An exclusive interview with Pervez Said, Director Islamic Banking Department

SHABBIR H. KAZMI, Special Correspondent
Mar 12 - 18, 2007

PAGE: How do you review the growth of Islamic banking in Pakistan during last five years?

PERVEZ SAID: Islamic banking in Pakistan has continued to show impressive growth, surpassing the growth rates recorded by the conventional banks during the past five years. Presently there are five fully operational Islamic banks and one more is in pipeline. About 12 conventional banks have opened stand-alone branches for Islamic banking. These banks include multinational banks like Standard Chartered and Dubai Islamic Bank. Currently, the assets of Islamic banks in Pakistan are estimated to be about Rs 126 billion. Market share of total industry assets of Islamic banks is 3%. There are 157 branches of Islamic banking institutions in 25 cities across Pakistan. Full-fledged Islamic banks have 99 branches while there are 58 Islamic banking branches of conventional banks.

PAGE: What has been the response of general public?

PERVEZ SAID: The public acceptance of Islamic banking has been quicker and much larger than what was anticipated. Initially the Islamic banks attracted those depositors who due to their religious beliefs did not go to the commercial banks. Once Islamic banks have proved that they are viable and that they offer purely Shariah-compliant products, they have started attracting other clients who preferred the less pressured style of profit-sharing dealings, or who shared the social and moral precepts of Islamic banking. Many of these clients of Islamic banking believe that wealth should be directly invested in socially and economically productive ventures rather than idly earning money in interest-bearing accounts.

PAGE: How do you compare growth of Islamic banking in Pakistan with other countries?

PERVEZ SAID: Indonesia started its Islamic banking effort in the mid-90s, and currently their market share is 1.7%. Malaysia started Islamic banking in 1983 and currently their share is 12%, Bahrain started about 30 years ago, and Islamic banking concerns there have a market share of about 20%. Pakistan has done well as Islamic banking in the country started off with half a percent market share of the total banking market in 2001 and has reached 3.0%.

PAGE: Since the commencement of operations by Meezan Bank, which other (locally listed) banks have commenced their operations?

PERVEZ SAID: All the major banks like ABN AMRO Bank, Askari Commercial Bank, Bank Al Habib, Bank Alfalah, Habib Metropolitan Bank, Habib Bank Limited, MCB Bank, National Bank of Pakistan, Prime Commercial Bank, Soneri Bank, Standard Chartered Bank, the Bank of Khyber and United Bank have their separate Islamic banking branches. Six full fledged Islamic banks have been issued Islamic banking licenses; these are AlBaraka Islamic Bank, B.S.C, BankIslami Pakistan, Dubai Islamic Bank Pakistan, Emirates Global Islamic Bank, First Dawood Islamic Bank. Out of these banks, First Dawood Islamic Bank has yet to start operations.

PAGE: Pakistan has lately witnessed entry of few foreign Islamic banks, what has been the growth in terms of assets, etc?

PERVEZ SAID: Entry of foreign banks in Islamic banking Industry has provided a healthy competition, increased service levels and offered more Shariah-compliant options for customers. The growth in assets of the Islamic banking industry in Pakistan has been substantial. The total assets portfolio in the Islamic banking sector has expanded tremendously. Presently, the Islamic banking assets amount to Rs 126 billion as compared to Rs 13 billion in 2003.

PAGE: Why the interest is mainly from Middle East?

PERVEZ SAID: The banking in the Middle East had been transformed into Shariah-compliant modes many years back. Now, because of increasing oil prices, there has been excess liquidity in Middle Eastern economies, which has been flowing to various countries including Pakistan. Moreover, the accelerated entry of foreign banks, specially from the Middle East into Pakistan is the pay-off for the country's continuing economic recovery and a year of mounting profits for the banking sector.

PAGE: Do you identify some factors affecting growth of Islamic banking in the country?

PERVEZ SAID: There are religious as well as economic reasons, which have contributed to the growth of Islamic banking as an alternative to its conventional counterpart. The primary reason is prohibition of 'Riba' in the Qura'an. Islam as a religion calls for avoiding any transaction based on interest, economic exigencies, on the other hand, providing a new outlook to the role of banking in promoting investment, productive activities, influencing distribution of income and adding stability to the economy. Both these factors have led to increase in demand for Islamic banking in the country.

Since Islamic banking is an emerging system, there is a number of factors hindering its growth as well e.g. public awareness/understanding, lack of liquidity management instruments, taxation issues, product innovation, Shariah compliance in letter and spirit, availability of trained Islamic bankers and Shariah scholars, etc. Steps are being taken to resolve all these issues for smooth growth of this industry.

PAGE: Is it true that availability of qualified and experienced personnel a constraint in the rapid expansion of branch network in Pakistan?

PERVEZ SAID: Yes, it is true. This is one of the main factors hindering faster growth of Islamic baking industry around the globe. There are no quick fixes, but there are combinations of things that are needed to be done. In this regard State Bank of Pakistan has also started a certificate course on Islamic Banking through its subsidiary NIBAF. However, this course is initially targeting the need of Islamic bankers. Further, other training and educational institutions are also encouraged to offer Islamic banking courses to fill the gap. We are encouraging universities to introduce more Islamic banking courses. Moreover, we have plans to have a "School of Islamic Banking and Finance" to cater to the needs of this industry.

PAGE: What central bank is doing to facilitate growth of Islamic banking in the country?

PERVEZ SAID: To promote Islamic banking in the country, State Bank initiated three pronged strategy and set out detailed criteria in December 2001 for the establishment of vibrant Islamic banking system. These are: 1) Setting up subsidiaries by the commercial banks for the purpose of conducting Shariah-compliant transactions; 2) Specifying branches by the commercial banks or Islamic banking windows which would deal only in Islamic products, and 3) Setting up a new full-fledged commercial bank to carry out exclusively banking business based on proposed Islamic products.

Other measures taken include: 1) A Shariah Board has been set up, which uniquely consists of two Shariah scholars and also includes experts in banking and accounting, in addition to a legal counsel. 2) Various Task Forces have been set up to find solutions to the problems faced by the Islamic banking industry. 3) Periodic meetings are held with heads of all Islamic banks and Islamic Banking Divisions of conventional banks. 4) A Shariah Advisors' Forum has been established to discuss various Shariah issues at a joint forum. 5) Shariah Compliance Inspection Mechanism is being put in place to ensure proper and smooth functioning of Islamic banking institutions.