Islamization of banking is a gradual process and requires time to grow

May 29 - June 06, 2004

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 banking.

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 to reality.

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.