Islamic banking rising to achieve targets

At the same time, several conventional bankers are shifting their focus to Islamic banking, the latest reports and surveys indicate.

Islamic banking is shooting up in all directions, despite low awareness and hurdles, as the branch network needs further expansion in order to achieve its target share.

At the same time, several conventional bankers are shifting their focus to Islamic banking, the latest reports and surveys indicate. The fact is that Islamic banking is one of the fastest-growing segments of worldwide banking, including Pakistan.

In order to put Islamic banking on a still faster track, the State Bank of Pakistan, or SBP, has readied and launched a five-year plan covering 2015-18 to develop and expand Islamic banking. It also targets to help these banks to push their lending to farming and medium and small industries. The target: these banks should have a 15 per cent share in overall banking, while 85 per cent will be with conventional banks.

As of December 2013, the Islamic banking network consisted of 1,304 branches countrywide, but the problem with them is that close to 650 of these branches were located in big cities including Karachi, Lahore and Islamabad.

Does it mean that managements of these banks and branches wished to impress the government, the SBP and the business with their big presence as a show, rather than serving thousands of smaller cities and rural areas, where the acceptance of Islamic banking is far greater, and the potential to bring them into the financing system is really big?

There is a considerable latent demand for Shariah-compliant funding, while a number of hurdles, like small branch networks and low awareness of products available, are hindering the expansion, a new study unveils.

Customers, banking in the vast rural population, and separate Islamic banks will have to be catered to for this sector of banking to expand on a still faster tack. The near-term target for Islamic banking is to own up 15 per cent of the banking market share, from the present 10 per cent level.

A survey of 9,000 households and 1,000 business firms, just completed by Ebiz Consulting company of the UK, confirms that there exists a widespread acceptance by customers and the potential users of Islamic banking regarding the present ban on payment of interest. It signifies the importance of Islamic banking and the potential consumer preference for Islamic finance that was introduced in the late-1970s. Around 23 per cent of the customers feel it to be important to go only for Islamic banking. The report says 74 per cent of banking customers will prefer to move to Islamic banking. However, 69 per cent were of the view that they cannot do so because Islamic banking is not available in the area of their business or residence.

Despite the ongoing Islamic banking operations for nearly 40 years, these people expressed their inability over the operations and knowledge of the system and services available. This big majority mainly consisted of the people who don’t use any type of banking. Nearly 50 per cent were not aware of the difference between the various Islamic banking services offered. Then, this is the task for the awareness and spread of information about the system which has been lacking so for. This is a big miss by the managements of Islamic banking, because they have missed the business they could have obtained over these five decades while he country had a good growth and rising GDP of five to six per cent.

Even now when GDP growth is down to 4.1-4.3 per cent there is a good potential to grab a big chunk of business. This is also based on the fact that there is larger awareness and actual practice of Islamic teachings, especially among the growing middle- and higher-income groups. Nearly 33 per cent customers of Islamic banking are using the system for less than three years. It means newer people are coming in for the system but their numbers are still small. The managements also have to cater to those non-banking people who don’t wish to use the existing conventional banking. A big chunk of 70 per cent will like to use Islamic banking if companies or branches, separate from the conventional banking, are established.

All this situation belongs to the past. But is the Islamic banking horizon changing or on the threshold of change? The latest study by the SBP entitled “Knowledge, attitudes and principals of Islamic banking in Pakistan”, released last week, is optimistic on this count. It says, Islamic banking is “inspiring many conventional bankers to gradually steer their focus towards Islamic products”. It also says Islamic banking should meet the needs of Islamic microfinance, as well as funding the requirements for the farming sector and small and medium enterprises, or SMEs. The SMEs are performing a big role in overall industrial and manufacturing output and production, as well as supplying food to the growing population. Unofficially, the “informal sector” is contributing nearly half of the recorded industrial output and products.

The chances to expand Islamic banking are brightening up with the ongoing expansion of the sukuk open-market operations, with present moves to improve and expand the short-term liquidity of Islamic banking. The SBP has started open market operations in Islamic bonds, called Ijara Sukuk. Originally, the SBP had started Ijara Sukuk auctions in 2008 to provide Islamic bonds a chance to Islamic banking to put their surplus funds in zero-risk and Shariah-compliant bonds issued by the government of Pakistan. The latest of the 15 operations took place earlier this week.

The SBP’s decision to undertake sukuk OMOs is the second key decision since 2008. The SBP plans to pick up the excess surplus funds from Islamic banking, or inject cash into these banks, as the need be. Banks will not have to wait for the next Ijara Sukuk auction, as it happens now, nor will they have to place their funds, elsewhere, in a rush. The SBP has also asked for banks’ advise on whether to undertake the future OMOs, based on Bai-Muajjal, or on the basis of ready payment.

However, the key lies in vigilant policies, educating the masses and widening the outreach to improve visibility and accessibility of Islamic products.

Views expressed are the author’s own and do not reflect the newspaper’s policy.