June 02 - 08, 2008

Islamic Finance industry has made considerable progress globally. Over the last decade the Islamic Financial Sector (IFS) has registered a robust growth (between 15 to 20 percent per annum); making it one of the fastest growing segments of the overall financial system. At present the Islamic financial industry comprises of across-the-board financial institutions and markets. Moreover, there are dedicated regulatory, legal and academic institutions at the international level that are providing support in establishing the IFS. Also with the passage of time the international Islamic financial market is becoming increasingly dynamic and diversified.

In Pakistan Islamic banking is witnessing unprecedented growth. The State Bank of Pakistan (SBP) has been playing a leading role in the promotion and development of Islamic banking in the country. The drive to promote Islamic banking as a parallel system, operating at a level playing field with conventional banks, has been aimed at building a broad based financial system in the country to enable all segments of the population to access financial services and play their due role in the overall economic development.

The change in policy approach introducing Islamic banking in Pakistan has received a very encouraging response. Under the current policy first Islamic banking license was granted on 31st January, 2002. Since then the industry has been showing impressive growth. In 2003 only one bank operated as a full-fledge Islamic bank and two conventional banks were operating Islamic banking branches. The total assets and deposits of the Islamic banking industry accounted for a market share of around half and 4% respectively and the total branch network comprised of 17 outlets.

At present there are 6 full fledged Islamic banks and 12 conventional banks are operating dedicated Islamic banking branches. The total assets of the Islamic banking industry are estimated around Rs. 200 billion which accounts for a market share of over 4%. Similarly the market share in terms of deposits is also around 4%. The total network comprises of over 300 branches in 45 cities and towns and covering all the four provinces of the country and Azad Jammu & Kashmir.

The industry has done better in terms of its financial performance. Involvement of foreign investors in Pakistani Islamic banking industry is giving the industry a unique look through which success transfer is taking place as experiences are being shared leading to the development of the local industry. However, it also faces some serious issues needing immediate attention.


The absence of liquidity management instruments, such as bonds and other marketable securities, which could be utilized to either cover liquidity shortages or to manage excess liquidity, is a major challenge for Islamic banks. Development of Shariah compliant instruments, interbank market and capital market is very important to resolve different issues relating to the liquidity management by Islamic Financial Institutions and monetary management by the central bank/Government. Although, various alternatives have been developed by the research scholars but related nitty-gritty for their proper implementation, still require strenuous work on the part of government, regulator, legislators and policy makers.


Capacity building is another major challenge being faced by Islamic financial Industry. Proper understanding of Islamic banking services and their equal treatment vis--vis conventional products is vital for the practitioners in Islamic finance Industry for product innovation and differentiation. Islamic finance requires a different mind set because an institution is what its employees make it. It is, therefore, extremely important to have the people with the right kind of skills and commitment to run Islamic financial institutions.


The importance of R & D could not be overestimated. It is particularly more important for the progress of Islamic finance industry because it has yet to achieve its full potential and objectives. Innovations are required for developing products that are not just the mimics of their conventional counterpart but also have the ability to help in achieving the objectives of Islamic economic system. Focus of product development need to be shifted from mode or conventional product-based to the customer's need based. Therefore, to sustain the Islamic banking industry's growth it is imperative to create a progressive research and knowledge based environment where it not only becomes easy for the Islamic banking institutions to deal with contemporary problems but which also fosters a futuristic view of the industry and aims to innovate and develop newer and better products and services.


Another major issue being faced by the industry is its limited outreach and distribution network. Islamic banking has a strong growth potential in emerging fields like micro-financing, agriculture financing, infrastructure finance, Small & Medium Enterprises etc. and due to its appeal among the masses because of its ethical and religious dimensions. Moreover, as the demand for launching of diversified and integrated Islamic financial System in the country is on the rise there is a great potential for Islamic Banking products in these areas. An additional factor in extending the outreach of Islamic banks is facilitation of its network expansion. The Islamic banking institutions also need to utilize alternate delivery channels for improving the accessibility of the Islamic banking services across the length and breadth of the country.


Like any other "new" concept, Islamic banking and finance is also going to take some time to be fully comprehended by the people at large. Any new product when introduced in a market will go through the natural dynamics of initially being understood by a few and with the passage of time as its need and practicability is felt and appreciated by more and more people greater efforts are employed to make it recognizable for everyone. In Pakistan the failure of implementing the Islamic banking system in its true spirit in the 1980's is another major factor that contributes to the high level of skepticism expressed by many commentators. These two factors along with many others make task of creating awareness about Islamic banking among the masses a daunting one.