People have great faith in Islamic Banking'

By Haris Zameer
Aug 15 - 21, 2005

Meezan Bank is Pakistan's only dedicated Islamic Bank which has excelled the banking business exclusively in the domain of Islamic banking in the country.

Irfan Siddiqui, the founding CEO of Meezan Bank was interviewed by PAGE to know what exactly the bank is contributing towards the concept of Islamic banking in Pakistan.

Mr. Siddiqui has held senior management positions with various financial institutions in Pakistan and abroad, including Pakistan Kuwait Investment Company, Kuwait Investment Authority, Abu Dhabi Investment Company, Abu Dhabi Investment Authority and Coopers & Lybrand, London.

PAGE: Would you like to outline the history of Meezan Bank, when it started its operation and what makes it the premier Islamic bank?

IS: Meezan Bank was originally established as an Islamic Investment Bank in 1997, and it is operating strictly under the principles of Shariah. Keeping in view our performance, the SBP issued us Pakistan's first Scheduled Islamic Commercial Bank Licence in January 2002. Alhamdollilah, our first three years of operations have been a great success, enabling us to truly lead the way forward in establishing a real, stable, and dynamic Islamic Banking system in Pakistan.

It is the mission of Meezan Bank to be the premier Islamic bank and in that endeavour we continue to provide the largest variety of Shariah-complaint financial products and services to our customers. Our benchmark is our vision to establish Islamic banking as banking of first choice to facilitate the implementation of an equitable economic system.

PAGE: Where does your bank stand at present and what growth it has achieved since inception?

IS: Meezan Bank has Alhamdolillah made remarkable progress in a short span of three years. We have developed alternatives of majority of conventional banking products. On the liability side we offer Riba-free transaction accounts i.e. Current Account, Rupee and Dollar Saving Accounts. Our Riba-free term deposits are Monthly Mudarabah Certificates, Meezan Providence and Certificate of Islamic Investment. On the assets side, Murabaha product is the most actively used financing contract which enables an Islamic bank to finance acquisition of fixed capital assets and meet the working capital needs of the customers. In addition, we offer a full range of Trade Finance transactions covering both imports and exports. We are the only bank to have financed exporters under SBP's Islamic Export Refinance Scheme on the basis of Islamic modes of finance. In the area of consumer finance we are offering Car Ijarah, besides Auto Leasing program and Easy Home - Pakistan first Islamic housing finance. Alhamdollilah all these products conform to the tenants of Shariah.

Our portfolio now includes a capital of 2 billion rupees, total assets worth 24 billion rupees, about 700 employees and a total of 23 branches countrywide, with more in the pipeline.

PAGE: How did the government respond to your presence in Pakistan?

IS: Since its inception Meezan Bank is fortunate to get much needed support from the Pakistan government. President General Pervez Musharraf along with the then finance minister, and today's Prime Minister, Mr. Shaukat Aziz, inaugurated the bank in September 2002, which was very encouraging for us.

Governor SBP Dr. Ishrat Hussain and his team at State Bank of Pakistan are also working very sincerely to promote Islamic banking in the country. In January 2003, SBP announced critical measures to promote Islamic banking in the country. SBP has also established separate Islamic Banking Department to facilitate Islamic banking in the country. Another major breakthrough was the introduction of an Islamic Export Refinance Scheme by the State Bank. This scheme has, for the first time in Pakistan, enabled us to provide Export Refinance at concessional rates under Shariah compliant instruments. Approval of this scheme on Islamic principles required a paradigm shift at the State Bank - which I am glad to say, was very forthcoming. In addition, the government made the debut of an international Sukuk (bond) offering for US$ 500 million to a consortium led by HSBC and Citibank in which Meezan Bank was the Shariah Structuring Advisor.

All these steps show that the government is taking very keen interest to develop Islamic banking in the country. However, the nascent Islamic banking industry requires continuation of support to promote Islamic Banking in the country.

PAGE: What has so far been the response from the public?

IS: Outstanding and very encouraging. The bank has grown five times in a period of just two years, which speaks of the response of the people of Pakistan. People have great faith in Islamic banking. They prefer to make investments and deposits based on Shariah law and want Shariah compliant products, so that they can earn Halal profit. Our customer base includes top businessmen, reputable business groups and many clients from small and medium enterprises.

It is also very encouraging to say that Meezan Bank has a very balanced portfolio with no bad debts, which is unique for a financing institution in Pakistan.

PAGE: Many people still believe that Islamic Banking is a transformation of conventional banking and does not comply with Shariah principles. Is it true?

IS: Kindly note that Islam does not believe in demolition of existing systems unnecessarily. Basic requirement of Shariah is that you need to undertake asset-based transactions. As you are aware that most of the interest based commercial loans are obtained for the purpose of financing assets therefore for converting them into Shariah acceptable mode you only need to change the processes. It is like as Halal and Haram meat. A McDonald's burger in Karachi and New York would look alike, taste alike and feel alike, but it is the processing that makes one Halal and the other non-halal.

Islam prohibits earning profit on money itself, however, it allows to earn profit by pricing real assets. Different modes are available in Islamic banking to finance different needs of the customers. As I explained earlier that two common modes are Murabaha and Ijarah. Murabaha can be used to finance acquisition of assets such as raw material and machinery. The essential feature of this instrument is that there has to be an underlying asset, which is financed, by the bank on deferred payment basis. Another mode of finance is Ijarah, which is an Islamic alternative to conventional leasing. The basic difference between Ijarah and conventional leasing lies in the distribution of risks and rewards of ownership between lessee and the lessor. These modes of finance provide a fixed rate of return to the bank, which is 100% permissible by Shariah. The present perception in the market is due to lack of awareness regarding Islamic Banking products. However, by the grace of Allah this perception is declining.

PAGE: Why have other conventional banks been slow to follow the example set by Meezan Bank?

IS: Well, you cannot say that conventional banks are not actively participating in Islamic Banking. In fact, after the issuance of Islamic Banking circular by the SBP a number of commercial banks announced establishment of Islamic banking branches. However, you can say that they are relatively reluctant, but this is understandable, they have been following a certain process for a long time, Islamic banking requires a change in their approach. Now instead of taking risk on money they have to take risk on asset. Change in mindset requires certain time, and I am hopeful that the success of Meezan Bank will give them required confidence for entering in this market.

PAGE: Do you think people are aware of the Islamic Banking concept or do they need education?

IS: There is certainly an awareness gap, but it is only a matter of time and education. Generally speaking, our attitude is that when it comes to religion, we are not bothered and do not care much about it. We need to develop a positive approach to teach and educate people. Meezan Bank is playing a key role in increasing awareness in this regard. Our marketing team has organized several seminars in collaboration with several trade bodies and academic institutions and I am happy to say that we are able to generate very good response from such seminars. However, I believe that media, especially the print media, can play a big role in promoting awareness.

PAGE: A number of banks, both local and foreign, have set up Islamic Banking windows and have also opened branches. How do you feel about this situation?

IS: It is quite encouraging especially with the support of the State Bank and the government that more and more conventional banks have realized potential future is Islamic Banking in Pakistan. Currently, Meezan Bank is the largest dedicated Islamic bank in Pakistan, while Bank Albaraka is another bank of this sort in the country. In addition nine conventional banks have been allowed to open 32 Islamic banking branches.

We feel this is a good sign that now conventional banks have realized the significance of Islamic banking. This action by SBP will contribute in the growth of Islamic banking market. Moreover, it will provide a healthy competition, increased service level and more Shariah compliant options to the customers.

I believe it is important that more banks embrace Islamic Banking so that more people will have access to Shariah-compliant products in Pakistan. Meezan Bank has a fundamental belief that "Profit follows responsibility" and that all upcoming new Islamic banking branches or windows of these conventional banks should take note of this.

PAGE: The central bank has issued a number of licences for Islamic banks. Are you ready for the competition?

IS: SBP is now actively supporting Islamic banking in Pakistan and has so far allowed nine commercial banks to start Islamic banking branches in addition to their interest based banking services. Moreover, licences for two full fledged Islamic banks are under review at SBP and they are expected to start operations next year.

Meezan Bank is not only ready for this increased competition with its broad range of Riba-free products and services but we also welcome the new players as a positive sign for the growth of Islamic banking. Moreover, Meezan Bank as the pioneer in Islamic Banking in Pakistan has even provided advisory services to a number of conventional banks to help convert their operations to Islamic Banking. This proves that we believe in co-optation and not just aggressive competition.

PAGE: Do you have any specific marketing strategy in Pakistan?

IS: Our core marketing strategy is to maintain a unique brand image of a dedicated, truly Riba-free and professional Islamic bank. Our challenge is two-fold; to create awareness as well as educate and convince as to the veracity of our proposition.

Based on that we are also expanding our branch network aggressively and at present we have 23 branches in all major cities including Karachi, Lahore, Gujranwala, Kasur, Islamabad, Rawalpindi, Peshawar, Multan, Faisalabad & Sialkot. By next year Meezan Bank intends to expand its branch network to other cities of Pakistan as well.