Pakistan is a country where population is predominantly Muslim and the share if Islamic finance should have increased enormously by this time. The decision of State Bank of Pakistan (SBP) to let the two systems in parallel was good but the overall response of all the stakeholders, particularly the government has been lackluster. Bulk of the government borrowing from the local market has remained Riba-based, mainly through Treasury Bills and Pakistan Investment Bonds. The latest issue of Ijara Sukuk amounting to Rs49 billion was delayed because of some ‘technical hitches’. The issue has also come after a long gap. Experts are of the opinion that the Government of Pakistan (GoP) should have gone for Sukuk to finance mega infrastructure projects i.e. dams, power generation and public transport, particularly Pakistan Railway.
Islamic Banking growth has also remained subdued mainly because of two factors: 1) lack of liquidity management products and 2) focus on corporate sector and urban areas. The slower growth in deposits can only be attributed to Islamic banks sitting on nearly Rs150 billion non-earning deposits. This has virtually stopped these entities from accepting fresh deposit. The common complaint is that income of conventional banks is high because these have invested bulk of the deposits in risk-free government securities. While IFIs are not allowed to invest in Riba-based instruments, availability of Shariah-compliant instruments is conspicuous by their absence.
It is worth noting that during January-March 2014 quarter total assets of Islamic banking grew to Rs1,016 billion from Rs1,014 billion during October-December 2013. A point worth noting is that the share of Islamic banking in overall banking declined to 9.4% from 9.6% during the period under review. Some experts attribute this decline to redemption of Sukuk as well as delay in issue of fresh Sukuk. The other two important observations are: 1) about 75% concentration of business in Sindh and Punjab and 2) nearly 56% of branch network confined to federal and provincial capitals, namely Islamabad, Karachi, Lahore, Quetta and Peshawar. Yet another observation was that only 10 new branches were opened in the quarter under review.
Modaraba operators also witnessed lackluster performance during FY14, though the full year reports are still not released. These premier entities continue to suffer due to limited availability of credit lines, despite Islamic banks sitting on tons on non-yielding deposits. This creates a doubt that the business models being followed by Mobarabas suffer from certain ‘technical hitches’. The blame for this subdued performance must go the office of Registrar Modaraba. Many of the CEOs are critical of the attitude of Registrar, who at one stage used to openly accuse that business models being followed by Modarabas are not Shariah compliant. If the apex regular suffers from this dilemma, the performance was bound to affect. It is on record that over the last five years hardly a few Modarabas have been floated. Having said that it is also necessary to point out that bulk of the business of Modarabas is confined to corporate sector, which is against the spirit because most of the entities could borrow from both conventional and Islamic banks at very competitive mark-up as against those still suffer from ‘financial exclusion’.
Takaful operators could be termed the worst performers as they carry a huge load of accumulated losses. The sponsors of these entities kept the conventional insurers out of this business. While conventional banks are allowed to open up designated Islamic banking branches, conventional insurers were denied the same treatment. For a considerably long time Islamic banks had to live with insurance covers issued by conventional insurance companies. An example is often quoted that no Takaful operator in Pakistan has the capacity to mitigate risk pertaining to a commercial building, Faysal House located in Karachi. Most of the Takaful companies have survived only because of ‘Car Ijara’ being undertaken by a couple of Islamic banks. However, this is a ‘high risk’ business segment due to rampant car snatching, particularly in Karachi.
Mutual funds are also concentrated in corporate sector as most of the asset management companies (AMCs) are extension of commercial banks and brokerage houses. As regards Shariah compliant mutual funds, bulk of the asset under management is confined to a few AMCs, Al Meezan enjoying the largest share of the pie. One completely fails to understand that in a country where assets managed by AMCs is still around 6% of total bank deposits and people also complaining about limited investment options, why size of mutual fund industry has remained so dismal? Either the AMCs don’t pay a competitive return or poor return is the outcome of parking of bad assets in AMCs by the sponsors (banks and brokerage houses). May be it is the time to probe the operations of AMCs as well as adequacy of the apex regulators, who may not be monitoring the performance of AMCs prudently.
Last but not the least, more attention has to be given to prepare a new breed of managers for institutions offering Shariah-compliant products and service. Still people having served for conventional banks and insurance companies are occupying key position in entities offering Shariah-compliant products and services. It is on record that that some of the Takaful companies have worked without CEOs for a long time. One of the fears is that many Pakistanis have been hired by overseas companies offering Shariah compliant products and services. While it may be point to take pride but brain drain seems to be having an adverse impact of local companies.