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Islamic banking shining bright in Pakistan

Published on 8th Feb, Edition 06- 2016


Meezan Bank has now emerged as country’s premier Islamic bank

When the present PML-N government took over in 2013, the share of Islamic banking in the country was about 9 percent, which is fast approaching about 13 percent, primarily because of the proactive approach of the Ministry of Finance and the State Bank of Pakistan.

Meezan Bank, the recipient of the Shariah Authenticity Award has now emerged as a leading premier Islamic bank competing with even larger conventional banks in Pakistan. The Islamic banking products structured by Meezan Bank are respected not only in Pakistan but taking global recognition of its products and services.

Altogether there were three Pakistani banks that received the awards. Albaraka Bank Pakistan Limited was the third, which received the Best Sukuk Deal of the Year Award for its Tier-II Capital Mudaraba Sukuk and previously, Bank Islami Pakistan Limited also received a GIFA Award in 2012.

As a result of year 2015, excellent performance of Islamic banks, Pakistan stands at number three (along with the UK and Saudi Arabia) after Malaysia and the UAE.

More Islamic bank licenses

MCB Bank in Pakistan has already received a license for full-fledged subsidiary Islamic banks and is in fact preparing for its full launch in 2016. On December 16, 2015, the board of directors of MCB Bank Limited approved the sale of the bank’s entire Islamic banking operation to its wholly-owned subsidiary MCB Islamic Bank Limited (MCBIBL) for Rs7.946 billion.

While the global Islamic financial services industry continued to grow, it is the second consecutive year of single digit growth – 7.3% in 2015 – as opposed to 9.3% in the previous year. In fact, Islamic banking and finance has grown with a declining rate since 2013. In this context, predictions by some industry observers and consultancy firms of the estimated size of the industry to reach $3.5 trillion seem to be exaggerated.

The Global Islamic Finance Report (GIFR) 2015 predicted that Islamic financial assets would reach $5.3 trillion by the end of 2020.

However, in expectation of further slowdown in the growth of Islamic financial assets in the wake of low oil prices, continued social disorder and political conflict in some of the key IBF markets, Edbiz Consulting, the publisher of the report, has decided to revise future size estimates.

Details Sep-14 Jun-15 Sep-15
Murabaha 30.3 24.8 24.8
Ijarah 8.6 7.7 7.5
Musharaka 10.1 10.2 13.6
Mudaraba 0.2 0.0 0.0
Diminishing Musharaka (DM) 35.1 34.7 34.2
Salam 2.6 5.6 4.4
Istisna 7.9 10.2 9.5
Qarz/Qarz-e-Hasna 0.0 0.0 0.0
Others 5.3 6.7 5.8
Total 100.0 100.0 100.0
Source: PAGE-Research Department
Big share

In Pakistan, we are witnessing the operations of Islamic banking alongside the conventional banking system. Islamic banks have been anticipating a bigger share of the pie and space in coming months and years. They mainly derive their confidence from Shariah-compliant products that they offer to a largely conservative Muslim society. The other major reason behind their growing optimism is the fact that already Islamic financial institutions, in one form or another, are operating in over 70 countries. Its huge success in Malaysia, for example, is a strong case in point.

From an industry perspective, Islamic banking is still the fastest growing area in banking. However, whilst deposits keep growing, the issue is more on the assets side.

Islamic assets are very difficult to find, as there are not enough Sukuks or other such Islamic products. If you look at Islamic banks, their ADR is closer to 35 percent on average – the key reason for this is that they cannot find Shariah-compliant structured assets. The government could help by rolling out local and foreign currency Shariah-compliant Sukuks.

No more ‘Special Hiba’

Under the State Bank of Pakistan (SBP)’s directions, the entire Islamic banking industry was required to stop offering ‘Special Hiba’ to priority customers with effect from January 1, 2015. Special Hiba is an amount paid over and above the announced profit rate to specific clients in a pool by the Islamic Banking Industry. Although Special/Individual Hiba was subject to explicit approval of the Shariah Advisor; however, most of Shariah Advisors were not in favor of this preference rate, being offered to the priority customers of a pool. Therefore SBP decided to gradually phase out individual Hiba and in 2012 restricted special Hiba at 2 percent, over and above the actual return earned by a depositor.

As per SBP’s directions, Islamic Banking Institutions (IBIs) can offer Hiba but not to any priority/special customers and now, if offered, will be distributed across the board to all the deposit categories in a pool. Previously, the Special Hiba was being distributed to selected investors/individual/companies/depositors of a pool.

Banking sources told PAGE that the SBP’s move will bring more clarity in Islamic mode of banking as Islamic scholars’ thoughts on Special Hiba are still diverse and most of them are agreed that no special preference should be given/offered to the any customer.


It may be noted that the SBP, in November 2012, issuing instructions to improve transparency and bring standardization in IBIs Profit & Loss distribution policies and practices, asked IBIs to bring Special Hiba at zero level in CY15. Special Hiba is over and above the actual return earned by the depositor based on performance of the pool and respective weightages and the reasons for allowing such special.

According to SBP’s guidelines IBIs will gradually phase-out the practice of offering special or individual Hiba to priority customers. Therefore, special or individual Hiba for CY 2012 was frozen to previous year’s level in absolute terms, i.e., up to the actual amount of special or individual Hiba during CY 2011, up to 50 percent in 2013, up to 25 percent in 2014 and zero (0) percent in 2015.

Industry sources said that previously all Islamic banks were offering individual Hiba to attract bulk deposits and facilitate their customers. End of December 2014, special Hiba share in overall deposits of IBIs stood at some 2 percent.

According to industry sources, besides making investment more Shariah-compliant, a restriction on individual Hiba will bring another challenge for the IBIs as now they cannot offer a special rate to specific customers on deposits of higher amounts compare to other participants of the pool.

Particularly, now IBIs will face difficulties to attract deposits of government-owned institutions and ministries, which always asked for higher or special profit rates.

Since the beginning of Islamic banking in the country, the IBIs are offering Individual Hiba and as per SBP requirements; and they were required to submit details to Islamic Banking Department along with the Shariah Advisor and Board of Directors approved framework.

Already, Islamic banking has made strides into the mortgage market with around 25 percent share in the country’s house finance. The formal financial sector accounts for only one to two percent of total housing transactions in the country, while the informal lending caters to around 10 to 12 percent of the total. Whereas, the rest of the housing finance is arranged through personal resources, showing a tiny share of mortgage-based lending in the country.

Given the present situation, experts believe that future of Islamic banking is bright as this industry is set to show growth this year and onward.


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