Share of Islamic banks may reach 12 per cent in three years: SBP

Market share presently stands at 6 per cent.

KARACHI: The momentum of growth in the Islamic banking industry, despite a slowdown in overall economic activity over the past two years, has sparked optimism that Islamic banks may achieve a 12 per cent share of the sector in the next two to three years, according to the State Bank of Pakistan (SBP).

Islamic banking in the country has shown tremendous growth since its re-launch in 2003 – the share of Islamic banks in the industry increased to more than six per cent at the end of June this year, the SBP said in its annual performance report for 2009-10.

Total assets of the segment grew 31 per cent to reach Rs411.1 billion in June, compared with Rs313 billion a year earlier. Meanwhile, deposits rose at a faster pace of 38.5 per cent to Rs329.8 billion. The financing and investment portfolio also grew 21.5 per cent reaching Rs235.5 billion.

“Growth rates have remained at high levels since 2004 (assets of Islamic banks stood at Rs18.8 billion in June 2004), indicating the increasing acceptability of Islamic banking as a viable alternative to conventional banking,” said the SBP.

The number of Islamic banking institutions also increased to 19 during the period under review. Of these, six are full-fledged Islamic banks and 13 are Islamic banking branches and windows of conventional banks. Overall, the network boasts 667 branches.

Initiatives

In order to standardise Shariah practices in the segment, the SBP issued ‘Essentials of Islamic modes of financing’ and related model agreements in 2005 as minimum requirements for Islamic products.

These guidelines were later made compulsory in 2008 with the advice that for the Islamic modes for which essentials had not been prescribed, Shariah standards of the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) may be used as guidelines.

The SBP is reviewing AAOIFI standards for adoption in Pakistan.

Key hurdle

Lack of awareness is one of the key impediments in the growth of Islamic finance and the central bank has formulated an awareness programme, which includes orientation sessions for central bank departments, senior management of conventional banks, the business community, academia, government departments and the general public.

“None of the initiatives can be successful if the business community is not convinced that Islamic banking is genuine and there is some business advantage,” said the SBP. To deal with that, the central bank said its field offices are reaching the business community across the country.

Published in The Express Tribune, November 20^th, 2010.