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Fast-growing Islamic banking set to help achieve financial inclusion goals

Published on 2nd Nov, Edition 44, 2015


Islamic banking industry in Pakistan has been growing at a fast pace ever since its re-launch in 2002 and now represents over 12-percent of overall banking industry with as many as 19 Islamic banking institutions offering Islamic banking products and services through a network of over 1,400 branches across the country.

Almost all the conventional banks are also introducing Shariah-based banking upon which the central bank is reviewing their requests whereas the central bank has imposed bar on Islamic banks to convert into conventional bank.

The Islamic banks are more accountable to SBP and Shariah advisor than conventional banks, while the central bank is working on its major role to ensure the participation of every citizen in the financial system, through its Financial Inclusion Policy, and the system of Islamic banking is proving to be a bridge on the way of success in the present scenario.

Presently, Islamic banks are leaders in several sectors and three leading Islamic banks have some 85-percent portfolio of housing finance.

The growth of Islamic banks came after laws were changed here to make it easier to establish an Islamic bank, and there are now a plethora of stand alone Shariah lenders, Islamic banking units attached to conventional banks, and smaller Islamic financial institutions in the countryside.

Growth in the sector has lost steam due to a broader slowdown in the economy, which is expanding at six-year lows — giving authorities another reason to launch their drive. 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 12 percent, primarily because of the proactive approach of the Ministry of Finance and the State Bank of Pakistan.

Best banks

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 products structured by Meezan Bank are respected not only in Pakistan but there is also a global recognition of its products and services. There were three Pakistani banks that received the awards. Al Baraka Bank Pakistan Limited was the third, which received the Best Sukuk Deal of the Year Award for its Tier-II Capital Modaraba Sukuk. Previously, BankIslami Pakistan Limited also received a GIFA award in 2012.

Business leader Chaudhry Yasir Farooq told PAGE that businessmen wanted to get rid of interest-based banking to expand the scope of their operations. However, there was still lot of confusion between conventional banking and Islamic banking which needed to be cleared up by more awareness sessions. He stressed the need for Islamic banks to expand their network of branches to increase outreach and create awareness.

On the other hand, the banking spread touched its lowest point in the last 11 years. Shrinking spreads reduce banks’ profitability, as they pay a higher interest on deposits but earn a smaller return on advances. Banks generally respond to such a scenario by investing more in riskless government securities that offer guaranteed returns.


The average spread for 2015 so far stands at 5.65 percent, down 37 basis points from the same nine-month period last year when it hovered at 6.02 percent. Cumulatively, lending and deposit rates have shrunk by 118 and 82 basis points, respectively, since the start of 2015.

The fast-growing Islamic finance industry is set to grow. The fast-growing Islamic finance industry is set to jump up. At present, the Islamic finance industry over 10-percent of the country’s financial system and maintains strong growth momentum, however, this industry in Pakistan needs trained human resource to realize the true market potential and emerge as a strong player in the global financial arena. The existing potential need to further enhanced as globally Shariah-compliant assets are expected to grow by 15-20 percent per annum over next few years.

Monetary policy goals

Globally the size of Islamic finance industry had reached to $1.8 trillion in 2013 and according to some estimates it is likely to reach $5 trillion by 2020.

Under Strategic Plan 2016-20, the Central Banks plans to enhance effectiveness of monetary policy, strengthen financial system stability regime, improve the efficiency effectiveness and fairness in the banking system, increase financial inclusion, develop modern and robust payment system as well as to strengthen the SBP’s organizational efficiency and effectiveness. The strategic goal to enhance the effectiveness of monetary policy would be achieved by; (i) strengthening SBP’s monetary policy independence; (ii) implementing a flexible inflation targeting framework that balances price stability with economic growth; (iii) strengthen research capabilities to support sound monetary policy decision-making; (iv) increase transparency of communications about monetary policy-decisions; and (v) increase effectiveness of reserves management and strengthen its data management system.

Strengthening of the financial system stability regime would be achieved through; (i) design and implement a comprehensive financial system stability framework consistent with FSB principles; (ii) improve crisis management framework; (iii) implement deposit insurance scheme; (iv) pursue necessary laws and regulations to implement the financial system stability framework; (v) establish a national financial system stability council and review lender of last resort facility.

The goal to increase financial inclusion needs to be targeted by implementing national financial inclusion strategy (NFIS), revising legal framework to remove obstacles to inclusion, such as those that inhibit secured lending, enable and promote alternative channels for delivery of financial services that meet consumer needs and to enable and promote Islamic banking.

The ‘Vision 2020’ also envisages strategic goals to develop modern and robust payments systems by developing Pakistan’s national payment system’s blueprint, modernize payments through clearing and settlements infrastructure to improve efficiency, security, costs and access as well as by implementing a robust regulatory and supervisory framework for Financial Markets Infrastructure.

Financial inclusion is a must for not only spreading banking network but also documentation of economy. Islamic banks are sure to grow with introduction of more innovative products. This is necessary for documentation of economy.


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