Sep 26 - Oct 2, 20

Islamic finance has achieved a substantial growth in the last two decades annualizing a growth rate of about 14 per cent over the years.

The Islamic finance industry that is currently estimated to be worth about US$1 trillion has made further headway in the Islamic traditional markets such as Malaysia, the Gulf Cooperation Council countries, Pakistan, and Indonesia, apart from penetrating new markets such as Europe and Africa.

While Islamic banking assets account for a large part of this value, the segment that has enjoyed especially strong growth in the more recent years is sukuk.

However, Islamic banking is facing challenges like any other new industry. Islamic banking is based on the principles of Islamic finance and people have very little knowledge about the concept.

This in itself gives rise to a number of challenges, for instance establishing credibility, and spreading awareness. Capacity building is another major challenge. Conventional banking is being taught in numerous universities whereas very few institutions are offering formalized education in Islamic banking thus production of quality human capital is another challenge for the growing sector.

The lack of effective marketing remains as one of the key reasons why the sector has not been able to serve its massive potential. The way mass media and social media has evolved in the overall scenario, it has become very important to be able to use these tools effectively in order to market Islamic banking in general and its products/services in particular.

According to a recent IMF study, Islamic banks performed better than conventional ones in terms of profitability, credit and asset growth. The Islamic banking system has great potential for further market share expansion and a possible contribution to market stability given the available credit.

Assets also reflected a similar trend, which were less affected and grew twice the pace of conventional banks during the period of economic crisis.

The growth in the market share of Islamic banking in Pakistan has also been impressive. This can be seen by looking at the market share achieved by other countries over time. The Islamic banking has a seven per cent share of the total banking industry. This share has been achieved in just seven years of the launch of State bank of Pakistan's Islamic banking initiative.

When you compare this to larger Muslim economies like Indonesia, Bahrain or Malaysia, the growth rate, on an annualized basis, has been much higher. The industry has grown from just six or seven branches in 2002 to a cumulative branch network of approximately 800, covering all the major cities of the country.

The growth trends of Islamic banking in Pakistan clearly show a bright and prosperous future. Now, almost all the banks have Shariah-compliant banking products.

In fact, the government has done a tremendous job with SBP promoting Islamic finance since 2003.

Pakistan, desiring to nearly double Islamic banking by 2015, is focusing on poor, conservative villages to drive growth and has ordered Islamic lenders to open 20 percent of all new branches in rural areas.

Experts told PAGE that Islamic banking, primarily being a faith-driven industry, has a significant potential in Pakistan as the concept directly appeals to the religiously sensitive segment of the society.

According to them, Pakistan has five fully-fledged Sharia-compliant banks and 12 conventional banks with Islamic operations, creating a network of 800 branches.

Islamic banking currently accounts for 560 billion rupees asset base, or 7.5 percent of the country's overall banking system.

The prospects for growth are already attracting both the conventional banks in Pakistan and foreign institutions, primarily out of the Gulf region. Both Dubai Islamic Bank and Bahrain's Al Baraka Bank have subsidiaries in Pakistan and Standard Chartered Saadiq, the Islamic arm of UK-based Standard Chartered, also launched operations in the country.

Even though Islamic banks are yet to achieve economies of scale that can make them practicable competitors, the solution is to spread mass awareness on processes, to adapt to beleaguered market conditions, to offer the highest levels of customer services and not to imitate conventional banking strategies. The focus, thus, should be on choosing and creating the most adequate products, services and policies, which are truly compliant with Shariah and adaptable to the current needs of billions of Muslim customers and even beyond them.

There are so many areas where Islamic banks can achieve progress leaps and bounds. Therese areas are Islamic mortgage finance, Islamic home financing, and Islamic car financing.

The difference between Islamic and conventional housing finance is that the former is equity based and the latter is debt based.

In an Islamic mortgage situation, both the bank and the client share the risk of equity ownership. Islamic banking system has much public acceptance and its future is brilliant. The Islamic banks need to educate public about its products and security system.