ISLAMIC BANKING

GROWING IN POPULARITY

By HARIS ZAMIR
Mar 27 - Apr 02, 2006

The future prospects of Shariah complaint banking products largely depend upon how efficiently and prudently the existing Islamic banking institutions perform in terms of profitability and growth in their asset and deposit base.

Moreover, committed are the sponsors of the institutions to convince entrepreneurs and depositors to route all their financial transactions through Islamic banks.

Keeping in close touch with market requirements and responding to them promptly could enhance the potential growth of the Islamic banking industry.

Introduction of innovative Shariah complaint products is crucial aspect of such growth.

It is estimated that there are 267 Islamic banks in over 75 countries, which manage approximately $202 billion in deposits, $400 billion in investments and over $262 billion in other assets. Islamic windows of international banks manage another $200 billion to $300 billion. The average annual rate of growth of Islamic banking is considered to be over 10 percent per annum since it first emerged in 1960s.

Throughout Asia, the Middle East and Europe, more and more banks and their customers are turning to Islamic finance. A growing number of the decisions to do so are increasingly made on commercial rather than religious grounds. The rising global interest in Islamic finance has led to major expansions in the number of institutions offering Islamic financial services. Global financial institutions, led by HSBC, Citigroup, ABN AMRO, Deutsche Bank and BNP Paribas, have now set up either Islamic divisions or Islamic subsidiaries.

Islamic Banking has proven its competence and can grow to become a powerful force in years to come in Islamic countries and beyond. For an industry that is still considered something of a newcomer, in the past three decades, it has done a very impressive progress. It is projected that total assets of the industry would growth in the range of 8 to 15 percent over the next five years, according to Opportunities and Trends in Islamic Finance, February 2005.

According to an analyst a big challenge for SBP is to develop Shariah-complaint products to enable the monetary management of Islamic Banking Institutions. Similarly, accounting standards for all modes of Islamic financing need to be developed, as in the case of Murabaha and Ijara. Increase in the size and volume of Islamic capital markets also depends on the existence of a secondary market for trading in Sukuk, which is still to be developed even on an international level. Another challenge for the industry is the establishment investment banks and liquidity management institutions exclusively for Islamic banking, following the models of Bahrain and Malaysia.

The State Bank of Pakistan in report earlier said that the unique distributive and facilitating nature of Islamic banking products can contribute extensively not only in the development of the economy but also to the reduction in poverty, unemployment and income inequalities. Products based on profit and loss sharing with emphasis on financing production and not consumption, can have a favorable impact on savings and investments. If operated efficiently and transparently. In this respect, Musharaka can especially be used in short, medium and long term project financing, import and pre-shipment export financing and working capital requirements.

Islamic financial services in Pakistan, a relatively recent occurrence, have recorded a noteworthy progress during the last three years, constituting an asset base of Rs 57.1 billion and deposits of over Rs 37.6 billion as of September 2005. Given its nascent stage of development, the share of the Islamic Banking industry in the total assets of the banking sector grew from 0.5 percent in 1996 to 1.7 percent as of September 2005. However, given the rapid growth of this industry, it is expected that this share would grow considerably in the years to come.

The future of Islamic Banking in Pakistan looks very promising. SBP targets 10 percent of the industry under Islamic banking by 2020. At 98 percent correlation with GDP growing at 5 percent, the deposit size of Islamic banking is expected to reach Rs 480.6 billion in 2020 with a growth rate of 18.88 percent. It is conservative estimate as in Malaysia the industry grew to 10 percent in 15 percent with a Muslim population at around 60 percent at a growth of 37 percent. In addition a renowned consultancy firm in Pakistan Ferguson Associates professes a similar conclusion. They projected that the deposit with Islamic banks in Pakistan would reach Rs 780 billion by 2014 with an average growth of 140 percent.

GENERAL INFORMATION OF ISLAMIC BANKING DEPARTMENT IN PAKISTAN

Islamic Banking Department was established on 15th September, 2003 and has been entrusted with the huge task of promoting & developing the Shariah Compliant Islamic Banking as a parallel and compatible banking system in the country.

Islamic Banking is one of the emerging field in global financial market, having tremendous potential and growing at a very fast pace all around the world. Al-Hamdulillah, the progress of Islamic Banking in Pakistan has also been commendable during the last two years. Currently there are three licensed Full fledged Islamic Banks and nine conventional banks with standalone Islamic Banking Branches with the total branch network of 62 branches operating in thirteen cities of all the four provinces in the country as of 30-06-2005 and applications for few more players are under consideration. The importance of Islamic Banking is also evident from the fact that the internal and external stakeholders have given high priority to Islamic Banking during the last Strategic Management Conference at SBP.

One of the biggest challenges being faced by this growing industry is the dearth of professional Islamic Bankers and capacity building in this regard is one of the top most priorities for the promotion of Islamic Banking. In order to play our regulatory and supervisory role more efficiently we are working on the areas like Risk Management, Corporate Governance, Prudential Regulations, Accounting & Shariah Standards etc. regarding Islamic Banking

Currently the Islamic Banking Department (IBD) consists of following three divisions:

1. Policy Division
2. Shariah Compliance Division
3. Business Support Division

The conventional banks in Pakistan have 31 dedicated Islamic banking branches and there is increasing interest from these entities to open branches. With the new applications for full-fledged Islamic banks show the promising growth. The State Bank of Pakistan expects the number of total dedicated Islamic branches to grow substantially by end December 2006.

According to an analyst with the regular entrance of new Islamic Banks, the market stands to benefit and grow. The injection of new ideas, the investment in training and infrastructure, and the healthy results that free competition engenders, all coming together within a properly regulated and risk management environment. "Though the Pakistani market presents its own unique set of challenges amidst a dynamic and competitive arena, it truly presents the fitting crucible for the evolution of Islamic banking in its most cogent form".

Meezan Bank, the country's premier Islamic bank said in its recently released report that soon the "smart branch", though not new concept would be launched. The concept of self-service branch, using state of the art technologies, the branch would be equipped with a system through which the customer would immediately be able to deposit and withdraw cash or make electronic bank transfers. Moreover, SMS banking is another value added service that would be providing aimed to give comfort for mobile customers to do banking the way they want to.

GROWTH OF ISLAMIC BANKING IN PAKISTAN

 

2003

2004

2005

Total Assets

12.9

44

60

*Rs In Billion