The Islamic banking and financial industry is expanding at a fast pace in Pakistan, but numerous challenges such as liquidity management, lack of bankers with sound knowledge of Islamic finance and lack of awareness of Islamic banking among stakeholders are hindering smooth growth of this sector in the country.
The failed attempt of the 1980s at Islamic banking in Pakistan has created skepticism about Islamic banking practices in the country. Even now its impact is being felt on the current initiatives taken by the State Bank of Pakistan (SBP) and other banks as religious scholars, bankers, academics and the people are still skeptical about Islamic banking. So it is important to establish the credibility of Islamic banking to ensure the growth being envisioned and planned.
In the past thirty year, globally Islamic financial industry has made considerable progress. Particularly during the past decade, the Islamic financial sector (IFS) has registered a robust growth of around 15 to 20 per cent per annum, making it one of the fastest growing segments of the overall financial system.
At present Islamic financial industry encompasses all financial institutions and markets. There are dedicated regulatory, legal and academic institutions at the international level that are providing support in establishing IFS.
A number of institutions to set international standards in Islamic finance and banking have been established over the past few years. Some of these are the Islamic Financial Services Board, the Accounting & Auditing Organisation for Islamic Financial Institutions, the International Islamic Rating Agency, the International Islamic Financial Markets and the Liquidity Management Centre.
Once looked at as a patchwork of niches in the Gulf region and Malaysia, Islamic banking and finance is evolving into a global market. According to the International Monetary Fund, huge demand for Shariah-compliant financial products from a large number of Muslims, including immigrants in western countries, petro dollar, increasing oil wealth in the Middle East and the demand for Shariah-compliant investment and attractiveness of Shariah-compliant financial services for non-Muslim investors seeking ethical investments are the major factors that have contributed to the growth of Islamic Financial Sector.
Like most parts of the world, Islamic banking is witnessing unprecedented growth in Pakistan. The SBP is playing the leading role in the promotion and development of Islamic banking in the country. The establishment of a fully- fledged Islamic Banking Department at the SBP to focus on Islamic banking issues has provided the industry the necessary impetus for the growth and popularity of this sector.
An official of the SBP said that the central bank’s drive to promote Islamic banking as a parallel system, providing a level playing field with conventional commercial banking is aimed at building a broad-based financial system in the country to enable all sections of people to access financial services and play their due role in the overall economic development.
Today Pakistan has six fully-fledged licensed Islamic banks and 12 conventional banks have licences to operate dedicated Islamic banking branches.
All the big five banks in Pakistan are providing Islamic banking services. The total asset of the Islamic banking industry are more than Rs160 billion, which account for a market share of around 3.2 per cent. The market share of deposits, financing and investment, stands at 2.9 per cent and 2.5 per cent, respectively. Islamic banks have more than 200 branches in 32 cities and towns of the four provinces of the country.
Pakistan has several comparative advantages in Islamic banking. Since Muslims constitute 97 per cent of the country’s 160 million population, this provides a huge untapped domestic market base.
The growing popularity of Islamic products offered by Islamic banks and other commercial banks indicate the rise of this sector in future both in Pakistan and other countries.
“The SBP is planning to achieve a 15 per cent share, in deposits and assets, in Islamic baking by 2012, besides expanding and extending the outreach of Islamic banking products to a maximum number of consumers and the corporate sector. It also plans to introduce Islamic finance in micro finance, SME, agriculture and other sectors,” a high official of the SBP said while explaining the plans of the central bank to promote Islamic banking in the country. He said the SBP was striving hard to strengthen the regulatory framework in line with the best global practices besides establishing at least one specialised institution of international repute to develop human resources for the Islamic banking and financial industry.
Islamic banking is gaining financial depth as 10 to 15 per cent customers approaching Islamic banking institutions are said to be new to banking who stayed away from the conventional banking system because of their belief.