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Islamic banking model needs radical changes

The Three Centres of Excellence in IBA, in alliance with top Malaysian institutes, provide research, training and development in Islamic Finance

The Islamic banking era that started with the commencement of operations by a full-service Islamic bank, Meezan Bank Limited in Pakistan has posted robust growth during the first decade. However, subsequently its growth pace slowed down due to a number of impediments, worst being banks suffering from excessive liquidity. This issue emerged mainly because Islamic banks are not allowed to invest in government securities. Bulk of the investment of conventional banks is in interest bearing Treasury Bills and Pakistan Investment Bonds.

Islamic Banking Bulletin of State Bank of Pakistan (SBP) for October-December 2016 quarter confirms the above stated problem. According to the data, net investments of Islamic banks, including designated Islamic banking branches for the quarter, declined to Rs490 billion, from Rs663 billion for July-September 2016 quarter. This decrease in investments was mainly attributed to maturity of Bai Muajjal of Sukuk issued by the Government of Pakistan (GoP). As a result, investments decreased by Rs173 billion.

The quarterly review shows that assets of Islamic banks grew by paltry Rs65 billion to Rs1,853 billion. Deposits increased by Rs97 billons to Rs1,573 billion. Market share of Islamic banking assets and deposits in overall banking industry were reported at 11.7 percent and 13.3 percent respectively. Profit after tax was recorded at Rs11.8 billion. Among other profitability indicators, return on assets (ROA) and return on equity (ROE) were recorded at 0.7 percent and 10.6 percent, respectively at end December, 2016.

Another contentious issue facing Islamic banks is their limited outreach. It is believed that the problem has been overcome by deployment of technology. The need to visit a brick and mortar branch has reduced significantly with the use of ATMs, Internet banking etc. However, analysts say for undertaking various transactions, visit to a branch is still mandatory. It is encouraging to note that the network of 21 Islamic Banking Institutions (IBIs); 5 full-fledged Islamic banks (IBs) and 16 conventional banks having standalone Islamic banking branches (IBBs) has increased to 2,322 branches (spread across 112 districts) by end December, 2016. Province/Region wise breakup of branches reveals that Punjab and Sindh jointly account for over 77 percent. The number of Islamic banking windows operated by conventional banks having Islamic banking branches stood at 1,220 by end December, 2016.

As regards bringing a change in the business model, the address by Saeed Ahmad, previous deputy governor, State Bank of Pakistan (SBP) at Institute of Business Administration (IBA), Karachi on January 17, 2017 offers the guidelines. He said, “The potential of Islamic finance lies in the fact that it is intrinsically linked with economic development and a number of Islamic financing modes can be conveniently tailored for financing infrastructure and industrial development projects. Pakistan, a relatively late entrant in the global Sukuk market, is now in limelight with the issuance of third international US dollar Sukuk of one billion in October 2016.

Through China-Pakistan Economic Corridor (CPEC), Islamic banks have a chance to promote economic welfare in a more pronounced manner and address general misconceptions about the true spirit of Islamic banking. Infrastructure development has been known to trigger economic growth in countries and these cash intensive projects can be a valuable source of funds deployment for the Islamic banking institutions, which are flushed with liquidity. The banking sector has to move out of its comfort zone to benefit from the opportunities presented by the CPEC. The agility of the Islamic banking industry, its scholars and product developers will be tested in coming years the sector can carve its path to gain a mutually advantageous position. “Signing of Memorandum of Understanding (MoU) between Meezan Bank Limited and Chinese consultants is a welcome initiative in this regard.”

It has also been realized that the exponential growth of Islamic banking has led to the vacuum of trained human resource at all levels. To overcome the problem, three Centres of Excellence in Islamic Finance (CEIF) have been in Pakistan that includes one at Institute of Business Administration (IBA) Karachi. The prime objective is to provide a platform for discovery, enhancement and dissemination of knowledge in the field of Islamic Finance. It aims to be a world class centre which, through education and research, carries on IBA’s legacy of thought leadership in the Islamic Finance industry.

CEIF, based at the IBA’s City Campus, offers Executive Learning Programs, Forums for discussions between various stakeholders. In this regard, CEIF has signed an MoU with Malaysian based University, INCEIF, as its Academic Partner. Furthermore CEIF has entered into collaborations with Islamic Research and Training Institute (IRTI) and International Shariah Research Academy (ISRA) to cooperate in enhancing the objective of Research, Training and Development in the field of Islamic Finance.

In line with its aim to provide demand-driven training, IBA initiated a strategic partnership with Meezan Bank to establish the Centre. The Board of Management of the Centre includes CEOs of major market players and regulators with Dr. Ishrat Husain as the Chairman. This strong linkage with the industry will enable the Centre to achieve its key objectives, which include: 1) provide trained human resource to the industry to take it to the next level of maturity, 2) conduct quality research and document case studies for enhancing and disseminating knowledge, 3) offer a platform for debate, discussion and discourse on current issues and best practices around the globe, 4) provide a network of global outreach, 5) advance theory of Islamic Economics and Finance and its role in the society and 6) establish a data centre with best local and international resources.

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