The branching out of conventional banks into the
arena of Islamic banking is in accordance with the policy of the
Government of Pakistan being pursued for implementation by State Bank of
Pakistan (SBP). SBP had initiated the process of converting the
conventional banking system into Islamic Banking. Government of Pakistan
had taken a wise and rational step by adopting a 'parallel banking'
strategy of promoting Islamic Banking alongside conventional banking.
The previous governments had tried to stupefy the Islamic banking
movement through judicial proceedings that created wave of allegations
and accusations, substantiating the common perception that even after
half a century, Pakistan has not been able to headway in Islamic
Shaukat Aziz, Federal Minister for Finance and
Economic Affairs and Dr. Ishrat Husain, Governor, State Bank of
Pakistan, initiated the parallel banking process when they realized that
our nation was not yet ready for "total conversion" with
future progress determined by the market forces.
State Bank had initiated a three-step strategy, in
addition to establishment of a dedicated Islamic Banking Department at
SBP. First they would setup exclusive Islamic banks. Second, from the
existing conventional banks, some would be allowed to establish Islamic
Banking subsidiaries, and third, conventional banks would establish
Islamic Banking branch operations to start with. In two to three years,
these branch operations may be converted into a "subsidiary".
And once this subsidiary is successfully operators for two or three
years and the promoter is comfortable with the progress, then the
subsidiary operations may transform itself into an Islamic bank (as a
separate entity). The only challenge that will be faced is that the
people involved (human resource) should be dedicated and sincere to the
system and the cause, with a clear vision of exploring a critical new
frontier. The present government has an exemplary model with which to
work. The Government in the near future will ensure a level playing
field, and shape Islamic Banking into an attractive endeavor.
In order to infuse the market with trust and
confidence, the SBP has been proactive, focused and determined in its
approach towards Islamic Banking. In the current scenario, they
instituted an Islamic Banking Division in SBP under the supervision of
Mr. Pervez Said, Advisor to Governor SBP on Islamic Banking. Being a
very senior person dealing with the issues related to Islamic banking,
he will be able to win trust of the market which will feel more assured.
It is heartening to note that moves are being made to
Islamize other financial services too besides banking. In this regard,
Pak-Kuwait Investment Company Limited, which is one of the country's
premiere joint venture financial institution, is launching the first
ever Islamic Insurance Company in Pakistan. Initially, in Phase I, it
have planned to implement the framework for General Takaful (insurance)
and in Phase II, the framework for Life and Family Takaful (insurance).
However, when we started moving and researching this area of business,
we realized that there was an equal demand for Family & Life Takaful
business. While the demand for General Takaful came from the banks and
asset based entities, Family & Life Takaful demands stems from both
the commercial and consumer (individual) domains. Pak-Kuwait is now just
waiting for the license from the SECP to activate its Islamic Insurance
(Takaful) companies. We have established joint ventures with well-known
Takaful operator from Gulf and the Far-east to attain the technical
know-how to commence operations.
Pak-Kuwait has put certain systems in place with the
help of an established Gulf-based Takaful company, that will enable it
to provide information & products on Family Takaful instantly on
line. A Shariah board would be a constituted which will be based on
teamwork between the foreign & local scholars. The system will be
two-tier, where on one side would be the conventional process of
acquiring insurance (through agencies). The second would be online,
whereby the consumer would be able to enter through online bank accounts
& apply electronically. Access to policies, information, guidelines
& various other aspects would be easily available. The online model
would expand Family Takaful's reach into the global market. Pak-Kuwait
has been bestowed by Allah Almighty both the opportunity and the
responsibility to promote Islamic-based financial institutions and
products. It can very proudly say that while 6-7 years ago, Islamic
banking in Pakistan was a mere dream, however, the dream today has been
realized by Pak-Kuwait in the form of Meezan Bank Limited from fiction
In the past year, Islamic banking has really taken
root in our society, with various consumer products being thrust towards
the consumer. Some concerns have cropped up regarding the viability of
such a situation of intense competition like in the area of housing
finance (mortgage financing). The product is the same everywhere as the
banks are only competing on the financing terms. The banks have to
seriously examine the prevailing situation. They have to come to a
realization that what the Pakistani market genuinely lacks in product
innovation. The banks have to now analyze the market to ascertain
whether it is a saturated or a young market. If they find it to be
young, then they have to concentrate on growth and product development.
Markets are groomed on product innovation and financial engineering. The
financial sector is faced with tough decisions. Either to compete in a
cutthroat market, in which no one can survive, or compete through
diversified products relying on product innovation and market expansion.
In the end the Islamic banking consumer will rely on them to ensure that
he goes home with at least the same benefits and satisfaction that a
conventional banking system provides and at times even better.
Another perception, that appears strong in the public
mind, is that Islamic Banking is concentrated in the urban areas rather
than the rural which is true. This needs a little explanation. Banking
has two sides, one is liability and the other is asset side. Liabilities
cover deposits and their mobilization. The assets are generally
generated and concentrated in the urban areas, whereas, rural areas are
never able to generate enough business. They only provide deposits since
they are more inclined towards Sharia compatible banking. Right now,
deposits are not the biggest challenge, since there are faith and
conviction driven. Assets on the other hand are commercial ventures.
They are not easily generated, as most people are afraid of the
information sharing involved in Islamic Banking, and believe, that
Islamic Banking is more cumbersome, involving lot of documentation.
Islamization of banking is a gradual process and
requires time to grow. One honestly hopes that soon Islamic banks would
penetrate rural areas. The country's first full-fledged Islamic Bank
which is Meezan Bank is still a young venture and a premier one. It has
been very cautious in its expansion drive. One has to keep in mind that
the nation is looking towards Meezan Bank's success, as a test for
Islamic banking success. The critics would pounce on it if it were to
fail even remotely. Therefore the bank has been very conscious of both
its responsibility towards Sharia compliance and towards meeting the
commercial considerations of business with faith and determination they
will deliver on both.
The writer is Managing Director, Pak-Kuwait
Investment Company (Pvt) Ltd.