News Column

Pakistan has (two) plans

May 18, 2014



The State Bank of Pakistan (SBP), the country's Central Bank, recently unveiled a 10-year strategy paper for banking sector reform. It also published a separate five-year Islamic finance strategy paper: Islamic Banking Industry of Pakistan 2014-2018.

In the 10-year paper, the SBP noted that it has been promoting Islamic banks to provide formal financial services to the segment of the population that thus far has excluded itself for faith reasons. Based on the current growth rate of the country's Islamic banking sector, the SBP said it believes that Islamic finance will grow to constitute almost 12 per cent of the Pakistani banking system within five years. So far, however, it added that Islamic banks have no branches in rural areas, where they clearly have a substantial customer base to explore.

The SBP, under its new branch licensing policy, expects rural Islamic bank branches to increase at the rate of 20 per cent of all new branches opened.

To ensure proper due diligence in the development of Islamic finance, the SBP has constituted a Shari'ah Advisory Board, which approves broad policy, the regulatory framework and new Islamic financial products. The Central Bank is also working to develop a proper liquidity management framework and new instruments to allow Islamic banks to grow and compete with conventional banks in a prudent and sound manner. The establishment of Islamic microfinance institutions has also been encouraged.

Pakistan's Islamic banking industry currently holds a market share of around 10 per cent. However, the SBP notes that to sustain and further boost the growth momentum, significant changes in the architecture of the industry are needed... and this is where the new five-year plan comes in.

The plan has an extensive focus on improving the public perception of Islamic banking as a distinct and viable system capable of catering to the diversified financial needs of various segments of society.

The aim is to double the outreach of Islamic banking institutions during next five years and, according to the five-year plan, increase market share to 15 per cent of the banking system. Interestingly, the five-year plan has a higher target than the 12 per cent cited above that is mentioned within the 10-year plan. Islamic banks have a presence in more than 80 districts across Pakistan. It has been growing at a CAGR of 53 per cent since 2003 (27 per cent since 2008). The Islamic bank branch network is growing 15-20 per cent annually; the current total of about 1,200 branches is expected to grow to 2,000 branches during next five years.

Pakistan's current legal framework does not distinguish between conventional banking and Islamic banking. The SBP, therefore, envisages the introduction of legislation to remove confusion and inconsistencies in the legal, regulatory and taxation environment.

Going forward, efforts will be made to develop housing finance product(s) based on market prices and rentals vis-À-vis the current practice of fixed property prices and KIBOR (Karachi Interbank Offered Rate) linked rentals. The main criticism of the current Islamic banking paradigm is the overwhelming use of debt-creating products while the equity products based on Musharaka and Mudaraba have been very limited on the asset side. The five- year plan envisages working closely with the industry to develop and offer Musharaka/Mudaraba-based products.

Among a number of other proposals, the SBP adds that Islamic finance offers viable financing alternatives in project and infrastructure financing. In this regard, policy guidelines will be developed specifically for the issuance of project/infrastructure specific Sukuk.

The five-year plan sets out an ambitious programme of time-bound specific actions plans. The responsibility to execute the Strategic Plan rests with the SBP's Director - Islamic Banking Department, Saleem Ullah.

Robin AmlÔt

Managing Editor CPI Financial


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Source: Islamic Business & Finance