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Islamic banking has an ample scope in consumer financing

Published on 6th Oct, Edition 40-41, 2014


Knowledge, attitude and practices of Islamic banking

“Knowledge, Attitude and Practices of Islamic Banking in Pakistan” was the theme of a research survey conducted by the State Bank of Pakistan (SBP) which in fact was the driving force behind the eye catching growth of the banking sector. According to the survey there is an overwhelming demand for Islamic banking in the country that is evenly distributed amongst rural and urban areas, varied income strata and education levels. According to the analysis pent-up demand for Islamic banking is higher amongst retail (95%) than businesses (73%).

The study indicates an important aspect about the outreach of the Islamic banking as the individuals in rural areas or in low income brackets have relatively limited access to financial services. This highlights a huge opportunity for Islamic microfinance in rural areas. Although the branchless banking have helped a lot in extending the banking facilities in the countryside yet a bulk of the population in remote or rural areas has no access to banking finance in Pakistan. This has indicates a dual purpose for the banking sector one is to enhance the outreach and second to utilize huge accumulated funds with the Islamic banking industry due to lack of Shariah-compliant investment portfolios in Pakistan.

There was a time when Consumer Finance was the major product of the conventional banks in 2005-07 when the mark up rate was somewhere in the region of 6-7 percent that attracted a huge demand for consumer finance especially in the real estate, automobile financing, home loans and even personal loans and that real go both in favor for the economy as well as the financial institutions. However that model could not be sustained due to reasons best known to the financial regulators. Now at this stage when the interest rate is in the double-digit in Pakistan the consumer finance has lost its luster as a leading financial solution yet it offers a great opportunity to the Islamic banking which operates on interest free model.

It is unfortunate that the country is confronted with an alarming issue of high rate of poverty and unemployment and the Islamic Banking Industry which stands on the principle of exploitation free financial services can play a historic role in poverty alleviation from the society by offering financial products especially to the unemployed or the low income groups with a target of bringing in poverty ridden segment of the society out of gloom. The real and primary goal of the Islamic banking is not confined to profit making alone but to lend a supporting hand to the poor in accordance with the actual norms and spirit of the Islamic banking.

However, the on ground reality gives a different picture regarding attitude and practices of the Islamic Banking Industry. Although it gives a sense of satisfaction to the customers that it is free from Riba (interest) yet it costs even more than the conventional banking products while lack of friendly attitude or giving relaxation to the deserving cases portrays a different picture of what the Shariah-compliance emphasis, which is generally known as free from exploitation. For instance if a customer desires to wind up his deal before the time of maturity, he is required to pay the whole amount and not entitle to get benefit of wind up the contract before maturity of the contract. This indicates lack of relaxation while dealing with the customers, which calls for some modification to broaden the base for Islamic banking in Pakistan.


Governor State Bank of Pakistan encouraged the industry to focus on research and development to develop innovative financial solutions that can meet needs of growing clientele of Islamic Banking Industry. He emphasized that while Islamic Banking Industry has established its foot prints in international and local market, the industry should not be complacent and stride towards bringing it closer to the key objectives of Islamic economic system; transparency, social justice and equitable distribution of wealth. He formally launched the KAP report and appreciated the efforts of Islamic Banking Department, and EdBiz Consulting Ltd for successful completion of the project and thanked DFID for financing the study.

Subsequently, a detailed presentation on the survey findings was delivered. The first known initiative of its kind, the study has quantified the demand for Islamic banking in the country both for retail and corporate customers and has also identified demand supply gaps. The survey has a nation-wide representation of 9,000 households (Banked and Non-Banked) and 1,000 Corporate.

The study recommends that the role of Shariah scholars needs to be further enhanced and made more public in promoting Islamic banking and finance. Lack of general awareness about Islamic banking has emerged as one of the key challenges confronted by the industry.

The study indicates that rural markets, SME, agriculture and microfinance sectors have got huge financing needs and are potential markets for Islamic banking. It can also be inferred from findings of the study that Islamic banks are desired to significantly improve their investments in expanding their outreach to 2nd and 3rd tier cities both to improve their visibility across the country and also to increase their interaction with local businesses and trading communities. According to survey findings, given the supply-demand gaps, there is huge potential for further development of Islamic banking in Pakistan.

The ceremony organized by State Bank of Pakistan (SBP) at the launch of the report was chaired by Ashraf Mahmood Wathra, Governor, State Bank of Pakistan, which was attended by presidents of banks and senior industry representatives, Shariah scholars, reputed members of academia, officials of DFID, World Bank and other reputed national and international organizations, last week.

Deputy Governor State Bank of Pakistan Mr. Saeed Ahmad in his closing remarks informed the participants of measures taken by the central bank to address the key challenges facing the Islamic Banking Industry. Mentioning the resolve and commitment of the Government of Pakistan for promoting Islamic banking in the country on sound foundations, the Deputy Governor shared with the audience progress of the National Steering Committee on Islamic Finance.


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