo: the num9er o0 0ive the trimmed average
0ormula :ill not 9e implemented ma!ing the controlling o0 the 9enchmar! 96 the industr6>s
largest 9an! a certain possi9ilit6# 8he 11?R73 derived 0rom such a situation ma6 9e to lo: to
9e accepta9le to other 1slamic 9an!s in the industr6; :ho :ill have to charge a higher premium
over and a9ove the 9enchmar! rate ma!ing it di00icult 0or them to mar!et their 0inancing
products to their corporate and retail customers#
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8he lo: cost o0 deposits :ill certainl6 ena9le M" to Buote rates :hich are ver6 much lo:er
than the rest o0 the mar!et# =ence even i0 :e consider that the num9er o0 contri9utors does not
0all 9elo: 0ive contri9utors the rates Buoted 96 M" shall 9e sidelined as outliers# 8he 11?R73
in such cases :ill then 9e 9ased on the remaining values# 8hese values ma6 9e contri9uted 96 a
large num9er o0 1slamic 9an!s and 1slamic 9an!ing :indo:s 9ut the resulting 11?R73 rates
ma6 not re0lect the true industr6 position nor 9e 9ased on the lo:est cost and ris! levels o0 the
industr6 since a0ter all M" does represent ))G share o0 the industr6#
8.1 atings
8he contri9uting 9an!s 0or "1?R and 31?R have similar ratings and 0inancial strength :hich
allo:s 0or each o0 the contri9uting 9an!s to 0reel6 trade 0unds 9et:een them at the contri9uted
rates# 8he ratings o0 the 9ig H group o0 9an!s; the ma
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Name of !ank ating #genc)'hort &erm
ating
:ong term
ating
Meezan an! "imited LCR7Q1S A7$ AA7
an! 1slami "imited PACRA A$ A
Du9ai 1slamic an! LCR7Q1S A7$ Aur< an! "imited LCR7Q1S A7$ A
Al ara!a an! Pa!istan "imited LCR7Q1S A7$ A
Due to M">s relative strength as mentioned earlier the 9an! has 9oth long term and short term
ratings higher than its peers# 1n 0act M">s short term ratings are eBual to the top tier
commercial 9an!s in the industr6# As 0ar as other pla6ers in the 1slamic 9an!ing industr6 are
concerned all o0 them have a one level lo:er short term credit rating o0 A7$#
Due to this di00erence in credit ratings all 1slamic 9an!s do not have su00icient inter9an! credit
lines :ith each other; there96 reducing the volume o0 transactions 9et:een them# 1nstead 1slamic
9an!s are more satis0ied :ith having inter9an! short term credit lines :ith the 1slamic 9an!ing
:indo:s o0 conventional 9an!s :hich have the same credit rating as their conventional parent
companies since ratings are issued 0or the institution as a :hole and not independentl6 0or the
:indo: operations# Almost all o0 the conventional 9an!s mentioned in the ratings grid have
conventional :indo:s ecept Allied an! "imited# Secondl6 the development o0 product
structure o0 local commodit6 mura9aha in (**+ in Pa!istan has allo:ed 1slamic 9an!s to use this
vehicle o0 8a:arruB 0or par!ing their ecess liBuidit6 even :ith conventional 9an!s# Such
measures have raised e6e9ro:s o0 various o9servers including the regulator; ho:ever the 1slamic
9an!s and their Shariah advisors have
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alternatives :ith 9etter ris! pro0iles to invest their ecess liBuidit6 :ith rather than rel6 on other
1slamic 9an!s#
8he unavaila9ilit6 o0 su00icient lines :as also raised as one o0 the stum9ling road 9loc!
restricting the development o0 1slamic inter9an! mar!et and practical via9ilit6 o0 11?R73
during the meetings 9et:een 1slamic 9an!s 0or the launch o0 11?R73# Since rates Buoted 0or
11?R73 need to 9e eecuta9le as mentioned in the mechanism a9ove so as to avoid rigging o0
rates and ma!e the 9enchmar! a real representative o0 the industr6; the unavaila9ilit6 o0
su00icient lines :ould e00ectivel6 ma!e the contri9uted Buotes non7eecuta9le hence increasing
the chances o0 the 11?R73 rates 9eing rigged#
8.2 'tandardi9ation
Another important 0actor inhi9iting inter9an! 0lo: o0 0unds 9et:een 1slamic 9an!s is the 0act
that di00erent 1slamic 9an!s and :indo:s use products 9ased on di00erent modes 0or acceptance
and placement o0 0unds in the inter9an! mar!et# 8his :as also the main 0actor highlighted 96
8reasurers and Shariah advisors in the various meetings held 9et:een 1slamic an!s to 9uild a
consensus 0or the launch o0 11?R73# M"2 AP" and " use the Mushara!ah structure 0or
accepting and placing liBuidit6# ?n the other hand D1 uses the Ia!alah 9ased structure 0or
placement o0 liBuidit6# 8he second largest 1slamic 9an! 1" initiall6 had its inter9an! product
structure 9ased on Ia!alah 9ut later discarded it citing Shariah compliance issues; the 9an! also
:as not in 0avor o0 using Mushara!ah 9ased structure earlier 9ut no: seems to 9e settled :ith
the same structure# As 0ar as 1slamic :indo:s o0 conventional 9an!s are concerned an! Al0alah
1slamic2 MC 1slamic2 =a9i9 Metropolitan 1slamic and =a9i9 an! 1slamic use the Mushara!ah
9ased structure 0or inter9an! activit6# .a6sal an! 1slamic2 Standard Chartered SaadiB and
Soneri an! 1slamic use the Mudara9ah Structure# Similarl6 the use o0 Commodit6 Mura9aha or
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8a:arruB has 9een a ma
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Regarding Ia!alah; 1" cited .iBhi concerns in using Ia!alah and giving a 0ied 0ee to the
:a!il in a special investment pool :here the Ia!eel is also participating as a partner along
:ith the Mu:a!!il#
Regarding its non approval o0 Mushara!ah; D1 advised that Jits glo9al Shariah 9oard is not
convinced regarding the Shariah compliance o0 the 1nter9an! Mushara!ah product and hence
it is not possi9le 0or them to secede 0rom them>; hence the reason :as more o0 an internal
polic6 matter rather than a purel6 Shariah issue#
Ihile the .iBhi issues are not the su9
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=a9i9 an! 1slamic# Despite this consensus the launch o0 11?R73 could not 9e achieved in
(*$* due to the a9sence o0 t:o !e6 pla6ers in the industr6 i#e# 1" and D1#
8he current situation in (*$) is more or less the same :ith seven 1slamic :indo:s and three
0ul0ledged 1slamic 9an!s 9eing in consensus on the 1nter9an! Mushara!ah Structure; :hile three
0ul0ledged 1slamic 9an!s are in consensus 0or the Ia!alah structure# Iith this divided mandate
the development o0 an e00icient 1slamic inter9an! mar!et and hence a via9le 9enchmar! remains
a distant possi9ilit6#
8.3 :ow confidence regarding 'hariah compliance$
Due to di00erent schools o0 .iBh; scholars 0rom Mala6sia2 Pa!istan and Oul0 Region have
di00erent opinion on di00erent issues :hich result in di00erent product structures prevailing in
di00erent regions# 8his has hindered the process o0 standardization and integration o0 glo9al
1slamic 0inancial mar!ets; restricting the 0lo: o0 0unds 9et:een
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Shariah advisors; products o0 1slamic 9an!s :ith 0oreign Shariah 9oards are seen :ith
s!epticism# 8he local religious schools and their 0at:a issuing 9odies have onl6 certi0ied
products o0 1slamic 9an!s :ith local Shariah scholars# Ihile the position o0 these institutions
regarding 1slamic 9an!s :ith 0oreign scholars is that o0 anon6mit6; that is neither approving nor
disapproving these institutions# 8his is also the position o0 the countr6>s t:o 9iggest religious
institutions Lamia Darul Kloom and Lamia Al Rashid; 9oth the institutions hold heav6 in0luence
among the general pu9lic# Again the ma
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Buali0ied Shariah scholars# 8here are three local Shariah scholars on its panel 0or managing
Shariah matters o0 the su9sidiar6 along :ith the high pro0ile glo9al Shariah 9oard o0 the AO#
8he 9an! used to operate :ith one Shariah scholar previousl6 9ut reconstituted its local panel in
(*$* :hen the 9an! acBuired 5mirates Olo9al 1slamic an!# 1n contrast D1 and SC SaadiB
9oth emplo6 one local Shariah scholar :ho :or!s under their glo9al Shariah 9oards#
8his issue has also hampered the development o0 clean inter9an! lines 9et:een 1slamic 9an!ing
institutions restricting the 0ree and e00icient 0lo: o0 0unds 9et:een them# Resolution o0 this issue
is crucial 0or the development o0 the 1slamic 9an!ing industr6 and the launch o0 an 1slamic
9enchmar! rate in the countr6# Qarious measures need to 9e ta!en to resolve this issue#
1nstitutions 0acing the pro9lem o0 mar!et perception and Shariah accepta9ilit6 need to rethin! on
their Shariah governance structures and pro9a9l6 0ollo: in the 0ootsteps o0 AP"@ !eeping
intact their high pro0ile glo9al Shariah 9oards as :ell as creating a local committee o0 local
Shariah scholars catering to the local demands and sentiments o0 the mar!et# 8his ma6 result in
di00erent Shariah positions 9eing ta!en 96 these 9an!s 0or the same product 9eing o00ered in
di00erent mar!ets; 0or instance re9ate on earl6 pa6ments in Mura9aha transactions :hich ma6 9e
allo:ed in the OCC mar!ets 9ut prohi9ited in the Pa!istani mar!et; or di00erent products 9eing
o00ered 0or di00erent mar!ets# =o:ever this is the strateg6 emplo6ed 96 success0ul multinational
organizations :orld:ide; ta!e 0or instance the eample o0 Pizza =ut and 3.C o00ering di00erent
menus 0or di00erent mar!ets catering to the local tastes#
Such di00erences o0 opinion can also 9e :eeded out through Shariah advisor level negotiations
9et:een 1slamic 9an!s# Alternativel6 the 1slamic 9an!s -especiall6 those :ith 0oreign Shariah
scholars/ can approach the local religious and 0at:a institutions to resolve the issues and
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misunderstandings regarding their products# 8his :ill not onl6 help in 9ringing standardization
9ut also result in more mar!eta9ilit6 and accepta9ilit6 o0 their 9rand name#
8.7 ole of Central !ank 'hariah !oard
Role o0 the central Shariah oard is crucial 0or the development and standardization o0 1slamic
9an!ing products in an6
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reverse repo transactions# 8hese issues are o0 vital importance 0or the development o0 1slamic
mone6 mar!et 9ut no signi0icant progress or intent at the regulator6 level can 9e seen#
A mas Shariah oard lies in the
governance structure o0 its Shariah 9oard; eplained one 1slamic 9an!ing eecutive during
discussion :ith the author# 8he composition o0 the SP>s Shariah 9oard -SP (**2 SP11P/
shall involve t:o Shariah scholars2 one accountant2 one la:6er and director o0 the 1slamic
an!ing Department -1D/ o0 SP :ho shall also act as secretar6 to the Shariah oard# 8he role
o0 the accountant and the la:6er shall onl6 9e to provide technical help to the Shariah scholars#
8he authorit6 to ma!e 0inal decisions shall rest :ith the chairman o0 the 9oard :ho shall 9e 0rom
among the t:o Shariah scholars# 8he pro9lem lies in the 0act that since its incorporation either
one or 9oth o0 the scholars appointed on the SP Shariah 9oard has at the same time served as
Shariah advisor o0 a particular 1slamic 9an!# Currentl6 one o0 the scholars on SP Shariah oard
is also the Shariah advisor o0 D1 :hile the other scholar is the Shariah advisor o0 MC 1slamic#
8his is not the case in other the Shariah scholars are
associated :ith rather than resolving the pressing matters o0 the overall industr6#
8.8 Non availabilit) of 'hariah compliant *inancier of :ast esort *acilit) 5*0:*6
?ne ma
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96 placing government papers as securities to the SP# 1n contrast there is no such 0acilit6
availa9le 0or 1slamic 9an!s# A Shariah compliant structure 0or this 0acilit6 9ased on the concept
o0 Mudara9ah :as developed in consensus 96 1slamic 9an!s and su9mitted to SP on $( th
Septem9er (*$$# Su9seBuentl6 the mem9ers o0 the development committee o0 the proposal also
gave their presentation to SP#
Knder the structure :henever an6 1slamic 9an! is short o0 0unds it can approach the SP 0or
reBuirement o0 0unds# SP a0ter the usual scrutin6 can provide 0unds as Ra9ul Maal 96 investing
in the general asset pool o0 the investee 1slamic 9an!; :hich is managed 96 the 1slamic 9an! as
Mudari9# SP>s investment :ill 9e given a pro0it sharing :eightage# 8he tenor o0 SP
investment can 9e 0rom $ ) da6s; to 9e decided at the time o0 application 96 the 1slamic 9an!#
Kpon maturit6 o0 the investment period; pro0it o0 the pool :ill 9e calculated 0rom :hich the
pro0it share o0 SP :ill 9e calculated as per the pre agreed pro0it sharing :eightage and
distri9uted to SP along :ith the initial investment value#
8he structure is similar to that 0ollo:ed 96 the central 9an! o0 1ndonesia# =o:ever despite the
e00orts the 1slamic 9an!s are still devoid o0 this 0acilit6# Iithout this 0acilit6 1slamic 9an!s are
devoid o0 a source o0 liBuidit6 suppl6 :hich can act as a cushion in times o0 liBuidit6 crunch#
Currentl6 in times o0 liBuidit6 crunch 1slamic 9an!s have to rel6 on the inter9an! mar!et to avail
liBuidit6# Due to under development o0 1slamic liBuidit6 mar!et as discussed in previous sections
arranging liBuidit6 0rom the inter9an! mar!et 9ecomes an uphill tas!# ConseBuentiall6 liBuidit6
can onl6 9e arranged at higher costs2 and more o0ten the overnight rates o00ered 0or the liBuidit6
are even higher than the SP :indo: rates availa9le 0or conventional 9an!s# Apart 0rom this the
non availa9ilit6 o0 the 1slamic Discount Iindo: causes 1slamic 9an!s to ta!e a cautious
approach in managing their 0unds# 8his impacts their dail6 and :ee!l6 liBuidit6 management
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Figure 1 - Money Market Equilibrium
0%
2%
4%
6%
8%
10%12%
14%
16%
18%
20%
0 2000 4000 6000 8000 1 0000
Liquidity Supplied & Demanded (in
PKR n!"
K#$R
&
##$R-
Demand
Supply
approach since 1slamic 9an!s have to 0ul0ill dail6 and :ee!l6 statutor6 Cash Reserve
ReBuirements -CRR/ o0 the regulator# 8his has resulted in a situation :here the 1slamic 0inancial
mar!et and the 1slamic 9an!s operate at a level :hich is lo:er than the optimal e00icienc6 level
resulting in arti0iciall6 higher liBuidit6 management costs# Knder these circumstances and given
the small size o0 the industr6 an6 average 9enchmar! rate o0 the 1slamic 9an!ing industr6 :ill 9e
higher than it :ould have 9een :ith the availa9ilit6 o0 1slamic Iindo: .acilit6; thus not
re0lecting the true sentiments o0 the mar!et#
;. Independence of II!0-+ from +I!0
1slamic 9an!s are 0inancial institutions and li!e all 0inancial institutions the6 are agents o0
0inancial intermediation# 8hat is all 0inancial institutions including 1slamic 9an!s have t:o ma
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'#+G o0 the total 9an!ing industr6# Iithout going into the statistics the 1slamic inter9an! mar!et
is even smaller than this 0igure :ould suggest due to it>s under developed nature and small
volume transactions among 1slamic 9an!s# Knder this scenario even i0 the 11?R73 is launched
as per the proposed mechanism it is almost certain that the rates o0 11?R73 :ould 9e more or
less eBual to the 31?R# 8he reason 0or this possi9ilit6 is that 0inancial mar!ets li!e all mar!ets
are driven 96 the 0orces o0 demand and suppl6 :hich interact in the mar!et to achieve the
eBuili9rium price# 8he price in the 0inancial mar!et is the interest rate at :hich the liBuidit6 is
demanded and supplied# 8he t6pical demand curve o0 liBuidit6 is negativel6 sloped as can 9e
seen in .igure $#
8he negative slope is due to the 0act that lo:er the interest rate the higher is the demand 0or
liBuidit6 0or a speci0ied period o0 credit; :hich is assumed to 9e ,7months in .igure $# 8he
0igure also sho:s the suppl6 curve o0 liBuidit6 :hich is positivel6 sloped denoting the 0act that
higher the interest rates higher :ill 9e the amount o0 liBuidit6 that 0inancial institutions are
:illing to suppl6 0or a speci0ied period o0 credit# 8he mone6 mar!et eBuili9rium is the point
:here the demand 0or liBuidit6 and suppl6 o0 liBuidit6 interact denoting the 0act that suppl6 and
demand are eBual at that point o0 interest rate# 1n .igure $ the mone6 mar!et eBuili9rium is at the
point :here 31?R is eBual to G# ?ther things remaining constant2 an6 one institution
charging rates higher than this point sa6 0or instance $*G :ill realize that it is una9le to 0ind
su00icient 9orro:ers to lend to since there :ould 9e other 0inancial institutions o00ering credit at
much cheaper rates o0 G in the mar!et# =ence this institution :ould 9e 0orced to decrease its
rates 0or suppl6ing credit to the mar!et up to the rate o0 G since an6 rates a9ove than this
mar!et eBuili9rium rate :ould not get the reBuired num9er o0 9orro:ers# Similar :ill 9e the case
i0 :e 9ring in 11?R73 into this mar!et# ?ther things remaining constant2 i0 0ive 1slamic 9an!s
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and certain num9er o0 1slamic 9an!ing :indo:s :ere to Buote their rates as per the proposed
mechanism o0 11?R73 and i0 that rate :ere to 9e higher than the prevailing mar!et eBuili9rium
rate o0 31?R these host o0 1slamic institutions :ill 0ace the same situation as 0aced 96 the
institution :hich Buoted $*G rate in our h6pothetical eample# 10 ,7month 11?R73 is Buoted at
$*G on an6 single da6 :ith eBuili9rium 31?R 9eing G 1slamic 9an!s :ill not 9e a9le to 0ind
su00icient inter9an! and even corporate customers to provide 0inancing to# Contrastingl6 since
11?R73 is proposed to 9e a t:o :a6 rate the 9id rate o0 11?R73 :ill also 9e higher than (**
9asis points than the 9id rate o0 31?R# 8his :ill provide ar9itrage opportunities to the mar!et
participants :ho :ill start 9orro:ing 0rom the conventional s6stem at G and place the
9orro:ed 0unds at $*G :ith 1slamic 9an!s# 5ven conventional 9an!s :ill 0ind it pro0ita9le to
start placing their ecess liBuidit6 :ith 1slamic 9an!s at $*G# 8his situation :ill result in 1slamic
s6stem 9eing 0lushed :ith ecess liBuidit6 and contracting avenues 0or deplo6ment o0 this
liBuidit6# As a result 1slamic 9an!s and :indo:s :ill have to reduce their Buotes 0or the
0ollo:ing da6s up to the point :here 11?R73 is eBual to 31?R or the eBuili9rium rate#
10 the 11?R73 rates are Buoted 9elo: the eBuili9rium 31?R rates the process :ill 9e reverse#
.or instance i0 the eBuili9rium ,7month 31?R is G and the ,7month 11?R73 is Buoted at ,G
the 1slamic 9an!ing institutions :ill :itness long Bueues o0 inter9an! as :ell as corporate
customers desiring to avail 0unding 0rom them# 8he ar9itrageurs including conventional 9an!s
:ill also 0ind an opportunit6 to avail 0unding 0rom the 1slamic s6stem and place these 0unds :ith
the conventional s6stem# ?n the other hand depositors :ho are indi00erent regarding Shariah
compliance :ill start to :ithdra: their deposits 0rom the 1slamic s6stem and deposit their 0unds
:ith the conventional s6stem# 8his pressure on :ithdra:als and high demand 0or 1slamic 0unds
:ould create a liBuidit6 crunch situation 0or 1slamic 9an!s :hich the6 :ould reBuire to resolve
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through replenishing o0 liBuidit6 0rom the inter9an! mar!et2 :ith other 1slamic 9an!s 0acing the
same situation and non availa9ilit6 o0 .?"R. 0rom SP the 1slamic 9an!s :ould 9e 9ound to
approach the 31?R priced conventional s6stem 0or availing the reBuired liBuidit6 through
8a:arruB :hich :ould 9e higher than the 11?R73 rates# =ence 9eing a d:ar0 to the
conventional s6stem the 1slamic 9an!s :ould 9e 0orced to increase their Buoted rates 0or the
0ollo:ing periods to stem the out0lo: o0 0unds 0rom its s6stem as :ell as to ease the pressure on
its 0inancing side# 8he rates :ould have to 9e increased upto the point :here 11?R73 is eBual
to the 31?R rates 9aring transactional cost o0 ar9itrage#
1n the scenarios discussed a9ove the Buestion arises :h6 :ould the 1slamic s6stem 9e 0orced to
revise its rates rather than the conventional s6stem 8he ans:er lies in the 0act that 1slamic
9an!ing is merel6 a '#+G o0 the total an!ing industr6 in Pa!istan and hence is not a dominant
position to dictate its rates# =ence the conventional s6stem is currentl6 the mar!et ma!er and is
the mat have an6 empirical
evidence in an6 other mar!et regarding ho: :ill the mar!et move :hen 1slamic 9an!ing
captures a ma
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not 0ollo: 31?R since 9oth the rates :ill have same level o0 presence on ground and 9oth the
rates :ill 9e in a position to move the mar!et#
;., Independence of II!0-+ with a !ar on free flow of funds
8he placement o0 ecess liBuidit6 96 1slamic 9an!s :ith conventional interest 9ased institutions
is a matter o0 concern among various Buarters and is not vie:ed 0avora9l6 96 various Shariah
scholars since it results in 0acilitating conventional 9an!s to ma!e ri9a 9ased lending :hereas the
=ol6 uran 0or9ids Muslims 0rom helping one another in :rong doing and transgression -Surah
Al Maidah H@(/# 1ndeed it seems undesira9le and un
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11?R73 is achieved at G assuming other things are constant and there are no transaction costs
o0 ar9itrage# 8he suppl6 in this 0igure is the total suppl6 o0 mone6 9eing the aggregate o0 suppl6
o0 the 1slamic mar!et and the conventional mar!et# 8he same is the case :ith demand :hich is
the aggregate o0 the t:o mar!ets#
8he .igure ( -9/ sho:s the
conventional mar!et# 8he
demand in the conventional
mar!et is the same as the
demand in 0igure ( -a/ since
the 1slamic 9an!s are not
9arred 0rom accepting 0unds
0rom the conventional
s6stem# =o:ever the suppl6
in 0igure ( -9/ is less than the suppl6 level in 0igure ( -a/ since the 1slamic 9an!s are not allo:ed
to place 0unds :ith conventional 9an!s# =ence the suppl6 curve -Suppl6/ in 0igure ( -9/ is to
the le0t o0 the suppl6 curve -Suppl6/ in 0igure ( -a/; the gap 9et:een the t:o curves depicts the
unavaila9le 1slamic mone6 suppl6# Due to this shi0t in the mone6 suppl6 the eBuili9rium 31?R
o0 the conventional mar!et at
$*G comes out to 9e higher
than the eBuili9rium that
:ould have 9een in case 0ree
0lo: o0 0unds :as allo:ed
Page ) o0 *
Figure % (b" - on'entional Money Market Equilibrium
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0 2000 4000 6000 8000 10000
Liquidity Supplied & Dem anded (in PKR n!
K#$
Supply
Demand
Supply**
Figure % (" - #!lami Money Market Equilibrium
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%20%
0 2000 4000 6000 8000 10000
Liquidity Supplied & Demanded (in PKR n!"
##$R-
Demand
Supply
Demand**
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9et:een the t:o s6stems as depicted in .igure ( -a/# 4o: let>s loo! at .igure ( -c/ :hich
represents the 1slamic mone6 mar!et; notice that the suppl6 curve in .igure ( -c/ is at the same
level as in .igure ( -a/ since the conventional 9an!s can placeo00er their 0unds :ithto the
1slamic mar!et; the suppl6 in the 1slamic mar!et :ill 9e same as suppl6 o0 0unds in .igure (-a/#
=o:ever since conventional 9an!s are not allo:ed to accept 0unds 0rom 1slamic 9an!s the
demand 0or the 1slamic 0unds :ill 9e less than the demand sho:n in .igure ( -a/# =ence the
demand curve -Demand/ in .igure ( -c/ is to the le0t o0 the demand curve -Demand/ in .igure
( -a/# 8his decrease in the demand :ould result in eBuili9rium 11?R73 at ,G in the 1slamic
mar!et 9eing less than the eBuili9rium 11?R73 :hich :ould have 9een in case 0ree 0lo: o0
0unds :ere allo:ed 9et:een the t:o s6stems as depicted in .igure ( -a/#
=ence :ith the restrictions in place and no ar9itrage opportunities availa9le it is highl6 li!el6
that 11?R73 :ill 9e di00erent and lo:er than the 31?R rate at all times due to ecess suppl6
and lo:er demand 0or 0unds in the 1slamic mar!et; ma!ing 11?R73 largel6 independent 0rom
the 31?R 0iing# 1t is important to note that the eplanation discussed a9ove assumes that there
:ill 9e no indirect lea!ages 0rom the 1slamic s6stem to:ards the conventional s6stem# 1n the real
:orld scenario it is highl6 li!el6 that even though direct placement 0rom 1slamic 9an!s into
conventional s6stem :ould 9e restricted other economic agents such as 0irms and corporate
entities; especiall6 those :hich are indi00erent regarding Shariah principles; :ould start availing
0unding 0rom the 1slamic s6stem :hile placing their ecess liBuidit6 :ith the conventional
s6stem there96 resulting in an indirect ar9itrage# =o:ever the magnitude and the pace o0 this
ar9itrage :ill determine the impact it :ill have on the t:o 9enchmar! rates; :hich remains to 9e
seen# 1rrespective o0 the e00ects; as 0ar as the independence o0 11?R73 is concerned a restriction
on 0lo: 0unds is 9ound to ma!e it a realit6#
Page )H o0 *
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;./ Independence hampered due to nature of Islamic !anking financing$
Currentl6 the nature o0 0inancial intermediation underta!en 96 1slamic 9an!s is similar to that
ta!en 96 conventional 9an!s# oth s6stems have adopted de9t 9ased approach 0or 0inancial
intermediation# Ihile 9oth the deposit side and the 0inancing side o0 the conventional s6stem is
9ased on de9t; 1slamic 9an!s rel6 on non de9t 9ased contracts 0or accumulation o0 deposits and
de9t 9ased transactions 0or 0inancing purposes# 8hese de9t 9ased 0inancing o0 1slamic 9an!s
comprises the 0ollo:ing modes mura9aha2 ta:arruB2 istisna2 musa:amah2 etc# Knder these
modes the 9asic underl6ing ris! e00ecting the decision ma!ing o0 1slamic 9an!s is the credit
de0ault ris! :hich is similar to the underl6ing ris! o0 the conventional lending 9ased products#
=ence the price that the mar!et or the customers are :illing to pa6 0or this ris! is
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:ithout an6 ceiling# =ence in such a scenario; even i0 1slamic 9an!s gain a ma
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is possi9le to hedge the ris!s through diversi0ication# =ence along :ith the eisting port0olio
1slamic 9an!s should 0ocus on developing this port0olio o0 shir!atul aBd 9ased activities# Kpon
signi0icant size o0 this port0olio 1slamic 9an!s :ill have t:o t6pes o0 assets those :hich are de9t
9ased and capped to a certain level o0 ris! and pro0it rates; and secondl6 the port0olio :hich is
partnership 9ased :ith managed ris! 9ut higher returns :ithout an6 capping# Iith these inherent
characteristics; irrespective o0 their size or share in the industr6; 1slamic 9an!s :ill provide
11?R73 Buotes :hich :ould 9e di00erent and independent 0rom 31?R re0lecting their o:n
liBuidit6 status2 placement opportunities2 epected returns and ris!#
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paper also suggests that real independence can 9e ensured i0 the 1slamic 9an!s ad
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Mu0ti Muhammad 8aBi Ksmani2 (**+2 /he 0istric 1udement n Interest deli+ered in the
Supreme $urt f ,akistan2 Ma!ta9a Ma>ari0ul uran2 3arachi#
4ational an! "imited2 (*$(2Annual Reprt !"##
State an! o0 Pa!istan2 PD Circular 4o#2 (**2Benchmarkin $rprate 2endin ,rductst KIBOR* vie:ed $* March (*$)2http@:::#s9p#org#p!9pd(**C$#htm
State an! o0 Pa!istan2 DMMD Circular 4o#$2 (**'2 Intrductin f interest rate crridr*vie:ed $* March (*$)2 http@:::#s9p#org#p!dmmd(**'C$#htm
State an! o0 Pa!istan2 1slamic an!ing Department -1D/2 (*$)2 Islamic Bankin Bulletin
3ecember !"#!2 vie:ed *) April (*$)2 http@:::#s9p#org#p!i9d9ulletin(*$(17Sep7(*$(#pd0
State an! o0 Pa!istan2 (*$(2 $redit Ratins f Banks* 3.Is 4 M.Bs2 vie:ed () March (*$)2
http@:::#s9p#org#p!pu9licationscTratingRatings7$(7Sep7(*$(#pd0
State an! o0 Pa!istan2 (**2 Strateic ,lan fr the Islamic Bankin Industr in ,akistan*vie:ed $* March (*$) http@:::#s9p#org#p!departmentspd0StrategicPlanPD.Strateg6
G(*Paper7.inal#pd0
8homson Reuters2 (*$$2Islamic 1uristic ,rnuncement2 vie:ed () March (*$)2
http@thomsonreuters#comcontent0inancialpd0crossTasset11RT.at:aT5n#pd0
8homson Reuters2 (*$$2IIBR .act Sheet2 vie:ed () March (*$)2http@thomsonreuters#comcontent0inancialpd0crossTassetii9rT0actsheet#pd0
Knited an! "imited2 (*$(2Annual Reprt !"##
Iorld an! (*$$2 56rld Bank .inancial Inclusin 3ata%2 vie:ed )* April (*$)2
http@datatopics#:orld9an!#org0inancialinclusioncountr6pa!istan
http://www.sbp.org.pk/bpd/2004/C1.htmhttp://www.sbp.org.pk/bpd/2004/C1.htmhttp://thomsonreuters.com/content/financial/pdf/cross_asset/IIBR_Fatwa_En.pdfhttp://www.sbp.org.pk/bpd/2004/C1.htmhttp://thomsonreuters.com/content/financial/pdf/cross_asset/IIBR_Fatwa_En.pdf