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Viable Islamic banking system – A respite for common man

Published on 22nd Feb, Edition 08- 2016


Many International Financial Institutions are keen to invest in the field of Islamic banking and finance in Pakistan

In the face of growing demand for the Islamic banking products, different International Financial Institutions are showing interest to invest in the field of Islamic Banking and Finance in Pakistan. In the last three decades, a number of new Islamic financial products have been developed primarily by applying Islamic nominate contracts in new ways to achieve the economic profiles of conventional products, so as to allow Muslims to have access to financial services in ways that are not contradictory with their belief.

Islamic banking industry sources told Pakistan and Gulf Economist (PAGE) that 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 over 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 there is also global recognition of its products and services.

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. Previously, Bank Islami Pakistan Limited also received a GIFA award in 2012.

In this perspective, while the government was pursuing appropriate policies for the promotion of Islamic banking and finance in the country, financial institutions are eyeing Islamic banking and finance.

Analysts believe the share of Islamic banking in overall banking sector was steadily growing. This showed the tendency of the public to use Shariah-based banking system and made it incumbent upon the relevant quarters to further bring improvement in it. However, the banks dealing in Islamic finance need to come up with microfinance schemes in various sectors including agriculture for poverty alleviation and just distribution of wealth.

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, they said.


Development keep growing

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.

Stock market brokers told this scribe that after emergence of Pakistan Stock Exchange (PSE), the Islamic Index would have a positive impact on the stock exchange, as the shares could now be traded according to Shariah.

According to them, there are numerous opportunities of investment in Islamic Banking in Pakistan. Foreign investors are taking interest in investing in Pakistan due to prudent policies being pursued by the government.

The experts opined that the Islamic banking and finance system can bring prosperity in our society, if we act seriously on Islamic way of life especially in our financial matters. Islamic banking should grow to over 15-percent by 2016 from its current share in the country’s banking industry.

Future direction

Pakistan introduced Islamic banking in the 1970s but for most people, it remains a new phenomenon — two-thirds of Islamic banking clients have had such a relationship for fewer than three years. Conventional banks want to retain clients and offered several plans of Islamic financial products, but in doing so they will have to ensure a clear segregation of the two businesses. While measures such as tax neutrality are helpful for the practice of Islamic banking and finance, Islamic financial products are indeed no different from their conventional counterparts in terms of their economic effects.

This is indeed the time for Islamic banking and finance to pause and think for a while what future path it would like to take.

Islamic banks, both at global and domestic level, are working in shadow of conventional finance i.e., adoption of conventional products that have been tailored to comply with Shariah principles.

Problems of moral hazard, adverse selection are of serious nature and remain major hurdle in using participatory modes of financing.

However, their absence deprives the industry from attaining one of its desired socioeconomic goals of ensuring equitable distribution of wealth.

Our Islamic banking industry people need to sit together to formulate viable Islamic banking system to reap the true benefits of Islamic finance for the benefit of people.


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