PAKISTAN'S ISLAMIC FINANCIAL SYSTEM AND GLOBAL SCENARIO

MUHAMMAD ASHFAQ
ashfaq8585@hotmail.com
Dec 22 - 28, 2008

While the world is accepting the significance of Islamic financial system for now, in Pakistan as early as in 1948 Muhammad Ali Jinnah, founder of the nation had emphasized the Islamic financial principles and said at the inauguration of State Bank of Pakistan:

"I shall watch with keenness the work of your organization in evolving banking practices compatible with Islamic ideas of social and economic life. We must work our destiny in our own way and present to the world and economic system based on true Islamic concepts of equality of manhood and social justice."

HISTORICAL VIEW OF ISLAMIC FINANCE AND PAKISTAN

Islamization of banking was started by the establishment of a small saving bank in Egypt in 1963 and it was considered first sincere attempt to put Islamic principles in practice. Efforts about Islamization of financial system were started in 1974-78 in Pakistan and Pakistan was included in three countries which in fact tried to establish interest free banks at their national levels. During 1981, financing of import bills, Rice Export Corporation were put on mark-up basis. Further developments regarding Islamization of financial system were taken in 1985 by introducing interest free modes of financing to both companies and individual and banks were directed to make interest free Pak Rupees banking. In addition to this, State Bank of Pakistan, which is country's Central Bank specified 12 modes of non-interest financing.

After the early efforts of establishing Islamic financial system on strong footings, policy makers and industry helped in the re-launch of Islamic banking and finance in 1990s. The State Bank of Pakistan introduced Islamic Banking Policy in 2001 in order to further foster its commitments in developing this promising field in Pakistan. This State bank of Pakistan policy was mainly divided into two avenues: (1) To issue licenses for the incorporation of full fledged Islamic banks, example of that was Al-Meezan Investment Bank, which was previously working as Islamic Investment bank. (2) On the other side, SBP allowed commercial banks to open dedicated Islamic banking branches to offer wide range of financial services.

SBP also introduced various modes of financing and shariah audit guidelines for above Islamic banks. Now in Pakistan 6 full fledged Islamic banks and 13 commercial banks offer a network of around 227 branches. Cumulative assets of Islamic banks are approximately Rs. 135 Billion while Islamic deposits and financing stand at 3% and 2.4% of market share respectively. Following facts and figures show that Islamic financial system is getting momentum in Pakistan.

NUMBER OF ISLAMIC BANKING BRANCHES

BANK TYPE

NAMES 2002 2003 2004 2005 2006 2007 GRAND TOTAL
Full Fledge Islamic MBL 6 4 6 12 34 20 82
Banks AIBL 1 1 1 2 2 1 10
BIPL         10 10 20
DIBL         10 7 17
EGIBL           9 9
FDIBL           5 5
Islamic Bank Total 7 5 7 14 56 52 141  
Commercial BAFL   5 6 4 8 2 25
Banks Standalone BAHL     1   2   3
Islamic ABNB     1 1 1 3 6
Branches Askari bank         6 5 11
BOK   1 2 1 1 12 17
HBL     1       1
HMB   1 1 1 1   4
UBL         1 4 5
Soneri     1   1 1 3
SCBPL     1 2   3 6
MCB   1 4   1   6
NBP         1 1 2
CBSIBs Total 8 17 9 23 29 86    
Grand Total   7 13 24 23 79 81 227
Source: Pakistan & Gulf Economist, June 23-29, 2008


GROWTH OF ISLAMIC BANKING IN PAKISTAN AT A GLANCE:
(RS IN BILLION)
DESCRIPTION 6-DEC 6-SEP 5-DEC 4-DEC 3-DEC
Total Assets 118 95 72 44 13
% of Banking Industry 2.90% 2.50% 2.10% 1.40% 0.50%
Deposits 83 66 50 30 8
% of Banking Industry 2.80% 2.30% 1.90% 1.20% 0.40%
Financing and Investment 72 53 48 30 10
% of Banking Industry 2.40% 2.50% 1.80% 1.30% 0.50%
Full Fledged Islamic Banks 6 6 2 2 1
Commercial Banks Standalone 12 11 9 7 3
Islamic Branches . . . . .
No of Branches. 150 114 70 48 17
Source: State Bank of Pakistan


RETURN ON BANKS ASSETS AND EQUITY
BANKS BEFORE TAX % RETURN ON ASSETS, JUNE- 2007 BEFORE TAX % RETURN ON ASSETS, SEPT -2007 BEFORE TAX % RETURN ON EQUITY, JUNE- 2007 BEFORE TAX % RETURN ON EQUITY, SEPT -2007
Public Sect Commercial Banks 3.8 4.1 30.4 32.2
Local Privet Banks 3 2.9 31.1 29.5
Foreign Banks 2.3 2 23.3 18
Commercial Banks 3.1 3.1 30.5 29.7
All Banks 3 3 31 30.1
Source: State Bank of Pakistan

GLOBAL SCENARIO

It is very encouraging that over the last three and half decades, Islamic financial system has transformed into full-fledged distinctive field with hearten growth rate of 15%-16% per annum. Nowadays, Islamic financial institutions are spread in more than 90 countries, which is the strong evidence of its significance and conversion of convention financial system to Islamic financial system. Currently in Malaysia, Bahrain, Pakistan, UAE and few other countries of Gulf Cooperation Council are having Islamic financial institutions working parallel with the conventional system.

After the Bahrain with the largest concentration of Islamic financial institutions in Middle East, Malaysia has a visible presence of Islamic financial system which is running in a very efficient manner with conventional financial system. Although Islamic financial system has taken a very appreciating start in Pakistan and Sudan, but yet a lot is needed to make it more customer satisfactory. Within South East Asia, only Malaysia has 31 Billion dollar Islamic banking assets, 1.9 Billion dollar Takaful industry. As far as Pakistan concerned in South Asia, it stands out for its proactive and system approach regarding evolution of Islamic financial system. Facts and growth figure of Islamic finance has grown enormously to almost 1.5 trillion dollar industry and this growth confirms that having 1.6 billion Muslim population, it has great potential which is yet to be exploited to the full extent.

CONCLUSION

It has to be recognized that Islamic financial services have been transformed from being a peripheral activity to a sizeable industry which is attracting global interest. But size of Islamic financial industry is still quite small as a proportion of the total world's financial assets, the current growth trends and the investments in infrastructure in development of Islamic finance lend confidence that this industry has promising potential. The challenge for the industry is to consolidate itself to be able to better compete with global players through achieving economies of scale, efficiency and cost effectiveness in addition to rapidly building its capacities to standardize regulation and supervision and accounting practices while strengthening the governance of the industry. For the Islamic finance industry to grow, move forward and capitalize on the enormous growth potentials there should be greater cooperation among the industry player, better coordination to address the issues of shariah harmonization, urgent need for the structuring of new capital market products that are shariah compliant. Also revival of stock market in Pakistan is particularly needed.

To promote Islamic financial system is not sole responsibility of Islamic banks but business community and general public has to take some sincere initiatives so that this holy endeavor can produce results.