ISLAMIC BANKING IN PAKISTAN

PROF. DR. KHAWAJA AMJAD SAEED
Nov 23 - 29, 2009

PRELUDE

Listed Financial sector in Pakistan has six constituents namely, Investment Banks, Commercial Banks, Modarbas, Mutual Funds, Leasing and Insurance. Its market capitalization share in the total listed sectors of Karachi Stock Exchange is 38%. The performance of each segment of financial sector is of varying nature. Sickness exists in many segments. A series of articles in this respect has been contributed by me earlier and published in PAGE during 2008-09. However this article will focus attention on a review of Islamic Banking in Pakistan.

CONSTITUENTS

This paper will consist of five constituents, of state Bank of Pakistan namely:

I: Vision and Mission of Islamic Banking Department

II: Strategy for Islamic Banking in Pakistan

III: Historical Rundown

IV: Quantitative Analysis

V: Future Outlook

The above aspects are now briefly explained.

I: VISION & MISSION OF ISLAMIC BANKING DEPARTMENT OF STATE BANK OF PAKISTAN (SBP)

State Bank of Pakistan, in its role as central bank, has developed the following aspects:

1. VISION

"To make Islamic Banking the baking of first choice for the providers and users of financial services".

2. MISSION

"To promote and develop Islamic Banking industry in line with the best intersectional practices, ensuring Shariah compliance and transparency".

It is very important that the stakeholders to revisit the above aspects reflected as vision and mission. Motivated by the enlightened guidance provided by State Bank of Pakistan, all Islamic Banks must follow sunshine vision and driving mission. These aspects need to be indoctrinated in the minds of all stakeholders so that their efforts are reflected in real life situation as achievement motivation.

II: THREE PRONGED STRATEGY

In Pakistan, State Bank of Pakistan has followed three point strategy relating to development of Islamic Banks. These strategies include the following:

1. Full fledged banks can be established in Pakistan.

2. Islamic Banks can set up their subsidiaries.

3. Stand-alone Islamic Banking branches opened by conventional banks in Pakistan. Therefore, flexibility exists in respect of starting and expanding Islamic Banks in Pakistan.

III: HISTORICAL RUNDOWN

1. Pakistan was created out of Islamic Ideology. Therefore Islamic Banking gets support for its development.

2. Quaid-e-Azam Mohammad Ali Jinnah, father of the Nation, while inaugurating the State Bank of Pakistan on July 01, 1948 had guided Research Department of SBP to help develop Islamic Economic System which is based on equality and brotherhood.

3. Constitution of Pakistan

Article 38 (f) of the Constitution of Pakistan is quoted below:

"The state shall eliminate riba as early as possible".

4. 1970s to 21st Century

a. 1970: efforts, in their initial stages, started to eliminate riba.
b. 1980s:

Bold and comprehensive initiatives were taken. Pakistan joined the race of three countries in the world for interest free banking several existing laws were reviewed. New financial instruments were introduced, Twelve Non-Interest Based (NIB) modes were released to replace riba based practices, Profit & Loss Sharing concept was introduced.

c. 1990s:

Court battles were on instructions were issued by courts for a time framework for implementation of replacing conventional banks into Islamic Banks. However the system did not positively respond for implementation.

d. 2000s:

In January 2002 Commission for Transformation of Financial System was constituted in SBP. Task Force was set up to suggest ways to eliminate interest from government financial transactions.

However, the end conclusion has been to continue parallel banking ie. Conventional and Islamic Banks. This system is going on in Indonesia and Malaysia also.

IV: QUANTITATIVE ANALYSIS

1. From 2003 to 2007, the average number of full fledged Islamic Banks is 3.8. This appears to be a steady increase in view of the fact that the total number of scheduled banks in Pakistan is around 44. This number will continue to decline due to mergers and acquisition of banks as motivated by SBP for consolidation of baking in Pakistan.

2. Based on our research, the progress of Islamic Banking industry from 2003 to 2007 is reported below:

a. Full fledged Islamic Banks: 6 times
b. Branches of Islamic Bank branches: 19 times
c. Conventional Banks with Islamic Banking branches: 4 times
d. Branches of conventional banks: 15 times
e. Total Islamic Banking institutions: 4.5 times
f. Total number of branches: 17 times

3. Trends in Islamic Banking from June 2004 to June 2008 are reported below:

a. Deposits: 12.5 times
b. Financing & investments: 12.5 times
c. Total assets: 12.2 times

V: FUTURE OUTLOOK

Future outlook is presented in the following two parts:

1. FORECASTS

a. By 2012, total of Islamic Banking industry is forecasted as Rs. 1 trillion.

b. In the next five years, 1200 branches of Islamic Banks are vitalized

c. The hope is that it will be 12% of total banking industry

2. CHALLENGES

We visualize the following future challenges:

a. 15,000 people are needed in the next five years to equip Islamic Banks. In this respect Universities in Pakistan must respond to this challenge. Curricula must be changed in management education. High Education Commission should provide motivation in this respect for Universities to positively respond.

b. Islamic Banks must demonstrate growth with profitability. The top management must evolve the process to translate the above challenges.

c. The scope of services for user may be extended to such areas as micro finance, agriculture and small & medium enterprises. This will widen the base of socio-economic development in our country and will address to the two vital issues in our country namely, promotion of employment opportunities and alleviation of poverty.

d. Sharia compliant financial services be expanded. Awareness be created in this respect and logistics be developed as cushion to achieve the above objective.

e. Differentiated products be developed. Some Islamic Banks have taken correct initiative in this respect. This areas needs to be logistically well cushioned.