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IMF expert points to rate of return in Islamic banking

RECORDER REPORT

KARACHI: An IMF expert on Islamic financing here on Monday said that there existed "known rate of return" in many modes of Islamic instruments.

Dr Ghaith Shabsigh, of International Monitory Fund, presented a detail but quick overview of different Islamic modes of financing and their similarities with traditional (contemporary) financing.

He discussed a list of Islamic instruments where the rate of return is known, but failed to satisfy many among the audience on the issue of fixed rate of return. He gave the example of Moharaba, an Islamic mode of financing, in this context.

He said there "is no return on deposits" but certificates on deposits could be issued with known rate of return in the Islamic banking system. These deposits are guaranteed, as redeemable, he added.

Similarly, fixed income government securities can also be issued, and this was is not un-Islamic.

He said leasing (Ijara) was Islamic.

He pointed out some minute differences in the traditional and Islamic leasing modes.

Various Islamic banking products were discussed by the IMF expert.

He also highlighted the main difficulties encountered by 'Islamic' banks. He said the Islamic banking system was facing the problem of limited number of available financial products, particularly on deposits side.

The lack of market-based valuation of assets and difficult liquidity management, was another front for the Islamic system, he said.

He stressed the need to build blocks for efficient and market-based financial system.

The need of a legal frame work was also discussed and it was observed that it must be completed before introducing Islamic mode of instruments. It would also help in avoiding deception and misinterpretation, he added.

To develop and create more products, along with legal frame work, a regulatory regime should be established. The expert also suggested private monitoring.

Emphasising the need for 'rating agencies' to evaluate the rating of Islamic financial instruments, the IMF expert stressed for developing a money market in accordance with the requirement of Islamic economic system.

He said he did not see any unIslamic factor in the process of securitisation. He was of the view that "we should not see outcome: instead, we must monitor the bottom line a contract which will tell us whether it is Islamic or not."