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Abstract
This study presents a history of the Islamic banking sector, its accountability and regulation in Pakistan, set in its contexts of the rise of Islamic banking internationally in a global finance marketplace alongside the localized Islamization of Pakistan's economy. The historical analysis is informed by the Economic Theory of the State and the principles of Islamic theocracy, and examines the events leading to the establishment of the Islamic banking system in Pakistan, government accountability and regulatory strategies, and the market response. The findings reveal the complexity of attempts to reform Pakistan's banking sector into a purely Islamic-based system and the contests between government, the central bank and religious authorities for the sector's accountability, regulation and control. The re-emergence of a dual banking system and its accountability and regulation for both economic management and theocratic purposes illustrates the ongoing compromise and accommodation between national religious culture and a global financial environment.
Keywords
Accounting, accountability and regulation, banking and finance, Islamic banking, Pakistan, State Bank of Pakistan, nationalization, theocracy
Introduction
Since the establishment of the Dubai Islamic Bank in 1975, the world's first fully-fledged Islamic bank (Dubai Islamic Bank, 2010), the Islamic banking and finance sector has experienced rapid growth and acceptance around the world. This growth has been achieved despite uncertainty over how the interest-free financing system would operate alongside the existing conventional financing system. The governments and financial institutions of Muslim nations have worked towards developing and regulating the current Islamic financial system, which is growing in acceptance by the wider financial community and presenting itself as an alternative to the conventional financing system.
This article presents an historical analysis and critique of the evolving accounting and accountability regulations in the Islamic banking industry in Pakistan. As the first country to attempt to Islamize the entire banking sector in the 1980s (Murdoch, 2009), Pakistan has faced many commercial, accountability and regulatory challenges in transforming the economy. These challenges included the introduction of Islamic financing in a regulatory environment that was originally developed for the operations of the conventional financing system. Today, Pakistan operates a dual-banking system, where both Islamic and conventional banks compete for market share. While previous studies have focused on the lack of success, and the contemporary state of Islamic...