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Monday, 9 April 2012

Islamic banks progressing in Pakistan

Lahore—Islamic finance has achieved a substantial growth in the last few years, annualising a growth rate of about 18-percent. The Islamic finance industry that was currently estimated to be worth about US$1 trillion had made further headway in the Islamic traditional markets such as Malaysia, the Gulf Cooperation Council countries, Pakistan, Indonesia, apart from penetrating new markets such as in Europe and Africa. While Islamic banking assets account for a large part of this value, the segment that has enjoyed especially strong growth in the more recent years is Sukuk. 

Despite growth, Islamic banking is facing challenges like any other new industry, which despite being new is actually a very competitive market. Islamic Banking is based on the principles of Islamic finance and people have very little knowledge about these concepts. This in itself gives rise to anumber of challenges, for instance establishing credibility and spreading awareness. Capacity building is another major challenge posed to the Islamic banking. 

Conventional banking is being taught in numerous universities whereas very few institutions are offering formalized education in Islamic Banking, thus production of quality human capital is another challenge for our growing sector. The lack of effective marketing remains as one of the key reasons why the sector hasn’t been able to serve its massive potential. However, with growth of Islamic Banking, more educational institutions are emerging to prepare killed human resource. 

According to a recent IMF study, Islamic banks performed better than conventional ones in terms of profitability, credit and asset growth. The Islamic banking system has great potential for further market share expansion and a possible contribution to market stability given the available credit. Assets also reflected a similar trend, which were less affected and grew on twice the pace of conventional banks during the period of economic crisis. 

The growth in the market share of Islamic banking in Pakistan has also been impressive. This can be seen by looking at the market share achieved by other countries over time. The Islamic Banking sector in Pakistan has around 10% share of the total banking industry. 

In Pakistan, Islamic banking emerged as a response to both religious and economic needs. Efforts for economy wide elimination of Riba started during 1970s and most of the significant and practical steps were taken in 1980s. The mid-80s attempt was a significant step in the evolution of Islamic banking system in the country. In a technical sense, it was the most advanced model compared to any other model being practiced anywhere in the world at that time. However that system fell apart as it did not adequately address issues such as putting in place an effective Shariah compliance mechanism, giving emphasis to capacity building, and opting for a flexible and evolutionary approach. In any case this effort provided a valuable experience that has been taken into account while formulation of SBP’s current strategy to re-launch Islamic Banking in Pakistan. 

The banking system in an economy works like the blood circulation system of a body. As only an efficient blood circulation system can ensure a healthy body, similarly an efficient and equitable banking system can dispense economic efficiency and justice. These basic concepts and objectives are common to any banking system whether it be conventional or Islamic. The difference lies in the methodology adopted to achieve these objectives. 

Conventional banking aims to meet these objectives through use of interest based contracts while Islamic banking achieves these objectives through trade-based contracts. In Pakistan Islamic banking emerged as a response to both religious and economic needs. The initiative to re-introduce Islamic Banking in Pakistan was launched back in 2001 when the government decided to promote Islamic banking in a gradual manner and as a parallel and compatible system that is in line with best international practices. Following the decision of the government to shift to interest free economy in a phased manner without causing any disruptions the effort was envisaged to be based on a market driven and flexible approach. Furthermore, it aims at building a broad based financial system in the country to enable all segments of the population to access financial. While the number and operations of Islamic banks are fast expanding, this segment of the market is still small relative to the appetite for Islamic finance.

(Pakistan Observer / 08 April 2012)

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