News Column


February 23, 2014

Pakistan was a rather late beginner and various half hearted attempts were made in the past to introduce Shariah compliant banking system. It will perhaps be correct to say that the real beginning was made in 2002 with the creation of Meezan Bank Limited, the first bank to obtain license from State Bank of Pakistan (SBP) as an Islamic bank. The apex regulator, SBP, decided to let the two banking systems run in parallel in the country. This decision was aimed at letting the people decide at their own rather than compelling them to opt for a system about which they may have certain reservations. The strategy has paid off and today Islamic banks have approximately 10% share in the banking system in Pakistan.

Over the years, Islamic deposits have posted an enviable growth rate of more than 30% per annum. Since commencement of global financial crisis, overall growth of regular commercial banks has remained subdued. However, a point to be noted that in the aftermath of 2008 crisis, Islamic banks have not only emerged stronger but also performed relatively better as compared to conventional banks, notwithstanding the inherent credit risks.

Although there has been some criticism on the system and critics feel that this is just a change of terminologies, but if we observe the risk associated with the Islamic banking products, we can then easily figure out the difference that makes this banking model not only apparently dissimilar but also purely distinct from the conventional products. People need to understand that it’s the form that draws the distinction and not the similarity in substance.

At present, 5 full-fledged Islamic banks are operating in the country and 14 conventional banks have also established dedicated Islamic banking branches. Total number of bank branches exceed 10,000 and out of these over 1,100 offer Islamic banking. The share of Islamic banks in total banking business is also close to 10%. The credit of this robust growth goes to the Islamic banks and windows, Central bank, Shariah scholars and above all to the clients, who have reposed confidence in the system. It is also on record that apart from local companies, many multinational companies (MNCs), operating in Pakistan and despite enjoying special arrangements with local and international banks, have also concluded some landmark financing transactions with Pakistani Islamic banks. This is due to the confidence of these MNCs on unique transaction structuring, especially off-balance sheet ones, to cater to short and long-term financing and competitive pricing of Islamic banks.

It has been clearly established during the last decade that now people believe in the strength of Islamic banking. They wish to have their accounts and carry out transactions with these banks, including designated Islamic branches of conventional banks. At present, NBP has over 1,300 conventional branches in the country with 18 dedicated Islamic Banking Branches at present. However, NBP plans to open more Islamic branches to get closer to those who wish to avail Shariah compliant banking and services.

To make strong presence in the Islamic Banking industry in Pakistan and to boost Islamic Banking business, NBP has recently developed 5-year Business Plan. The Plan proposes to increase the country-wide network of dedicated Islamic Banking branches to over 150 in the next couple of years. This growth has been planned to make NBP Islamic a meaningful player in the market, in line with its robust profile. We will also provide counters for FBR/ Tax Collections, foreign remittance through Western Union and Express Money, etc. The clients will also be provided with Lockers facility at selected branches. The entire focus will be on providing quality services to our clientele.

Since all NBP conventional branches are ‘Online’, we also plan to offer this major advantage to our Islamic clientele. People maintaining accounts with designated Islamic banking branches will also be able to deposit/ withdraw cash at NBP’s any conventional branch, and vice versa. This will not only deepen client relationships but also enable us to offer Cash Management, Collection Accounts, Payroll Accounts/Cards and other allied fee-based services. In future, we also plan to provide Internet, SMS, ATM debit cards and Mobile Banking facilities to our customers.

To create awareness among masses about Islamic Banking services, NBP has re-launched Islamic Banking with a new brand that is "Aitemaad", which is synonymous with the trust of people on NBP. To market Islamic products and services, NBP plans to capitalize on its strong brand recognition. This will help NBP to get closer to people who wish to do Islamic banking, by offering innovative asset and liability products. Going forward, a comprehensive range of Islamic Banking products and services will be available to our customers.

To ensure smooth functioning and adherence to Shariah compliant operations, NBP Islamic Banking has taken on board Mufti Ehsan Waquar as Shariah Advisor. Mufti Ehsan possesses a unique combination of religious and contemporary education. He has served at institutions like Emirates Global Islamic Bank now Albaraka Bank Pakistan, UBL and Yasaar Ltd. As a member of Shariah Advisors Forum at State Bank of Pakistan (SBP), he also worked actively with SBP. Under his supervision, NBP plans to conduct comprehensive in-house training programs, under which employees will be provided training in Islamic Banking products, practices and regulations. These training sessions will equip our human resources with in-depth knowledge of Islamic Banking.

It is very encouraging that the Central bank has also initiated generic awareness campaigns, which will benefit all the banks offering Shariah compliant products and services. Islamic Banking industry in Pakistan receives excellent pro-active support from the Central Bank and more specifically through its Islamic Banking Department, which is one of the main drivers in the growth of Islamic banking industry. It is also very positive on the part of Government of Pakistan to have an increased focus in the area of Islamic Finance. The government has formed a steering committee to promote Islamic Banking in the country and to formulate a comprehensive policy framework for Islamic financial system, implementing a real shariah based financial system. Some of the key objectives of this committee are as follows:

To find out practical ways and means to maximize equity-based financing instead of the widespread debt-based system.

To suggest solutions for the Islamic secondary market/money market for liquidity management

To chalk out a roadmap and propose a time plan for progress of different phases of Islamic banking.

To conduct an analysis of the possible legal obstacles in converting conventional banking into Shariah-compliant banking and the changes required to remove these obstacles.

Looking at the potential Pakistan has in terms of human resource and the capacity, we do not see why Pakistan cannot aim to become the hub of Islamic Banking and serve the industry globally. Presently, Malaysia, Dubai and London are eyeing to become a hub for Islamic Finance, however, if the Central Bank and Islamic Banking industry focus in this area, Pakistan can aim to be the global hub.

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Source: Pakistan & Gulf Economist

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