Dec 22 - 28, 2008

Islamic banking system has witnessed a very positive growth during the last couple of years and is steadily proving its potential to work as a compatible and parallel alternative system for providing financial services. By the end of financial year 2007-08, there were six full-fledged Islamic banks operating in the country with a network of around 200 branches. Also, there are 13 commercial banks offering Islamic banking services through 103 branches.

Total assets of the Islamic banks have been increasing significantly and the market share of Islamic banking assets in the overall banking system rose to 4.3% at the end of December 31, 2007 which was 2.9% in December 2006. Deposit base also posted impressive growth with CAGR of 107% in the last four years, standing at Rs 147 billion at the end of December 2007 from just Rs 8 billion in December 2003, with the share of Islamic banks growing to 4.1% (Rs 147 billion) in December 2007 from 2.9% (Rs 83 billion) in December 2006.

Financing and investment portfolio grew 50% in FY2006 and 60% in FY2005. The growth momentum continued in FY 2007, as the total financing and investment reached at Rs 107 billion at the end of December 2007, which is 62.8% higher than the corresponding figures of Rs 66 billion recorded in December 2006. Contrary to phenomenal progress made in the Middle East and some western countries, Islamic finance in Pakistan has little avenues to invest, and most of the time their funds remain idle.

Islamic banking system is flourishing in Pakistan, as tremendous increase was noticed in deposits in Islamic mode of banking. The total assets of Islamic banks in Pakistan had increased, as more than 13 commercial banks were offering Islamic banking services. The deposits under Islamic mode of banking in December 2003 were Rs 8 billion, which were increased to Rs 30 billion in December 2004. The increasing trend continues and deposits reached to Rs 147 billion at the end of December 2007.

Although the roots of Islamic finance lie in Islamic principles since the days of the Holy Prophet (PBUH), its development as an industry is relatively new. While conventional commercial banks provide financial intermediation services on the basis of interest (charged and paid), the basic premise of Islamic finance is the prohibition of interest. Islamic bankers have developed a number of instruments that perform financial intermediation functions without the involvement of interest.

From a small banking experiment in rural Egypt during the 1960s, Islamic finance is currently expanding at a rate of 10-15 per cent per annum. It is now the preferred channel of banking for one fifth of humanity. Financial experts told Pakistan and Gulf Economist that Islamic finance is a system based on strong economic and social considerations, envisaging equitable distribution of rewards and risks among the stakeholders.

Due to efficacy of the Islamic finance, Muslim as well as a few non-Muslim countries were practicing this mode of banking. The United Kingdom had taken significant initiatives in the development of Islamic finance by adopting an open door policy, they added. They maintained that investors from Middle East, Far East and UK had shown keen interest in the establishment of Islamic banks in Pakistan. Islamic banks in the last two decades have benefited from continued global economic expansion and low inflation.

However, these good times may not last forever. Financial reforms will make the competition for Islamic banks too tough, therefore, they need to make a lobby to persuade the regulators not to make competitive environment less conducive for them, they opined. They further said that Islamic banks are too small to make any meaningful lobby. However, there are at least two basic reforms that conventional banks are already pursuing and Islamic banks will not be at disadvantage or face unfair competition with the conventional banks, if they join conventional banks lobby for these reforms, they pointed out.

They said that conventional banks are looking forward to reforms that can allow them to expand the span and mode of their activities and some of their demands, if accepted, it may open new horizons for the Islamic banking too. Malaysia is, in fact, on its way to become a global leader in the Islamic finance industry which is believed to be worth one to two trillion dollars at the moment. It has the world's largest Sukuk market with $66 billion or 62.6 per cent of global outstanding Sukuk issuance as at end-June this year. Its Islamic banking has 12 per cent market share in the country.

Malaysia has already exempted taxes for three years on fees and profits earned from its foreign currency Islamic bonds outside the country with a view to boost the industry, they said. To a question, they said that the State Bank plans to raise market share of Islamic banking to 12 per cent by 2012 by evolving a regulatory framework, enhancing the spectrum of Islamic banking and strengthening Shariah compliance mechanism.