Increase in discount rate a good step for banking sector progress
Meezan Bank remains top Islamic bank in Pakistan with excellent results
Interview with Mr Irfan Siddiqui — President & CEO Meezan Bank
PAGE: Kindly tell us something about yourself and your organization:
Irfan Siddiqui: I am the founding President and Chief Executive Officer of Meezan Bank. My educational background includes a Foundation Course in Accountancy from Sunderland, UK and I am a Fellow Chartered Accountant from Institute of Chartered Accountants England and Wales. I have served on a number of senior management positions including Chief Executive Officer at Al-Meezan Investment Bank Limited, as a General Manager at Pakistan Kuwait Investment Company, Manager Finance and Operation at Abu Dhabi Investment Company and Senior Business Analyst at Exxon Chemical (Pakistan) Ltd.
Meezan Bank was launched in 1997 as an investment bank. For the first five years we functioned with a workforce of 30 people, then in 2002, the State Bank of Pakistan (SBP) issued Meezan with Pakistan’s first Islamic commercial banking license, and concurrently we took over the operations of Societe Generale (SG) in Pakistan. Converting SG’s four-branch conventional banking operations into a Shariah compliant one was an achievement and we operated as Pakistan’s only Islamic commercial bank for the next two years. Since then, we have seen an average of 40-50% growth in the size of our branch network every year and today we have a nationwide network of over 675 commercial banking branches in more than 180 cities pan Pakistan.
In 17 years of operations, we are not only the largest Islamic bank in Pakistan; we rank among the largest commercial banks in the country and have been recognized as the ‘Best Bank – 2018’ by Pakistan Banking Awards. Pakistan Banking Awards are recognized as the most credible and prestigious awards in the banking industry of Pakistan.
Meezan Bank is currently the 7th largest bank (in terms of Branch Network) in Pakistan. This milestone illustrates the success story of Meezan Bank while also highlighting how Islamic banking is successfully attracting more customers and gaining larger market shares and revenues in the intensely competitive environment of Pakistan’s banking sector. All branches of Meezan Bank offer a comprehensive and broad range of Islamic financial products as well as real-time online banking facilities to customers.
PAGE: Could you share your views on the progress of the Islamic banking sector?
Irfan Siddiqui: The Islamic banking industry has now grown to more than 15% of the overall banking sector in the country, and it is expected to grow to 25%-30% by the year 2023. Recently the Senate of Pakistan has unanimously passed a resolution which requires the Government of Pakistan to convert at least 30% of its debt into Islamic financing modes. This resolution has been followed by the enforcement of new regulations called ‘Shariah Governance Regulations 2018’ by the Securities and Exchange Commission of Pakistan; in line with the spirit of the Article 38 (f) of the Constitution of Pakistan. We are hopeful that with the correct enforcement of this initiative and adequate government support, this will not only enable the Islamic banking industry to grow at a faster pace but will also strengthen the foundations of a true Riba-free, Islamic economic system.
Islamic banking also serves as a tremendous opportunity for investors across the globe. Despite the challenges, Islamic banking is steadily making its mark across the world, not only in regions with predominantly Muslim populations but also in Western countries such as Germany and the UK. A few banks in the country have already announced to fully convert themselves into Islamic banks. With a higher comfort level of investors and lesser vulnerability that typically arises from higher debt instruments and derivatives, I see Islamic finance as an opportunity for investors worldwide who are seeking ethical solutions to prevent financial crises in the future.
In Pakistan alone, there is big potential for Islamic banking to fill funding gaps of China Pakistan Economic Corridor (CPEC) and Public Sector Development Programme (PSDP) projects. With $45 billion worth of infrastructure projects, the opportunities to offer Islamic bonds for infrastructure will grow. So I believe that if we forge ahead with the support of the government and the State Bank of Pakistan, the industry will Insha’Allah meet its growth targets in the coming days.
PAGE: What are the major achievements of Meezan Bank?
Irfan Siddiqui: Meezan Bank has played a vital role in the development of the Islamic banking industry in Pakistan. Be it product development, Sukuk structuring, deposit growth or spreading awareness of Islamic banking, Meezan Bank has been on the forefront. During year 2018, the Bank arranged 65 seminars on Islamic Banking in 38 cities of Pakistan which were attended by more than 6,500 participants. Recently, the Bank has led a consortium of banks to structure Rs. 200 billion Pakistan Energy Sukuk for the Government to reduce circular debt. Besides, Meezan Bank has been the Joint Financial Advisor to the Government for its Sukuk program. The Bank has shown tremendous growth in deposits, which depicts the trust which our customers have on us.
By the Grace of Allah, Meezan Bank recorded excellent all round results for the year ended December 31, 2018. The Bank’s market share amongst the full-fledged dedicated Islamic Banks operating in Pakistanis approximately 57%. Meezan’s market share for the Islamic Banking Industry as a whole including Islamic Banking windows of conventional banks in Pakistan is 35%. In addition, JCR-VIS Credit Rating Company Limited, an affiliate of Japan Credit Rating Agency, Japan has also upgraded Meezan Bank’s credit rating as follows:
The JCR-VIS has maintained the Bank’s short term rating at A1+ (A One Plus) with stable outlook which is the highest standard in short term rating. The assigned ratings indicate sound performance indicators of the Bank. Alhamdulillah, over the past 17 years, we have grown immensely and have helped a very large number of corporates and individuals in switching from conventional banking to Riba-free modes of financing. Our Shariah compliance focus has been one of our greatest accomplishments. Our strict adherence to Shariah compliance and focus on customer service are our strongest assets. We remained focused from the very beginning on ensuring Shariah compliance and quality customer service. Our brand personality is modest and humility is in the core of our team.
PAGE: What is the impact of the recent budget on the banking sector?
Irfan Siddiqui: FY20 Federal Budget reiterates measures of fiscal discipline and external account correction so as to lead the economy to a path of recovery and stabilization post a period of consolidation. The Super Tax is continued for banking sector as a result of which, the cumulative corporate tax rate for banks will be significantly higher than non-banking sectors putting banks at a disadvantage. Further, higher tax rate of 37.5% versus 35% flat rate on banks for income from investment in government securities has been introduced that will further increase the bank’s tax liability. However, it will now be encouraged to lend more to private sector businesses.
PAGE: Which Islamic banking products are doing well in Pakistan?
Irfan Siddiqui: Islamic banking in Pakistan presents a large variety of financing products. The most popular among these is the long term Diminishing Musharakah product, which constitutes about 30% of total Islamic financing. Musharakah/Running Musharakah, which are partnership based financing products, are about 20% of financing. Other popular financing products are Murabaha, Istisna, Ijarah, Salam and others.
PAGE: What is the impact of the increasing discount rate on the Islamic banking sector?
Irfan Siddiqui: For banking sector, an increasing discount rate will have a positive impact on liability side as it will attract deposits. Further, the spreads of banking sector are likely to improve as lending will now be at a relatively higher rate. However, on asset book, there is a risk of slowdown in credit uptake since the cost of advances has increased to a significant level. The rising rates will have an impact on the customer’s repayment capacity hence increasing the risk of defaults.