The Islamic financial industry’s assets have increased to Rs 159 billion by the end-June this year from Rs 71 billion in calendar year 2005, according to Financial Stability Review released by the State Bank of Pakistan.
With this expansion, the share of the Islamic banking industry in the overall assets of the financial sector increased to 3.4 percent by end-June CY07. The deposit base has increased from Rs 50 billion in CY05 to Rs 108 billion by end-June CY07.
The share of investments in total assets of Islamic banks increased from 2.6 percent to 6 percent in CY06. However, this is still much lower if compared to the share of investment in total assets of overall banking system, which was at about 23 percent at end of June 2007.
This asset structure indicates a lack of investment avenues for Islamic banks, which is considered a critical issue even at the international level, the review says.
In this regard, Islamic Real Estate Investment Trust (REITS) is an appealing development at the global level. The importance of REITS is also being recognized at the national level, and regulations are being developed to make it a formal investment opportunity for all financial institutions, including the IFIs industry. SBP has also constituted a taskforce with the mandate to develop a sovereign Shariah compliant instrument i.e. Bait-ul-Maal certificates, the proposal of which is currently under consideration.
Although the SLR requirement of Islamic banks is relatively low as compared to conventional banks, still the lack of a sovereign liquidity management instrument places the Islamic banks at a relatively disadvantageous position in fulfilling their SLR requirement. Except for the WAPDA Sukuk, there is a dearth of Shariah complaint SLR eligible instruments. This is substantiated by the fact that despite being tradable in the secondary market, there has been very limited trading activity of the WAPDA Sukuk.
Lack of a sovereign instrument for reserve management is a major hurdle faced by the Islamic banks. Islamic banks generally operate in an environment where they have to compete with a parallel system of conventional banks; however, they face the shortcoming of managing their liquidity without the availability of the requisite sovereign instruments for this purpose, which conventional banks have access to. Recognizing this limitation, SBP requires Islamic banks to maintain CRR at 7 and 3 percent, and SLR at 8 percent of time and demand liabilities.
Furthermore, SBP has allowed Islamic banks to include their cash in hand and current account balances with National Bank in meeting their SLR requirements.
Financing constitutes the major share of the asset portfolio of Islamic banks at 55 percent, though the share has decreased in comparison with CY05 when it was 64 percent.
As in conventional banks, deposits continue to form the largest share of the total liabilities of Islamic banks, at 81 percent in CY06. It is interesting to note that in contrast to conventional banks, the share of fixed deposits is higher in Islamic banks.