Mar 8 - 14, 2010

The debate is going on the degree of compliance of Islamic banking products with the Shariah principles. There are variable viewpoints. In the product form, there is no question of Shariah compliance, but we have to be cautious during implementation, says Mohammad Aslam, head Islamic banking Habib bank limited.

Since profit and lose can not be known in Islamic banking upfront, financial products are marketed with projected returns instead of guaranteed reruns. It is generally observed that some Islamic banks conceal the main element of projection while marketing term deposits. HBL Islamic division plans to utilize existing branch network along with new branches to encompass financially excluded markets nationwide. The division would introduce innovative profit and loss sharing products in near future, he tells Page during an interview.

The deposit mobilization potential in rural areas is huge and Islamic banking can tap the market aversive to conventional mode of banking, says he. According to him, eighty percent bankable market is untapped in Pakistan. The banks do not prefer to establish branches in rural areas of the country. This is self evident in the preference of branch opening in rural areas at the end following provincial capitals and semi-urban localities. He says deposit mobilization is not an issue, but investment is. Non-performing Islamic financing increased by 23.3 percent in July-Sep 2009 on top of 15.4 percent last quarter, according to State bank's quarterly Islamic banking bulletin. Most of the Islamic mode of financing declined during the quarter. Istisna financing witnessed remarkable growth up 26.2 percent to Rs6.1 billion as compared to Rs4.8 billion as of June 2009. Furthermore, while corporate financing decreased to 60.6 percent in the three months from 63.7 percent in the comparable period, consumer financing of Islamic banks inched up to 22.8 percent from 20.7 percent. As long as exports refinancing grows, Istisna financing will increase. HBL, which holds 18 percent of market share and has over 850 branches all over Pakistan, can expand Islamic financial services in rural and semi-urban areas through window operations. 'We plan to do this in near future,' says head Islamic banking HBL. 'Our idea is to develop financial super markets where customer can subscribe to any of the financial services in accordance with his desire.' He says HBL will open 11 (Islamic) standalone branches and 40 windows by June and 20 standalone branches and 70 windows by December 2010. First HBL Islamic branch was opened in 2005. Total numbers of branches and sub-branches of six full-fledged banks and 13 conventional banks in the country reached to 551 at the end of September, as per the SBP's statistics. State bank considers agriculture, SME, and microfinance as financially excluded areas where Islamic banks can better be placed.

There are three options to promote Islamic banking industry in Pakistan, says Mohammad Aslam. One, more full fledged Islamic banks are licensed. Second, conventional banks set up Islamic banking subsidiaries. And, third that is easy and cost effective way for conventional banks to enter in Islamic banking business, is window operation. Delivering banking services based on Islamic principles from an existing branch network saves the infrastructure costs therefore conventional banks find it more convenient path to embark on Islamic banking business. The third option is more viable for the growth of Islamic banking in the country, he comments. He says until market share of Islamic banks reach to an equivalent of conventional banks this would be a practical and an effective strategy to give impetus to Islamic banking industry in the country. A separate entity within the existing conventional banking infrastructure with separate accounts in financial statements can keep the autonomy of Islamic banking operation unaffected of conventional business, he adds. However, 'absolute isolationism is not possible at this stage,' he says adding when someday Islamic banks' market shares reign supreme, 'maybe conventional services need to be delivered through window operations'. How long would it take to become reality? He is not sure. He calls for cooperation amongst the Islamic banking stakeholders in fuelling growth of the industry. He does not limit the definition of stakeholders to players in the industry only, but extends its scope to customers as well. Customers should be aware about the difference of Islamic and conventional banking, he elaborates. Their knowledge is equally important to accelerate the growth of Islamic financial services. The main responsibility however lies on the industry players who must not be introvert while exchanging financial models of for instance solutions to operational difficulties with their counterparts, he remarks. 'Islamic banking sector is at evolutionary stage at present and alone contributions of all protagonists of Islamic banking can drive it to step into next stage. Industrial cooperation may focus on development of deliverable and reliable Islamic financial products," he says. In brief, "when size of the cake will enlarge, share for each would also be increased," he emphasizes. He is concerned about the lack of capacity building of stakeholders of the Islamic financial industry. HBL believes to involve its customers along with its employees in capacity building process, he says adding if Shariah advisors of all banks work together the products would be more Shariah-compliant. 'There is a need to publicize obligations that customers require to meet while choosing Islamic financial services.' HBL Islamic division has conducted four awareness building seminars so far. 'We have an advantage that 97 percent of country's population is Muslims.' Share of Islamic banking industry in total deposits reached 5.2 percent and 5.1 percent in total assets at end-June 2009, suggests SBP statistics. It is worthwhile to mention that while assets of conventional banks grew 8.8 percent in 2008, assets of Islamic banks swelled 34 percent in 2008. Asset base of Islamic banking institutions has been enlarging 59 percent since 2005 in Pakistan, the bulletin notes. State bank's strategic plan envisaged 12 percent share of Islamic banking industry in total banking assets in 2012. It is possible, agrees Mohammad Aslam. At international front where non-Muslim countries are eager to posses the stewardship of global Islamic financial industry, he is for increasing presence. According to the SBP, Shariah-compliant assets worldwide reached $700 billion, and are expected to grow to $1.6 trillion by 2012 with a growth rate of over 10 percent per annum. Main drivers of growth of Islamic financial services internationally are faith-based system and surplus liquidity of gulf countries, he nodded yes to the analysis of the bulletin. London, Singapore, Paris, and Hong Kong want to become global Islamic financial hubs and also to launch substitute solutions before liquidity vanishes off of the conventional financial system, adds Mohammad Aslam who had been executive vice president and chief representative Beijing office of HBL. The foreign entry will be need-based, he underscores.