News Column


February 23, 2014


Over the last one decade, Pakistan has witnessed substantial growth in Islamic finance, particularly in Islamic Banking. The credit for this growth goes to: 1) people of Pakistan who have gradually moved to Islamic banking from conventional banking, 2) regulators who allowed running of Islamic banking in parallel with conventional banking and 3) Islamic banks, which increased their outreach. Having said that, it is necessary to remind the policy planners, regulators and commercial banks that a lot more remain to be done. It is also to remind all the stakeholders that there may be a few ‘islands of excellence’ but overall signs of ‘fatigue’ are visible.

Reportedly, State Bank of Pakistan (SBP) has appointed third Deputy Governor, with specific mandate to oversee Islamic banking, till recently, a Director was heading Islamic Banking Department. While appointment of Deputy Governor is a good omen and shows renewed focus of the central bank, it is necessary to take an account of the prevailing situation requiring the central bank to ensure that its plans are implemented in letter and spirit. It may be correct to say that some signs of lapses are evident from the complacency prevailing in the ranks and files of the apex regulators.

Last year, the SBP launched a billion rupee advertising campaign for creating awareness about the ‘benefits of Islamic banking’. However, most of the experts strongly believe that placement of advertisements in selected newspapers failed in attracting attention of masses, which still have some serious reservations about the system. On top of that Islamic banking is confined to corporate sector and in less than half a dozen megacities. This is not merely an expression but an admission by the central bank in its review of Islamic banking for July-September 2013 quarter. The central bank has admitted, "It is pertinent to note that second and third tier cities largely remain under served as more than 56 percent of Islamic banking branch network is still concentrated in 5 big cities (Karachi, Lahore, Quetta, Peshawar and Islamabad)".

Client category wise financing of IBIs has also remained concentrated in corporate sector, having a share of nearly 70 percent followed by consumer financing (13.2%), commodity financing (11.3%) and SME (4.1%) in overall financing. It is important to note that relatively lower level of financing extended by Islamic banking in categories such as SMEs and agriculture is in line with the trend of overall banking industry indicating limited outreach of banking sector in the sectors.

The central bank has bifurcated banks undertaking Islamic banking into two categories: 1) full-fledged Islamic Banks (IBs) and 2) Islamic Banking Divisions (IBDs) of conventional banks. As regards share of these two categories, assets of IBs constitute 64 percent in overall assets of Islamic banking industry with remaining 36 percent assets being contributed by IBDs. SBP quarterly report reveals that assets of both IBs and IBDs witnessed positive growth compared to previous quarter but IBs recorded relatively better growth (2.7%) as compared to IBDs (2.3%).

According to the report there are total 1,161 branches in the country that offer Islamic banking. Out of these IBs have 696 branches, IBDs had 397 branches and 68 branches have been termed sub bank branches (out of these 53 belong to BankIslami Pakistan alone). Meezan Bank has the largest network (332), followed by Dubai Islamic Banks (108), AlBaraka Bank (Pakistan) (92), BankIslami Pakistan (89) and Burj Bank (75).

In Pakistan, a term ‘Big-Five’ is often used that include MCB Bank, National Bank of Pakistan, Habib Bank, United Bank and Allied Bank. Ironically, these five banks have the largest network of branches but the number of IBDs is disappointingly as low as 100, worst being that Allied Bank has no Islamic banking branch. As against this Bank Alfalah alone have 118 designated Islamic banking branches. The situation demands, the Big-Five to add more branches, particularly in rural areas where they have extensive footprint.

One of the suggestions is that the central bank should grant more permission to establish at least two more full service Shariah compliant commercial banks. Since NBP has a very strong capital base, largest network of branches and strong presence in rural areas, it should be granted permission to establish a full service Islamic bank. It would be more appropriate if NBP joins hand with one of the leading Islamic banks from Malaysia or United Arab Emirates. This on one hand will bring foreign equity and on the other hand expertise, which will be great value addition.

It is often said that limited number of branches is a serious impediment in the growth of Islamic banking in Pakistan. However, experts are of the opinion that limited number of Islamic banking branches is not a constraint because most of the commercial bank branches are ‘online’. These should be asked to accept deposits and disburse payments irrespective of the fact that these are Islamic or conventional. The added advantage is one can also deposit/withdraw cash from ATMs.

It may not be wrong to say that liquidity management remains a serious constraint. An option is available in the form of Sovereign Ijara Sukuk. Since introduction of these products, Islamic banks have started accepting more deposits. Analysts suggest that Sukuks should also be floated for arranging funds for the power sector. However, unless ‘circular debt’ issue is not resolved, no investor will be keen in investing Sukuks floated by the companies involved in power generation and distribution.

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Source: Pakistan & Gulf Economist

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