May 12 - 18, 2008

Islamic banking institutions are said to cater to the specified needs of predefined set of customers. Based on the non-conventional financial system, however, concept of IBIs servicing is rapidly making its way into numbering bankable population world over due to its enrooted commitment of maintaining socio-economic equilibrium. While the assets of Islamic banking services in global banking industry have been significantly increasing for past few years, share of its total assets and deposits in entire banking industry of Pakistan is inconsiderable, quite contrast to the phenomenal growth rate which country's banking and finance sector has overall been depicting for years and unprecedented profits which banks churn out. Share of Islamic banking industry in the total assets of and deposits in banking system of Pakistan is around 3.8% and 3.6% respectively while in value term till the end of September 2007 Islamic banking services formed an asset base of Rs. 178 billion and deposits of over Rs. 159 billion. Noticeably, the share is startlingly low in the context that large potential customer base exists for the Shariah-compliant banking. The nascence of IBIs is attributed as a reason behind slow progress by Islamic banking experts.

Pervez Said, Director Islamic Banking department, SBP expressed his utter hope that bases of assets and deposits of Islamic banking industry would increase to 12% by the year 2012. "Share of Islamic banking services in either side will Inshallah shoot up to 12% by 2012, he told this scribe. Recently, State Bank issued guidelines about risk management for IBIs operating all across the country. These guidelines are aimed at to educate IBIs about managing risks of credit, equity investment, market, liquidity, rate of return, and operation. The salient risk associated with the exposure to traditional banking system, State Bank framed in the guidelines, and that mainly obstructs timely scale in Shariah-compliant customers disturbs the market position, liquidity, and profitability of Islamic banks. That Shariah-followed transactions interface conventional financial system reinforces the likelihood of the risk. Apart from this, few bankers asserted that lack of attention Islamic financial institutions might encounter in new government setup, which is historically called liberal, would hamper the progress of IFIs in the country. It is noteworthy that the guidelines take under account the risk related to politico-economic dynamics but they don't prescribe remedial actions.

Pervez Said denied that new political set up would affect on the performance of Islamic banking services. He said Islamic banking industry has passed through the introductory policy making stage, adding now it is fully market driven. "We are out of that phase," he said saying Islamic financial industry has now become completely market driven. Before 2002 only one Islamic bank-Al Baraka-with four branches was persuading Pakistan's bankable population. As a matter of fact, it was year 2002 in which Meezan bank embarked on 6 branches to dole out its market share with AIB launching its second tier of one branch.

For long till 2006, the battle of wooing predefined set of customers continued silently in between these two Shariah-compliance financial institutions. In 2006, however, two new entrants namely Bank Islami and Dubai Islamic bank appeared on the landscape to captivate the interest of fore-players and to develop live market exuberance in order to make presence of Islamic financial products feel. And they did it with feel-full entry by opening 10 branches each. Next year landing of Emirates Global Islamic and Dawood banks in the lucrative market of Islamic banking products brought the total number of branches of Islamic banks close to 118. This number touched the base of 185 at the end of year 2007.

Before 2003, not a single conventional bank was engaged in the Islamic banking. During 2003, BAFL (Bank Al-Falah) inaugurated Islamic banking window operations simultaneously from its five branches. Bank of Khyber and Muslim Commercial Bank followed the suit by opening Islamic banking windows during the same year. But the growth of stand alone Islamic bank branches has caught its real pace during the year 2006, when the window operation pulled up the grand total of facilitation centres to 24, depicting exactly a cent percent progress in last year's figure. In fact, annual growth rate of 2005-06 and 2003-04 stood identically at 100%. While there were only seven branches of conventional banks licensed to undertake Shariah-compliant banking in 2003, in 2004 another 14 branches of various banks got licences. As alike, 12 Islamic banking windows in 2005 turned up 24 in the succeeding year. Also, the year 2006 exhibited remarkable additions of Islamic banking windows conventional banks curtained off because of the significant branches of banks came forward towards offering Islamic financial products in accompany with conventional ones during the year. Out of nowhere, suddenly Askari introduced Islamic banking operations from its 6 branches giving weight to total stand alone branch networks. During the same year, State Bank licensed further 8 branches of BAFL to expand outreach of Islamic banking products. Again, this also galvanized birth of yearly impressive results. 12 banks scored 24 in the year. As on December, 2007 SAIBBS of 12 banks ranged 103. Of them, BAFL has unmatchable share of 23. It is safe to assume, therefore, that Bank Al-Falah has gained a far superior edge over other conventional banks in promoting Shariah-based banking solutions.

Despite difference in banking solutions offered by conventional banks and Islamic banks attract different set of customers circumscribing them strictly within dogmatic criteria can perceptibly create bankable niche that limits the scope of market expansion. The enrooted commitment of Islamic banking to bring socio-economic equilibrium can result into just bank's profit sharing.