ISLAMIC BANKING IN PAKISTAN
Market leader or follower?
SHABBIR KAZMI, Special Correspondent
July 31 - Aug 06, 2006
Under the able guidance of State Bank of Pakistan Islamic Banking system has made strides in the country. Pakistan has achieved remarkable results in less than five years, which many other countries took nearly quarter of century. The decision to create parallel banking system, which is Shariah-compliant, has encouraged more people to opt for this system.
Though many critics may not agree, it is a fact that the policy adopted by the government has put Pakistan in the front line. The critics may not give Pakistan the status of 'leader' but a paradigm shift from Islamic Banking to Islamic financial system will make Pakistan the leader. The experts in Pakistan are not talking about an ideology but following the concepts as a routine. The increasing number of participants, expansion in the overall asset base, strengthening profitability indicators, contained credit and market risk allow the common man to make Islamic banks the first choice.
The concept of Islamic Banking has gained momentum in the past two to three years after a disappointing performance during 1980s and 1990s. According to sector experts, the Islamic Banking investment and financial management market is growing at a rate of 15% per annum around the globe. Islamic financial institutions are operating in more than 75 countries. Assets of these institutions have grown more than 40 times of the assets estimated in 1982.
Although Islamic banks appeared on the world scene as active players about quarter a century back, the principles upon which it is based, have been commonly accepted all over the world. In Spain and the Mediterranean and Baltic states, Muslim merchants claim that European financiers and businessmen adopted many concepts, techniques and instruments, which are close to Islamic Banking and finance. A number of leading foreign banks have opened up Islamic Banking arms in many countries, including Pakistan. The German state of Saxony-Anhalt revealed an appetite for Islamic products outside the Muslim world by issuing a 100 million euro Sukuk or Islamic bond in August 2004. Britain's first Sharia compliant bank also started operations lately.
In Pakistan, the central bank has also allowed commercial banks to set up Islamic banking subsidiaries or provide full Islamic banking facilities through dedicated branches. Islamic modes of financing are fast taking roots in Pakistan, which is evident from enormous growth in Islamic Banking. The total assets in the country under Islamic financing system come to about Rs 34 billion with as many as 52 companies doing business under the Shariah-compliant financing system.
Islamic banks have registered record growth of more than 30% in their net profit during the period of 2003-2004 and earned net profit of Rs 342 million during 2004 in Pakistan alone. The upsurge in capital base of Islamic banking system is quite notable, as it has more than doubled since 2003. The most amazing thing about the performance of these Islamic banks is that the net Non-Performing Financing (NPF) to capital ratio is less than one percent. According to figures available with the central bank the net mark-up income of these Islamic banks grew by more than 55%. However, provision went up by less than 4%. Reports indicate that for the year 2004-05, Islamic banks were more profitable as compared to many conventional banks.
COMPOSITION OF DEPOSITS IN ISLAMIC BANKING
Current Account Non Remunerative
Current Accounts Remunerative
Others (To be specified)
With the grant of a license to Bank Islami Pakistan, now there are three full-fledged Islamic banks operating in the country. The branch network has also increased from 48 to 54. Both, Islamic and conventional banks operating through designated branches are contributing towards enhanced outreach. The designated branches of Bank Al Habib and Habib Bank are already operating in the country. Soneri Bank started Islamic Banking operations on 31st December 2004. Given the increase in branch network, the overall balance-sheet footing of the designated branches has registered expansion, whereby full-fledged Islamic banks continue to hold the major chunk of the asset base.
The best contribution made by the central bank is that it has given a lot of autonomy to the players to nominate their own Shariah Advisors and come up with Shariah compliant products. Yet another major move is Shariah Audit. Under this arrangement most of products and operations are audited regularly to check and confirm the claims made by the players.
However, the biggest credit goes to the people who have opted for Islamic Banking system. They have done this out of their own will and not under any law or compulsion. The general consensus of people adopting Islamic Banking is that it looks after the interest of borrowers and lenders more efficiently and effectively.
The credit also goes to Shariah scholars who have been working day and night to come up with products, which are Sharia compliant. As the time passes it is expected that they would be able to come up with even better products. Though, it may be a little deviation from the topic, it is also a fact that now Islamic funds and Takaful have also become a norm.
The government has also issued Sukuk or bonds in the international market and the issue, which was over-subscribed gives two hints - economic fundamentals enjoyed by Pakistan economy are improving, and the credit for this goes to stronger financial system of the country.
However, one of the constraints - limited availability of people having formal education and on the job experience - has become a serious constraint in the proliferation of this system in the country. It is the responsibility of the central bank, the players and the educational institutions to educate and train people to work for this fastest growing business.