Prospects of Islamic banking in Pakistan

Growth in country expected to be higher than global average

LONDON: A hallmark of Islamic banking and finance in 2015 has been the resilience of Islamic retail banks in the Gulf Cooperation Council (GCC) countries in the wake of historically low oil prices.

The year has proven to be a testing period for the global Islamic financial services industry, with the gradual exit of the likes of Islamic Bank of Asia in Singapore and the visible diminishing enthusiasm in Islamic banking and finance of global banks.



Furthermore, Islamic asset management industry has also been slow in attracting new players from the western world. While the likes of Amana Growth Fund managed by Saturna Capital and Shariah-compliant funds by Azzad Asset Management have continued to excel, new players like Arabesque Asset Management, despite having some of the most impressive investment philosophies and methodologies, have yet to make a mark.

SEDCO Capital is another success story. It has shown great commitment to offer Shariah compliant funds with social responsibility in the heart of its investment philosophy.

However, other socially responsible Shariah compliant funds have not been as successful as the ones mentioned. For example, F&C Responsible Shariah Global Equity Fund’s assets under management (AUM) have shrunk from over $50 million in 2014 to $4.5 million at the end of October 2015.

There is some anecdotal evidence that sensitive investors prefer dealing with fund managers who manage only Shariah compliant funds and portfolios. Conventional fund managers managing compliant funds are fast going out of favour of Islamic investors. With this backdrop, Islamic asset management industry is poised for growth in Pakistan, where Islamic financial institutions adhere to Shariah standards more religiously than in many other countries.

This is consistent with what has for long happened in Islamic retail banking, which is dominated by full-fledged Islamic banks. Conventional banks offering Islamic financial services through dedicated Islamic branches or Islamic windows only feature marginally in Islamic retail banking.

There are certain exceptions to this general observation.

The likes of ADCB in the UAE and Bank Alfalah in Pakistan operate vibrant Islamic windows and close sources suggest that these banks are preparing for full-fledged subsidiary Islamic banks.

MCB Bank in Pakistan has already received a licence for full-fledged subsidiary Islamic banks and is in fact preparing for its full launch in 2016. On December 16, 2015, the board of directors of MCB Bank Limited approved the sale of the bank’s entire Islamic banking operation to its wholly-owned subsidiary MCB Islamic Bank Limited (MCBIBL) for Rs7.946 billion. The bank’s extraordinary general meeting to approve the transaction is scheduled for 8 January 2016.

While the global Islamic financial services industry continued to grow, it is the second consecutive year of single digit growth – 7.3% in 2015 – as opposed to 9.3% in the previous year. In fact, Islamic banking and finance has grown with a declining rate since 2013 when it grew by only 12.3%, compared with the 2012’s growth of 20.2%.

In this context, predictions by some industry observers and consultancy firms of the estimated size of the industry to reach $3.5 trillion seem to be exaggerated.

The Global Islamic Finance Report (GIFR) 2015 predicted that Islamic financial assets would reach $5.3 trillion by the end of 2020. However, in expectation of further slowdown in the growth of Islamic financial assets in the wake of low oil prices, continued social disorder and political conflict in some of the key IBF markets, Edbiz Consulting, the publisher of the report, has decided to revise future size estimates.

Situation in Pakistan

In Pakistan, however, Islamic banking has continued to grow, with share of Islamic banking assets in the national banking sector having grown to 11%. The industry is poised for further growth, as the fundamentals are right.



The State Bank of Pakistan, which commissioned Edbiz Consulting to conduct a survey ‘Knowledge, attitude and practices of Islamic banking in Pakistan’ in 2014, has confirmed time and again that there is an overwhelming and evenly distributed demand in the urban and rural areas of the country for Islamic banking.



According to Edbiz Consulting, the demand for Islamic banking is as high as 95% among the households at the retail level. “Demand stands at 73% among the businessmen,” according to the SBP survey, which is based on 9,000 households nationwide and includes banked and non-banked customers, and 1,000 corporates.

The writer is an economist and PhD from Cambridge University

Published in The Express Tribune, December 28^th, 2015.

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