“A few years ago, we embarked on a journey – the Siraat-e-Mustaqeem – the straight and the right path of faith and belief; and doing so while completely ignoring the naysayers who insisted that we may be risking our financial worthiness. We completed the world’s largest conversion of a conventional bank into an Islamic bank, where almost a million customers were converted from conventional to Islamic financial products.”
Our chairman’s speech at the ceremony marking our conversion had me thinking, not just about the journey but that our decision, though driven by the heartfelt need to do the right thing, also turned out to be very profitable, looking at the sheer growth that we experienced since the conversion.
We continue the righteous journey, having given a blueprint to the State Bank of Pakistan (SBP) for other banks to follow. This brings me to the fact that the growth of Pakistan’s Islamic banking industry has been tremendous over the past two decades.
It is progressing at an accelerated pace and this trend is expected to continue in the years to come. No longer just an option, Islamic banking is now the preferred mode of transaction, and many customers of conventional banks are shifting towards Islamic banking.
Also, the unbanked segments are now coming into the fold of banking through Islamic instruments due to their Riba-free status.
According to SBP data, the share of Shariah-compliant assets and deposits in Pakistan’s banking industry has risen to 20.3% and 22% respectively. The share of Shariah-compliant financing has grown to almost 27%.
Assets of Islamic banking institutions are growing at an average of over 30% for the last three years.
I will deliberate today on the significant change that Islamic banking has brought to the finance industry and the barakah that will continually get added to the financial functionality by excluding Riba from the equation.
We are the second-largest Muslim population in the world with low banking penetration. The government seeks to increase financial inclusion by promoting Islamic finance as part of the National Financial Inclusion Strategy.
“Only 21% of the adult population had a bank account in 2017, with 13% of adults citing religious reasons for not having them,” according to the World Bank.
The SBP conducted a prepared a detailed survey-based report called “Knowledge, Attitude and Practices of Islamic Banking in Pakistan”. The survey interviewed 9,000 households (banked and non-banked) and 1,000 corporates.
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%).
Research findings further indicate that 94.51% of banked respondents believed in the prohibition of interest, and 88.41% considered that the contemporary practices of interest-based banks are prohibited, while over 98% non-banked believed in the prohibition of interest and over 93% considered the interest charged and given by conventional banks as prohibited.
The last sermon in the farewell Hajj given by the Prophet Muhammad (PBUH) is considered to be the Magna Carta for mankind.
He mentioned upholding Tauheed, law, and justice, and emphasised economic justice by declaring Riba haram with reference to the sanctity of life, wealth, and property.
Riba was prohibited as it inculcates the concept of hoarding, selfishness, indifference, and worship of wealth. It also destroys the spirit of sympathy, mutual help, and cooperation.
The Islamic community was built on the grounds of brotherhood and therefore the new system of finance ensured harmony and well-being of the community through trade and risk sharing.
Riba also causes the establishment of monopolies, cartels, and concentration of wealth in a few hands. And so, the gulf between the rich and the poor widens.
We have had many discussions and reflections over our decision to go Islamic at Faysal and have understood that one of the most significant edges that the Islamic banking industry retains over conventional banking, in addition to being Riba-free, is its robust nature of better understanding the business dynamics of the customer, which automatically leads to lower non-performing financing.
Better insight into customer businesses has helped us shape our Shariah-compliant products accordingly. It is obvious now that Islamic banking institutions in Pakistan are more profitable than their conventional counterparts and their performance is generally better.
The economic situation of Pakistan today is worrisome, but giving up is not the answer. We are operating in a rapidly evolving environment where the only constant is change. We must remain flexible and agile in the face of these shifting realities.
At a time like this, Islamic banking has proven to be a blessing. Globally, Islamic banking is a huge success, attracting customers from all races and religions for its approach.
As for Pakistan, the share of Islamic banking in overall deposits and assets has increased and SBP is taking necessary measures to increase it to 35% by December 2023 and also to completely transform the system by 2027, as per the directives of the Federal Shariah Court.
The writer is a seasoned banker and an Islamic banking expert. He is presently part of the senior management at Faysal Bank
Published in The Express Tribune, June 19th, 2023.
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