Nov 19 - 25, 2012

Globally Pakistan is considered one of the fastest growing Islamic finance markets. However it is often felt that there is need for creating awareness about Islamic finance, provide a platform for stakeholders to share their experiences and insights about this fast emerging segment of the financial system. While followers of Islamic banking seems to be suffering from complacency, critics say only a fraction of potential has been achieved because overwhelming majority of population is Muslim that should not be undertaking Riba-based transaction. On top of that Islamic banking has attained the label of 'ethical banking' and in the aftermath of global financial crisis Islamic banks have emerged more resilient.

If one reviews the performance and growth of Islamic banking in Pakistan, it seems to be mainly drive by issue of Sovereign Sukuk, an important liquidity management instrument. The State Bank of Pakistan (SBP) in collaboration with the industry and the Government of Pakistan (GoP) developed Sovereign Sukuk. Over the last two years Rs369 billion (US$4 billion approx) Sukuk have been issued. The regular issuance of the Sukuk, almost on quarterly basis, has improved market confidence and tradability of the Sukuk.

Islamic banking industry has witnessed expansion in its asset base due to substantial increase of investment that accounts for over 8% share of overall banking industry's assets. Investment based asset expansion of Islamic banking industry is in line with the trend of overall banking industry, however, the difference can be observed with reference to asset mix of overall banking industry and Islamic banking Industry. With particular reference to the second quarter CY 12, the growth rate of investment for overall banking industry is lower than that of financing. However, the trend is opposite in case of Islamic banking industry where growth rate of investment is significantly higher than that of financing.

According to Kazi Abdul Muktadir, Deputy Governor, SBP the relative resilience and stability of the industry during the financial crisis and its flexibility and responsiveness to changing business needs has helped the industry to establish itself as a viable financial system. The tremors and aftershocks of the financial crisis are still on either in the form of European debt crisis and/or weakening global economic outlook and the policy makers are still looking for answers to fix these issues. Islamic finance, with its roots in a moral economic model that supports productive economic activity and discourages excessive leveraging and imprudent risk taking, can play an important role in rebuilding the financial system.

The evolution of Islamic finance industry in Pakistan is in line with the global trend, with growth picking up momentum mainly over the last one decade. Islamic banking was re-launched in 2002 with a more practical and gradual approach that allowed Islamic banks to operate in parallel with conventional banks. A comprehensive Shariah compliance framework has been introduced to ensure that the operations of Islamic banks are in conformity with the Shariah principles. The approach followed by the SBP has proved a mega success as the industry growing from scratch in 2002 now constitutes over 8% of the country's banking system with a network of 9641 branches and over 500 windows across the country.

The future outlook is positive due to Islamic finance getting acceptability both amongst the providers and users of financial services and likely to increase its share in the banking system to 15% over the next five years. The sustained growth of Islamic banking has also started catalyzing growth and development of Islamic capital markets, Mutual funds and Takaful companies, at present there are five Takaful operators, about 30 Islamic mutual funds.

The continuous high growth in investments is resulting in improving its share in overall assets; the share of investment in total assets increased to almost 49%. This trend of growth in assets base is mainly driven by regular issuance Sukuk. Financing followed its usual growth trend but showing deceleration lately. This deceleration can be linked to the continuing overall bad economic situation of the country as also indicated by industry wise financing that shows a slower growth in textile industry, the largest share holder in overall financing by Islamic banking institutions.

According to different segments financing portfolio indicated continuation of negative trend in financing to corporate sector, dropping from Rs152 billion at end March 2012 to Rs147 billion by end June 2012. As against this commodity financing recorded a positive trend during the second quarter due to financing to government for procurement of wheat. However, the share of commodity financing remained below 8% and the high growth in this category can be linked to base effect as well.

Non-performing loans are considered one of the most contentious diseases in Pakistan's banking sector. Non-Performing Financing (NPFs) continued its rising trend and by end first half CY 12 NPFs are reported at above Rs18 billion having 68% concentration in the category. Asset quality ratios; NPFs to Financing and Net NPFs to Net Financing increased from 8.4% to 8.8% and from 3.3% to 3.8% respectively over the last quarter though both are below that of industry averages of 16% and 6% respectively. This suggests that rising trend of NPFs can be linked to involuntary default resulting from overall bad economic situation of the country.