Sep 10 - 16, 20

In the last few years Islamic banking recorded a strong growth in Pakistan. Total assets of Islamic banking in Pakistan recorded by an extraordinary of 34 percent to Rs 641 billion at the end of December 31, 2011 over last year's Rs477 billion.

Deposits soared up to 34 percent to Rs 521 billion during 2011 over last year's Rs390 billion. Total assets of Islamic banking were 7.8 percent of the total banking industry while deposits were 8.4 percent share in the total banking sector in the country.

Financing and investment by Islamic banks surged to Rs475 billion in 2011 compared to Rs 338 billion in 2010.

The first quarter of this year marked the completion of ten successful years of Islamic Banking with concentration on corporate financing.

As of March 2012, Islamic banking accounted for 7.7 per cent of the assets of all banks. It had 8.4 per cent share in deposits and 7.4 per cent in net financing and investment of the entire banking sector.

Deposit of Islamic banking has been flourishing faster than general banking. As of March this year, Islamic banking witnessed over 33 per cent growth in deposits whereas the rate of growth in deposits of the overall banking industry was just 16.5 per cent.

Financing to non-performing assets (NPAs) ratio of Islamic banks was 8.4 per cent as of March 2012 against 15.8 per cent for the whole banking industry.

Sovereign Sukuk of Rs369 billion (US$ 4 billion approximately) were issued during the last two years that have largely covered the liquidity management issue of the Islamic banking industry.

Islamic banking now constitutes over 8 percent of the country's banking system with a network of 964 branches and over 500 windows across the country.

The sustained growth of Islamic banking in the country during the last ten years has also started development of Islamic capital markets, mutual funds and Takaful companies etc. Presently, we have 5 Takaful operators, about 30 Islamic mutual funds.

In early 2002 there was only one full-fledged Islamic bank-the Meezan Bank Ltd. Now there are five such Islamic banks and a dozen conventional banks with devoted Islamic banking branches. Over the last decade, the number of Islamic banking branches has exceeded 900, spread over 76 big cities and towns across the country.

Islamic Baking industry represents now one of the fastest growing segments in the worldwide finance industry and the Middle East region has been at the vanguard of the spectacular and exponential growth.

With a size of $1.35 trillion and annual growth rate of more than 20 percent, the Islamic financial industry now comprises 430 Islamic banks and financial institutions and around 191 conventional banks having Islamic banking windows operating in more than 75 countries.

Kazi Abdul Muktadir, Deputy Governor, State Bank of Pakistan (SBP) has stated recently that the State Bank is developing a new five-year (2013-17) strategic plan for Islamic banking industry. The new plan is expected to set the strategic direction for the Islamic banking industry.

According to him the Islamic finance industry is likely to increase its share in the banking system to 15 percent during next five years.

He disclosed that the State Bank is also developing a comprehensive Shariah governance framework to further strengthen the Shariah governance in Islamic Banking Institutions.

He said the State Bank has developed a comprehensive profit distribution & pool management framework in consultation with the industry and added that the framework will be issued most probably within this month.

Muktadir said that SBP will soon be launching a mass media campaign to create awareness about Islamic banking.

SBP will be further escalating its efforts to build the industry's Human Resource capacity through its regular and specialized training programs.

The future growth of Islamic Banking lies in developing a larger product-base. The Islamic banks should provide a broad clientele-base.

Currently only three products have 85 percent share in the financing mix of the Islamic banking - Murabaha (40 percent), Diminishing Musharka (35 per cent) and Ijara (11 percent).

Islamic bankers must exploit the other products like Mudaraba, Salam and Istisna. The wider use of a variety of Islamic banking products must reach the economy like small and medium-sized enterprises (SMEs) and agriculture.

Currently Islamic banking has so far stressed on corporate financing that accounts approximately 74 percent of their total financing, followed by consumer financing (14.6 per cent).

Most of the industry's lending is concentrated in textiles, sugar, cement, chemicals, pharmaceuticals, leather, automobiles and transportation equipment and electronic/electric industries.

Islamic banking in SMEs is just five per cent and in agriculture it is merely 0.1 per cent. Islamic bankers are no doubt actively involved in providing financial support to SMEs. Their involvement however would pick up pace in the very near future.

Islamic banks lagged behind in agricultural financing mainly because the rules to regulate such financing were introduced as late as in September 2008. It is only after the July-September 2010 floods Islamic banks began reaching out to farmers. Their role in this context is rather a bit slow but Islamic banking branches are actively lending in livestock, dairy, poultry and fisheries sectors.

In the commercial banking sector, the advances to non-performing loans ratio in agriculture sector is 18 per cent-third highest after SMEs (36 per cent) and consumer loans (18.6 per cent). Islamic Banking cautious approach in this context of making loans has so far helped Islamic bankers keep a better quality of assets.

According to Islamic bankers more rigorous Shariah laws governing the operations of Islamic banking have helped to improve profitability.

Most people dealing with Islamic banks complain that returns on their deposits remain somewhat in the same range of the overall banking industry. In this context some Shariah experts raised this issue at an international Islamic Banking conference held in Karachi in May this year. Some of them called upon Islamic bankers to examine whether they distributed profits judiciously among shareholders and depositors.

State Bank Governor Yaseen Anwar has said that the Islamic banking has grand opportunity to finance projects in agriculture and small and medium enterprise (SME) sectors which are the avenues neglected by conventional financial institutions. He emphasised the need for Islamic banks to be more aggressive in increasing their network in rural areas of Pakistan. The SBP governor said that Islamic microfinance can be effective in serving the deprived population.

Realising the significance of Shariah-compliant agriculture financing, the State Bank is working rigorously with the industry to develop standardized products.

The current Eurozone economic and financial crisis and the protests against the global financial system, which we have seen across the world, present Islamic Banking with a golden opportunity.

It is now time to talk and practically work about how Islamic finance can contribute to sustainable economic growth not in the Middle East or in the South East Asian Region, but also in every country across the world. In order to be competitive with Conventional Banking the Islamic Banks must now bring attractive Shariat product on a large scale.