Dec 22 - 28, 2008

Islamic banking has shown a tremendous growth and is thriving rapidly owing to the expectations of the people and peculiar nature of Shariah-compliant transactions. Islamic banks in Pakistan hold about Rs206 billion of assets, and have 2.6% and 4.3% market share in deposits and financing respectively.

The deposits of Islamic banks are multiplying quickly and have reached Rs60 billion. The State Bank of Pakistan is planning to evolve a specific regulatory framework in order to raise market share of Islamic banking to 12% by 2012. This measure would not only enhance the spectrum of Islamic banking but also strengthen Shariah compliance mechanism. It is pertinent to relate that the market share of Islamic banking in Pakistan was mere 0.5% in 2003 and there was only one Islamic bank. Today, there are six Islamic banks with 230 branches and 12 conventional banks have 103 outlets for Islamic banking. Commenced from an ordinary banking experiment in rural Egypt during the 1960s, Islamic banking is currently expanding at a rate of 10-15% per annum. It is now the preferred channel of banking for one fifth of humanity.

Although the very foundation of Islamic banking emerges from the Islamic principles as well as from the Divine commandments, however it turned up as an industry in recent days. While conventional commercial banks provide financial intermediation services on the basis of interest (charged and paid), the basic premise of this mode of banking is the prohibition of interest. Pakistan has a protracted history of Islamic banking with the initial attempt to Islamize Banking system in 1980s, leading to sweeping changes in the Banking Companies Ordinance, 1962 and associated laws and regulations to accommodate non-interest based banking transactions.


The Islamic banking has exhibited spectacular growth over the past ten years and is one of the fastest-growing financial intermediaries in the world. Leading Islamic banks have fast spread their network from home base to develop a regional and global reach. Some of the Middle East banks are now entering into African and Central Asian markets and are sizing up Australian financial market.

Presently Islamic banks present unique opportunities to both new entrants and existing players. There are now over 300 institutions offering Shariah-compliant banking, with an asset base of around $250-500 billion. Currently, Islamic finance activities are dominated by the GCC countries and Malaysia. The expansion of Islamic industry is largely centered on retail and consumer finance especially housing finance and current accounts and savings products; infrastructure and project finance; acquisition finance; and real estate development finance.

Malayan Banking Bhd (Maybank) is the largest Islamic banking player in the Asia Pacific. According to Asian Banker Research, Maybank, which is not a standalone Islamic bank, currently holds over US$6.4 billion Shariah compliant assets through its Islamic banking window. 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. But compared to Indonesia where Islamic banks account for only 2.1% of the total industry, Pakistani Islamic bank's share in total banking activity in the country is 4.1%. Although the rapid growth of this sector in the Gulf Corporation Council (GCC) is led by both private and government-owned entities but the latter is still playing an ever-increasing role as is evident from recent establishment of Alinma Bank in Saudi Arabia, Masraf Al-Rayan in Qatar; Al-Hilal Bank in Abu Dhabi; Ajman bank in Ajman and Noor Islamic Bank in Dubai.


To accelerate the pace of growth in Islamic banking following areas are to be addressed meticulously:

1- There is a dire need of aggressive deposit mobilization to augment domestic financial savings of the country. Islamic banks have phenomenal potential to exploit resource mobilization. Substantial savings have still not been channeled into the financial system because of reservations relating to interest based system or return deficiencies of the conventional system. Islamic banks, besides catering to the needs of small depositors through profit and loss sharing basic accounts with no charges, need to tap high net worth investors and companies which are increasingly being driven to the attractive options and returns being offered by more innovative players worldwide.

2- Islamic banks should make Financial Services available to underserved regions and poor and vulnerable groups. They ought to extend branch network to rural areas as is done by commercial banks.

3- Islamic banks should promote financial industry diversification by exploring new avenues in the light of Shariah and Islamic ideology. For that matter there should be specific emphasis on adequate development of Islamic capital markets. Some work is already under way in this regard as Sukuk bonds are being issued.

4- The risk management system is a vital area. It is important to enhance the risk absorption capacities. As in Islamic modes banks and customers operate on profit and loss sharing mechanism. Because of participatory nature institutions are exposed to risks associated with the transfer of assets and its management as well as any volatility in the values of underlying assets. In structuring new products, there is need for Institutions to factor in appropriate risks of real commodities, properties and equipment being financed with proper risk mitigation management and techniques.

5- SBP should promote international standards and best practices in Islamic Industry. SBP is an active member of international bodies designing regulations and guidelines for Islamic modes and has extended technical input to devised international standards. Islamic banks should be advised to follow IFSB rules in addition to conventional banking prudential regulations. To bring harmonization and standardization in the practices and procedures followed by Islamic Banking

Industry, Islamic Banking Department of SBP is already taking necessary steps for adoption/ adaptation of Shariah Standards issued by AAOIF (Accounting and Auditing Organization for Islamic Financial Institutions). In order to review these standards for possible adaptation Shariah Advisors of the Islamic Banking Institutions are to be engaged.

6- There has to be unique fiduciary responsibility as well as good corporate governance in Islamic banking. They should implement ways that are in conformity with Shriah and ensure sound internal controls. This step can calibrate them one notch above conventional commercial banks.


Global interest in Islamic finance industry and Pakistan's success in laying basic foundation and core infrastructure of Islamic financial system lends confidence that the country has good potential and prospects to further exploit this industry. Going forward, however, it is important that Pakistan adopts a more calibrated and coordinated approach and strategy for the development of Islamic finance industry. Therefore it is inevitable to launch joint capacity building efforts for Islamic finance industry.