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Growth in Islamic Finance surpasses conventional banking

Published on 14th July, Edition 28, 2014


Islamic finance based on principals of Shariah provides an alternate to conventional banking. Islamic banking industry size is estimated to be $400 billion with potential to grow at minimum 15 percent to 20 percent globally per year, much faster than conventional financial institutions. This has been the same trend over the last 5 years since 2008. Islamic Banking assets globally are estimated to be $270 billion. The sukuk market has more than doubled from $9.5 billion CY11, expected to reach $100 billion CY14 with Malaysia managing more than 60 percent of the issues. This is simply due to rapid demand of Islamic products in Muslim and Non-Muslim countries. There are 1.5 billion Muslims in the world which continue to be the focus for every bank. It is estimated that by year 2020, half of all Muslim savings will be in Islamic financial institutions. Today there are more than 300 Islamic Financial institutions globally operating in 75 Muslim and Non-Muslim countries and rapidly finding their place around the world. The largest markets i.e. Malaysia, Turkey, Saudi Arabia, UAE, Kuwait and Qatar constitute to 80 percent of the market. Emerging markets include USA, UK, France, Germany and Netherlands. Financial institutions in Western markets are eyeing Islamic Banking looking at the growth potential by opening of Islamic divisions.

Islamic banking in Pakistan is witnessing a consistent growth. State Bank of Pakistan (SBP) in 2003 established Islamic Banking Department dedicated to promote and grow Islamic Banking in the country. SBP further encourages conventional financial institutions to introduce Islamic counters. According to the Islamic banking bulletin released by SBP, currently there are five licensed full-fledged Islamic banks and 14 conventional financial institutions with standalone Islamic branches, total of 19 institutions. The industry constitutes to over 10 percent of the country’s banking system. Islamic banking assets grew from Rs857 billion in June 2012 to Rs903 billion in June 2013 closing December 2013 at Rs1,013 billion. The branch network reached 1,304 branches in December 2013. There were 1,115 branches as on June 2013 growing against 886 branches in June 2012. The deposit base grew from Rs603 billion in June 2012 to Rs771 billion in June 2013 closing December 2013 at Rs868 billion. Net Finance and Investments increased from Rs626 billion in December 2012 to Rs709 billion in December 2011. Murabaha and Dimishing Musharka are the most popular products with combined asset share of 76 percent. With the growth potential in front, it is expected the Islamic finance industry double its market share by year 2020.

Islamic Financial institutions are expected to show double digit growth in Pakistan. Keeping with the positives, the industry is facing challenges no different from international markets as discussed earlier. One particular challenge in Pakistan is the availability of investment options. Unlike the Bonds and Treasury bills, Islamic financial institutions need a vibrant fixed income market to place excess liquidity. Companies even today prefer to float PPTFCs rather than sukuk’s, primarily due to documentation and monitoring required by the lenders. It is required that the government floats sukuks just as they do with treasury bills. There are few universities who offer teaching in Islamic finance. Improvement in skills, training and development needs more investment than done today. There still prevails a significant population that is either unaware of Islamic banking or have confusions and misconceptions about its current paradigm. According to SBP, research and development focusing on need analysis is the key to help develop the industry. To find answers how to grow Islamic finance, SBP has recently conducted a survey based study “Knowledge, Attitude and Practices of Islamic Banking in Pakistan (KAP)” with a sample of 10,000 (both retail and corporate). SBP has also partnered with the industry in developing the next five years strategic plan for the industry that envisages further improvement in legal, regulatory and taxation environment for the industry along with diversification of products and markets covering non-traditional but strategically important sectors of agriculture and SMEs. The strategic plan aims towards doubling of existing branch network and increasing the Islamic banking share to over 15 percent of the country’s banking system.


There are several challenges Islamic financial institutions face globally. Competition from conventional financial institutions continues to be strong. There are many universities specially in Western markets who do not provide teaching to business students in Islamic banking. The implication is the speed with which Muslims and Non-Muslims are educated about Islamic financial products and general acceptance. With additional transaction cost to ensure each transaction is Shariah-compliant, cost to an Islamic bank is higher than a conventional bank. Availability of qualified professionals is an ongoing challenge. There is a need to build platforms in media as well as conventions where people and entrepreneurs can get answer how Islamic finance is different from conventional. Furthermore, acute need for institutions around the world to liaise on global practices to ensure that product structuring and offering is no different from one country in comparison to the other. It is important that interpretation of Islamic laws around the world is the same to bring conformity in the system. This will ensure that the essence of providing Riba-free products and services is not compromised. It is also important that financial innovation takes place to structure products to suite business and individual needs.

The success of Islamic banks largely depends on Islamization of the economy since Islamic banks compete with commercial financial institutions for deposit and advances. With conventional banks establishing Islamic banking windows, full-fledged Islamic banks in the country face a tougher challenge to grow the business in terms of volume and competitive pricing at par with conventional banks. Government need to make an effect to promote the bond and money market for Islamic financial institutions through floating of sukuk’s where financial institutions can earn through investment of residual funds. Islamic banking in Pakistan is in early stages of growth and thus far have shown high potential to compete with conventional banks to promote Islamic financing. The growth of the business depends on the increased knowledge of Islamic finance and the drive to promote this alternate mode of banking.


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