Qudsia Bano

Pakistan's financial outlook is poised for significant change as experts highlight the potential of Modarabah-based Open Market Operations (OMOs) to boost economic growth. This innovative approach is expected to infuse much-needed liquidity into the market while aligning with Islamic financial principles, thereby attracting a broader spectrum of investors. Modarabah, an Islamic finance structure where one party provides the capital and the other manages the investment, is now being integrated into the SBP's monetary policy toolkit. By leveraging this Sharia-compliant model, the State Bank of Pakistan aims to conduct OMOs that are more acceptable to Islamic investors, both domestically and internationally. “Modarabah-based OMOs represent a significant shift in our approach to liquidity management,” said Dr. Fahad Iqbal, an Islamic finance expert at the International Islamic University Islamabad. “This move is expected to enhance market participation and attract a new class of investors who prefer Sharia-compliant financial instruments.”

The introduction of Modarabah-based OMOs is seen as a strategic move to restore investor confidence, which has been eroded by recent economic instability and restrictive fiscal policies. “This innovative approach not only aligns with Islamic financial principles but also demonstrates the SBP's commitment to diversifying its monetary policy tools,” He said. “It sends a positive signal to investors about the country's willingness to embrace modern financial practices while respecting traditional values.” By incorporating Modarabah-based OMOs, the SBP aims to manage market liquidity more effectively. This method allows for the injection or absorption of liquidity in a manner that is transparent and compliant with Islamic law. “The liquidity provided through these operations can help stabilize the financial system, especially during periods of economic turbulence,” explained Dr. Iqbal. “This stability is crucial for fostering a conducive environment for economic growth.

The potential of Modarabah-based OMOs extends beyond domestic markets. International investors looking for Sharia-compliant opportunities are likely to find this development appealing. “Pakistan could become a hub for Islamic finance with such initiatives,” said Dr. Syed M. Abdul Rehman, Shariah Adviser at the SECP. “This could lead to increased foreign investment, which is vital for the country's economic recovery and growth.” Financial experts believe that the success of Modarabah-based OMOs could pave the way for further innovations in Pakistan's financial sector. “If implemented effectively, this could be a game-changer,” noted Dr Rehman. “It aligns with the global trend towards ethical and sustainable finance, which is increasingly becoming a priority for investors worldwide.” Dr. Rehman emphasized the need for robust regulatory frameworks to ensure the success of this initiative. “The SBP must establish clear guidelines and maintain transparency to build trust among investors," he said. "Proper oversight and management are key to realizing the full potential of Modarabah-based OMOs.”

Credit: INP-WealthPk