Pakistan's experience in Islamic banking

| Friday, October 30, 2009
Growing outreach and promising future

ISLAMIC banking industry in Pakistan remained least affected by the global financial crisis. It experienced some problems only after this crisis had snowballed into recession in advanced economies affecting growth prospects of Pakistan and other developing countries.

More importantly the industry has almost overcome these problems and now most of its indicators are showing a "reversion towards the usual high growth trend," according to the latest State Bank report.



The share of the assets of Islamic banking in overall banking industry grew from 3.4 per cent in June 2007 to 5.1 per cent in June 2009: in terms of value these assets increased 97 per cent-from Rs159 billion to Rs313 billion.

Total deposits jumped 120 per cent-from Rs108 billion or 3.1 per cent of the banking industry to Rs238 billion or 5.2 per cent. And total financing and investment also rose from Rs90 billion to Rs 195 billion showing a handsome growth of about 117 per cent.

In last two years, the share of financing and investment of Islamic banks in overall banking industry also went up from 2.6 percent to 4.2 per cent.



Three things have apparently helped in this phenomenal growth in Islamic banking. "First, it had a narrow base in June 2007," says head of Islamic banking at a large local bank. "Second, Islamic banking has a mass appeal in Pakistan both on religious grounds as well as being a relatively new concept. And third, it has some inbuilt characteristics that offer a better cushion against man-made crises."

That the unique features of Islamic financial institutions do protect them from the elements of man-made crises is all but evident: Total assets of top 100 Islamic banks grew more than 66 per cent to US$580 billion in 2008 from US$350 billion in 2007. In contrast to this the asset of top 100 commercial banks in Asia (the region that was not in the centre of the financial crisis) posted only 13.4 per cent growth. And according to reports, global Islamic banking is set to grow up to 30 per cent in 2009 as well.

What has boosted the reputation of Islamic banks as the institutions that can shield their clients against crises is their conservative approach to business, a balanced and ordered appetite for growth, a more equitable risk sharing and focus on the basics of banking as opposed to innovation.

"All these factors, which used to be perceived as weaknesses before the credit crisis began, are now being used as shields against the potential damages of imported stress," says a Moody's report adding that in the short term, in times of crisis, "clients may find it more comfortable doing business with an Islamic bank."



In Pakistan clients have really begun to find it comfortable doing business with Islamic banks-a fact that is evident from the growing numbers of the Islamic banking branches across the country. In June 2007 there were 162 bank branches providing Islamic banking. These included the branches of six fully-fledged Islamic banks as well as those of the conventional banks. In June 2009 the number of Islamic banks shot up to 18 and the number of total bank branches providing Islamic banking more than tripled to 528.



One of the reasons for the popularity of the Islamic banking in Pakistan is its growing outreach. Islamic banking facilities are available in almost all parts of the country and they have a strong presence in Karachi-the hub of commercial banking. Besides, Islamic banking now offers a wide range of products for both depositors and borrowers.



The availability of suitable modes of financing has attracted corporates as well as consumers towards Islamic banks. These banks have also been able to attract deposits of various types and from different classes of bank clients.



Lately, Islamic banks expanded their corporate clientele also because conventional banks became a bit averse to lending to the private sector after their NPLs went up. A conservative approach to banking has also kept consumer loans portfolio of Islamic banks more stable than that of the conventional banks. And Islamic banks have a better mix of fixed and saving accounts than the conventional banks. This is primarily because it is possible for Islamic banks to design fixed deposits schemes without the element of Riba. Despite all these plus points of Islamic banking it did not entirely escape the aftereffects of the global financial crisis and recession. The pre-tax profit of the Islamic banking industry declined about 18 percent in the last fiscal year. But here again the rate of decline was lower than in case of conventional banks that saw their earnings fall by 31 per cent during this period.

Officials of Islamic banks, however, point out that profitability of Islamic banking has picked up from April-June 2009 quarter wherein its pre-tax profit showed an increase of more than 150 percent.

They hope that the trend would continue as the economy is showing signs of a higher growth after posting a growth of just two percent in the last fiscal year.

They say that in case of Islamic banks it is the domestic economic slowdown that directly affects them rather than the global financial crisis and recession. Islamic bankers say that Islamic banking would grow faster in future once they are able to penetrate into so-far-unexploited area of agricultural financing and increase their portfolio of SMEs financing. Till June 2009 Islamic banking had very negligible exposure to agricultural financing and the share of SMEs in overall financing by this industry was a mere 8.6 per cent.



Islamic bankers admit that despite a rapid expansion of Islamic banking branches rural areas are still least-served. And even in those rural areas where Islamic banking outlets operate they focus on consumer financing rather than on agriculture loaning.

The State Bank has already issued guidelines for agricultural financing by Islamic banking outlets and Islamic banks have made a modest Rs100 agricultural financing, for the first time, in April-June 2009. Islamic banks are drawing strategies to tap this area of financing keeping in view the thorniest issue of recovery of loans.

Mohiuddin Aazim is a senior Pakistani journalist with two decades of experience in print and electronic journalism. He worked as an Executive Producer at CNBC Pakistan. He writes for Pakistan's Dawn; Outlook Afghanistan, in Kabul, and The Financial Express, in Dhaka. He contributed this article to The Brunei Times.

Link: http://www.bt.com.bn/en/business-asia/2009/10/29/pakistans-experience-islamic-banking

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