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Need of a new roadmap for accelerating growth of Islamic banking

Islamic banking was re-launched in Pakistan with the commencement of operations by Meezan Bank, as a full service Islamic bank more than two decades ago. To avoid the fallout of making an attempt to shift to Shariah-compliant banking from Riba-based banking, the State Bank of Pakistan and other market participants agreed to let the conventional as well as Islamic banks operate in parallel in the country. The logic put forward by the proponents of conventional banking was, “we want to give customers a chance to make a selection, rather than forcing them to shift to Islamic banking”. The result is that the share of Islamic banking in total banking in Pakistan remains less than 15 percent, despite lapse of more than one decade.

The growth of Islamic banking can be termed dismal because overwhelming majority of the population of the country is Muslim. As the incumbent government headed by Imran Khan, wants to bring the change in system for making it more transparent, efficient and sustainable and above all Shariah-compliant. It is an appropriate time to review the mindset of the ruling junta, policy makers, regulators and customers.

According to a banking sector expert, the biggest problem seems to be lack of commitment by the government. According to some banking sector analysts, the aggregate borrowing of the Government of Pakistan (GoP) exceeds Rs8,000 trillion – (the said amount not yet confirmed by the concerned authorities). Out of this more than 94 percent is interest-based. From the local market the GoP mainly borrows through conventional banking and the two most common instruments are Treasury Bills and Pakistan Investment Bonds (PIBs) on different tenors. To facilitate the conventional banks, investments in these instruments has been made part of statutory liquidity requirement (SLR).

Efforts have been made to mobilize funds through Sovereign Sukuk but their floatation has gradually declined because the GoP is hardly left with properties that can be offered as underlined asset. It is estimated that Islamic banks, including Islamic windows of conventional banks are sitting on half a trillion rupees non-yielding deposits. As a result income of Islamic banks has been constrained. The most adverse impact of the surplus liquidity is that Islamic banks are reluctant in accepting new deposits. Another who preferred to remain anonymous, the surplus liquidity of Islamic banks will rise to around rupees one trillion by the end of year 2018.


The efforts of central bank in promoting Islamic banking if often applauded locally as well as internationally. The central bank, boasts that Pakistan’s Islamic banking industry had continued to expand its market share in the overall banking industry, with its asset base and deposits growing significantly lately.However, in one of its own reports the central bank has admitted that the share of Pakistan-based Islamic banks in global Shariah-compliant banking assets stands at a meager one percent. Islamic banks in Pakistan owned assets worth Rs2.48 trillion (US$19.93 billion) as of June 2018, which were close to one percent of the global Islamic banks’ assets estimated above US$2 trillion at end of 2017. The other takeaways from the report include:

  • Total assets of Shariah-compliant banks in the country increased 21.9% to Rs2.48 trillion in the year ended June 30, 2018.
  • Market share of Islamic banking assets surged to 12.9% in the overall banking industry compared to 11.6% in June last year.
  • Similarly, deposits at Islamic banks grew 18.2% to Rs2.03 trillion, showing the market share of their deposits in the overall banking industry surged to 14.8% in June 2018 compared to 13.7% in June 2017.
  • The network of Islamic banking industry consisted of 21 Islamic banking institutions – five full-fledged Islamic banks and 16 conventional banks, having standalone Islamic banking branches by end-June 2018.
  • The network of Islamic banking industry increased by 96 branches. This addition was mainly due to demerger of 90 branches of MCB Bank Limited and their merger into MCB Islamic Bank Limited.
  • Branch network of the Islamic banking industry was recorded at 2,685 spread across 111 districts by the end of June 2018. The number of Islamic banking windows, operated by conventional banks having standalone Islamic banking branches, stood at 1,284.
  • Profit before taxation of the Islamic banking industry stood at Rs15 billion for the quarter ended June 2018 compared to Rs12 billion in the same quarter last year.
  • Profitability ratios like return on assets and return on equity (before tax) were recorded at 1.3% and 20.9% respectively by the end of June 2018.
  • Net investments of the Islamic banking industry reflected an increase of 4.8% (Rs26 billion) during the period under review and were recorded at Rs555 billion by the end of June 2018 compared to Rs529 billion in the previous quarter.
  • Client-wise financing shows that the corporate sector accounted for a 74.5% share in overall financing of the Islamic banking industry, followed by consumer financing with a share of 10.5% by the end of June 2018.
  • The share of small and medium enterprises’ (SMEs) financing and agriculture financing in overall financing of the Islamic banking industry remained low.
  • Asset quality indicators of the Islamic banking industry, including non-performing finances (NPFs)-to-financing (gross) and net NPFs-to-net financing were recorded at 2.7% and 0.4% respectively by end-June 2018.
  • Liquid assets-to-total assets and liquid assets-to-total deposit ratios were registered at 24.6% and 30% respectively by end-June 2018.
  • Capital base of the Islamic banking industry increased to Rs156 billion by end-June 2018 compared to Rs146 billion in the previous quarter. Capital-to-total assets and capital minus net non-performing assets to total assets ratios of the Islamic banking industry were recorded at 6.3% and 6.1%, respectively.
Way forward

The GoP has to take a decision in principal and also announce a time to curtail its non Shariah-compliant borrowing. If there is a dearth of Shariah-compliant instruments the developmental work has to be done on war footings. Pakistan has internationally renowned Shariah scholars who are competent enough to come up with appropriate products. However, there is an urgent need to restructure the Shariah Boards of State Bank of Pakistan and Securities & Exchange Commission of Pakistan.

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