Islamic finance outstrips conventional banking growth

ISLAMIC finance is outstripping conventional banking growth, and spreading its wings to most of the Pakistani cities and business sectors. Dubai, United Arab Emirates and the Gulf-based banks and financial institutions are making a major contribution to this expansion of Islamic banking in Pakistan.

By M. Aftab (ANALYSIS)

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Published: Sun 18 Nov 2007, 8:32 AM

Last updated: Sat 4 Apr 2015, 11:18 PM


The Islamic banking sector continues to grow at a rapid pace which is reflected by the increasing branch network of the Islamic Banking (IB) institutions, says State Bank of Pakistan (SBP), the central bank and regulator of all banking in the country. In just three months 'January-March, 2007 — SBP says, 20 new branches turned operational. It raised the IBs network to 170. Pakistan now has five full-scale IBs, while 13 conventional banks (CBs) also are engaged in Islamic banking.

A year ago, no one in the banking sector could foresee that Islamic finance and banking will take to such a fast track. But, even at that time Dr. Shamshad Akhtar, Governor SBP, was forecasting, „the future growth in banking will be in Islamic banking and small and medium enterprise (SME) banking. The latest data confirm it. IBs growth during January-March, the first quarter of calendar and banking year 2007, rose 15 per cent compared to December, 2006. IB's business share in this period was 3.2 per cent of the entire banking sector.

The portfolio of IB assets totalled Rs135.641 billion at end-March — up from Rs118.183 billion in December, 2006. SBP also indicates that Islamic financing constituted 52 per cent of total assets that rose to Rs69.993 billion in March, —up 7.0 per cent from Rs65.137 billion in December.


IB deposits are rising, too, and now account for 3.0 per cent of the overall banking deposits. These rose Rs10 billion to a total of Rs93 billion during this period.

IBs equity, in the same period, was up 32 per cent to Rs20.925 billion from Rs15.847 billion at end-December. The SBP attributes this increase to Emirates Global Islamic Bank's (EGIB) launch of its operations in Pakistan in February this year. EGIB's equity was Rs2.895 billion.

IBs un-appropriated and un-remitted profits at end-march rose 14 per cent, compared to December, 2006 — from Rs756 million to Rs860 million in that period.

Looking at assets and deposits, the growth trend is quite fast, even though analysts are asking can IB really compete with the Conventional Banking (CB)? CB has seen an unprecedented growth over the last four years, on the back of high, and still rising, credit demand and its actual take off by the private sector. It was spurred by free market policies pursued by the present government to ensure a plus 7.0 per cent GDP growth. The pro-GDP and pro-private sector policies, in turn have, unleashed a high inflation rate of more than 8.5 per cent and an unprecedented 13 per cent spiral in food inflation. Yet the government is sticking to these policies.

Lending rates

Dr. Akhtar acted two years ago to restrain inflation and introduced a tight monetary policy (TMP). It has moderately restrained inflation, but the price spiral continues unabated. The lending rates of the CBs have risen nearly a third to 14 to 15 per cent during the pursuit of the TMP. The present, four-year old, banking boom has come on the back of high lending rates and increased fee for a range of banking services, that have attracted serious criticism of the other sectors of the economy and the customers. The banks are enjoying an unprecedented average 7.5 spread, as they have kept the profit rates to depositors generally around a mere 3.0 per cent. The spread is the highest in South Asian region.

The business, industrialist and exporters lobbies are now demanding a cut in interest rate because the present high cost of finance has forced up their cost of production and turned several export products in-competitive abroad.

The business interaction between IBs and CBs is also expanding. For instance, IBs balances with other banks are rising. IBs balances with CBs rose to Rs22.192 billion —up 35 per cent from Rs16.383 billion in December. It happened on the back of more banks and their associates undertaking to Islamic modes, and higher liquidity available with IBs.


SBP, this week took yet another step to promote and expand IBs in Pakistan. It permitted CBs to open Islamic Banking Windows (IBWs). The central bank advised all banks operating Islamic branches to introduce Islamic windows. 'There is now a growing trend among banks to open Islamic Banking Windows (IBWs). In order to strengthen regulatory framework and maintain information about window operations, all conventional banks having Islamic Bank Branches (IBBs) are advised to submit the required information before starting IBW operation, an SBP notification said.

The banks, SPB said, will be required to provide it with details and services to be offered by IBWs, including details of systems and controls put in place, in compliance with the central bank's previous instructions. They will also provide particulars of banking commissions or fees to be charged, and details of training of human resources to operate Islamic banking.


The potential growth and deploying Islamic financing as a tool to improve the condition of the poor in the Muslim world was explored at the Third World Asia Islamic Capital Conference, at Karachi this week.

Dr. Ishrat Hussain, the former Governor of SBP, during whose tenure Islamic banking took roots in Pakistan, said Islamic financing can be used as a powerful tool for inclusive growth and amelioration of conditions of the poor in the Muslim world. Speaking at the conference, Dr. Hussain, who had also introduced widespread and modern banking reforms in Pakistan, said 'most of the attention on Islamic finance has so far been focused on regulatory framework, products and services offered, comparability with conventional finance, risk management characteristics, Shariah compliance, and expansion and penetration issues. But, very little work has been done to explore the unique features of Islamic finance.


Dr. Hussain said, the capitalist model has failed to deliver help to the poor. Its here that Islamic finance model comes to help them. He said, in the last eight years, the number of borrowers from banks in Pakistan rose from one million to 5.5 million. This number can easily be doubled if Islamic banks play their active role. He said access to farm credit, livestock and fisheries, dairy, SME finance, small mining and transport, and low cost housing, provided by Islamic banks, will relax credit constraints for those individuals and businesses, who wish to expand their businesses, invest in productively or their build assets.

Khalid Rafi, Chairman, Islamic Capital Partners said, 'our total banking system deposits are just under $60 billion of which IBs manage $2.0 billion.' He said, 'IB is gearing up to capture 12 per cent share by 2012 which will translate to an additional $15 billion in Islamic deposits during the next five years, in view of the tremendous pace of growth pf IB sector.

Irfan Siddiqui, President & CEO of Meezan bank said, 'Ibs have to put extra efforts to attract their customers who don't merely come for Islamic products, but they expect quality and satisfactory service as well.

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