Sep 10 - 16, 20

Despite the fact, the Islamic banking industry has shown impressive growth in Pakistan, it is facing manifold challenges.

A decade ago, Pakistan had only one Islamic bank, while now the country's Islamic banking industry includes five full-fledged Islamic banks and five takaful (Islamic insurance) firms, with an additional 12 conventional banks offering services through Islamic windows.

Over 900 Islamic banking branches in Pakistan speak of the confidence of the masses in the Islamic banking and the successful handling of regulator. The share of Islamic banks in the assets of all the banks could exceed 10-percent in the current fiscal if introduction of new products was focused.

The Islamic banks need to exploit the full potential of interest-free banking by expanding network and offering new products to reach to underserved sectors and unbanked population. Islamic banks should maintain the image of better risk managers, which was necessary for depositor's confidence. the deposit base of Islamic banking has been expanding faster than general banking due to speedy and better returns which was a very healthy development. Islamic banks should keep an eye on global strategies, remain Shariah compliant and find ways to improve rates of return to match inflation which would boost confidence of masses in Islamic banking.

In year 2011, Islamic banks fetched Rs.10 billion profit. Compared to the previous years, this banking segment has achieved a 34% year on year growth rate. Both the asset and deposit books of Islamic Banks have shown significant growth in 2011 and State Bank report has clearly stated that the growth in this industry is complemented by the profit level achieved last year.

Although 66% of the Islamic banks are full-fledged Islamic Banking Institutions, the remaining 34% being conventional banks with Islamic segments, this industry's presence is still limited to major cities.

Most of the Islamic branches lie in the seven major cities of Pakistan; namely Karachi, Lahore, Islamabad, Faisalabad, Rawalpindi, Peshawar and Quetta. Presence in tier 2 and tier 3 cities is a goal for the Islamic Banking Industry for 2012.

Shariah banking experts told PAGE that Islamic banking has recorded a robust growth in the country in the last few years and can further expand tremendously with the help of effective legislation and introduction of more products.

According to them, total assets of Islamic banking in Pakistan have grown by 34 percent to Rs 641 billion at the end of December 31, 2011 over last year's Rs477 billion. Similarly, deposits base has also surged by 34 percent to Rs 521 billion during 2011 over last year's Rs390 billion. The market share of Islamic banking has grown tremendously in the overall banking industry. Total assets of Islamic banking are 7.8 percent of the total banking industry while deposits have 8.4 percent share in the total banking sector in the country.

They maintained that financing and investment by Islamic banks have surged by 40 to Rs475 billion in 2011 compared to Rs 338 billion in 2010.

Regarding the issues being faced by Islamic Industry, the experts underlined the need for effective legislation for the faster growth of Islamic banking in Pakistan. They also urged Islamic banks to introduce all the products available in the conventional banking so that the businessmen can also depend on Shariah banking.

They said State Bank also frame necessary rules defining the roles and responsibilities of all those involved in the Sharia compliance process of Islamic banks, including scholars. Necessary support needs to provide to Islamic banks to build portfolios in non-traditional sectors such as agriculture and small and medium-sized enterprises (SMEs), they added.

It may be noted there are growing calls in the Islamic finance industry globally to improve the credentials and certification process of sharia boards at Islamic banks, to reduce the potential for conflicts of interest and increase transparency.

As per estimates, Islamic banking will grow to 15 percent of the country's total banking sector in the next five years. Islamic banks held 644 billion rupees ($6.8 billion) or 7.7 percent of total banking assets in March this year, central bank data shows.

Financing by Islamic banks is currently dominated by the mainstream corporate sector at 73.9 percent of total financing, with agricultural financing representing just 0.1 percent and SMEs 5.1 percent, data shows.

As per estimates, Islamic banking should grow to over 15 percent by 2016 from its current share of 8 percent in the country's banking industry.

About challenges posed to Islamic Banking Industry, the experts said some of the challenges being faced by Islamic Banking industry are the gross absence of participatory modes of financing as presently it has an exclusive and overwhelming focus on debt and trade-based modes of Murabaha and Ijarah. Scarcity of trained Islamic bankers also poses a serious threat to the growth and development of the industry on sound footing, they said. Limited capacity, particularly the scarcity of trained Islamic bankers, is a challenge as well as a threat to the development of Islamic banking industry in Pakistan, they said, adding, "Most Islamic bankers have a conventional banking background and thus we need to develop a better understanding of Islamic finance and its inherent strengths and its benefits for the business community and society as a whole."

They also said that Islamic Banking Institutions (IBIs) in the country were facing the issue of short-term liquidity management. "This not only adversely impacts the profitability of IBIs but also inhibits aggressive deposit mobilisation by them," he added. However, he said with the development of new Shariah-compliant instruments this problem will be resolved and they will also be instrumental in the development of Islamic inter-bank money market, besides providing a platform for developing benchmark for pricing of Islamic finance products.

Nevertheless, it would be better for the Islamic banking industry to innovate rather than replicate the conventional banking product.