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Consumer finance gaining worth in Islamic banking

There is a greater demand for consumer financing in Islamic banking in the country that is evenly distributed amongst rural and urban areas. According to survey Islamic banking is higher amongst retail (95 percent) than businesses (73 percent).

Islamic banking in rural areas and in low income brackets has relatively limited access to financial services. This depicts a chance for developing Islamic microfinance in rural areas.

In Pakistan the branchless banking have no doubt played a pivotal role in extending the banking facilities in the most part of the country but even then a bulk of the population in far flung and rural areas has no access to banking finance in Pakistan.

Due to lack of Shariah compliant investment portfolios in Pakistan the Islamic bank must utilize the huge accumulated funds with the Islamic banking industry.

Consumer finance was the major product of the conventional banks in 2005-07 when the mark up rate was somewhere in the region of 6 to 7 percent that attracted a huge demand for consumer finance specially in the real estate, automobile financing, home loans and even personal loans.

The consumer finance offers a great opportunity to the Islamic banking which operates on interest free model.

Pakistan is confronted with a frightening issue of high rate of poverty and unemployment and the Islamic banking industry, which is based on the principle of exploitation free financial services and can play a landmark role in poverty alleviation from the society.

The primary objective of the Islamic banking is not confined to maximizing profit but to support the poor and downtrodden people.

The Islamic banking gives a sense of satisfaction to the customers that it is free from Ribah or interest yet it costs even more than the conventional banking products.

The absence of cordial attitude or giving relaxation to the worthy cases gives a different picture of what the Shariah-compliance emphasis, which is generally known as free from exploitation. This calls for some modification to broaden the base for Islamic banking in Pakistan.

In this context Governor State Bank of Pakistan encouraged the industry to focus on research and development to develop innovative financial solutions that can meet needs of growing clientele of Islamic banking industry.

Islamic banking industry has established its place in international and local market, the industry should bring it closer to the key objectives of Islamic economic system; transparency, social justice and equitable distribution of wealth.

Islamic banks are growing at twice as fast as conventional banks in Pakistan and they have conquered half of the consumer financing market.

Most people in search of car and home financing were opting for Islamic banks as their first choice. Islamic banks are enjoying more than 50 percent market share in car and home financing in the country.

Dubai Islamic Bank Pakistan market share in all segments was improving noticeably every year. The market share of Islamic banks in all segments is increasing by 1 percent on average every year. It has increased to 14 percent in 2016 from 9 percent some 5 years ago.

Deposit base of Islamic banks in Pakistan has increased by Rs300 billion in the quarter ended June 30, 2016.

The deposit base has increased by almost 22 percent to Rs1, 626 billion in the quarter ended June 30, 2016 from Rs1, 336 billion in the quarter ended March 31, 2016.

The rapid growth has been the key reason behind the growing number of Shariah compliant banks in the country. Besides, a number of conventional banks have also opened Shariah-compliant branches over a period of time.

Currently 22 Islamic banks are operational in the country. Additionally, 17 conventional banks were also operating Shariah compliant branches.

Consumer financing has seen an increase in the last two fiscal years primarily due to a big jump in auto loans and to some extent in mortgage finance.

Banks had made net consumer financing of Rs31.2 billion in fiscal year 2014 and Rs31.3 billion in fiscal year 2015. This was equal to 10.5 percent and 17.3 percent of their net lending of Rs298 billion and Rs180 billion to private sector businesses (PSBs) in the last two fiscal years respectively.

In the first seven months of this fiscal year, banks made Rs4 billion worth of net housing loans against Rs14 billion auto loans.

Restoration of peace and order in Karachi is encouraging real estate developers to offer new housing schemes for different categories of middle income groups.

Till the end of the last fiscal year in June 2015, net new housing loans totaled about Rs1bn. Against this, net auto loaning, which makes up the bulk of consumer finance, stood close to Rs10 billion.

A surge in housing loans seen during this fiscal year is strong enough to keep up growth trend in overall consumer financing even if auto loans face a weaker demand in near future.

Banks have little excuse to let consumer finance grow less because economic growth is expected to pick up pace, mega housing projects are coming up and urbanization and public better lifestyle is creating demand for consumer finance.

Bankers say that an increase in housing loans seen during this fiscal year is strong enough to keep up growth trend in overall consumer financing even if auto loans face a weaker demand in near future.

The recently announced auto policy can in the short run, see a fall in consumer financing because only a small section of people using imported cars seek auto loans.

In the long run, when there is a gradual rise in imports of expensive cars and when local auto industry absorbs the policy shock or new auto units come up, there will be a surge in consumer financing.

Auto loans make a large part of consumer financing and since the new policy is aimed at balancing the protection level enjoyed by local assemblers and encouraging cheaper imports and entry of new car makers, it is but natural for banks to examine this policy from their business point of view.

Bankers point out that in spite of a good growth in housing and auto loans, overall consumer financing in the fiscal year 2015 remained weaker than in fiscal year 2014 due to decline in loans for purchase of consumer durables and personal loans made to individuals.

Consumer financing via credit cards is also gathering impetus with net financing volumes having risen by Rs1 billion each in fiscal year 2014 and fiscal year 2015 and by Rs1.1 billion in the first seven months of fiscal year 2016.

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