According to Global Islamic Finance Report 2012, the size of the Islamic banking industry has grown to $1.35 trillion with the annual growth rate of more than 20 percent. Globally the Islamic financial industry now comprises 430 Islamic banks and financial institutions and around 191 conventional banks with Islamic banking windows operating in more than 75 countries, it said.
The share of Islamic banking in Pakistan has reached 8.2 percent in assets and 8.9 percent in deposits, said Shafqat Ahmad, country head of Al-Baraka Islamic Bank.
“Our Shariah experts have worked relentlessly to develop asset-based products. Five years ago, 99 percent of the Islamic banking transactions were in Muharaba and there were no asset-based products,” he said. Today, the share of Muharaba-based transactions has decline to 45 percent and 55 percent transactions are in asset-based products such as Ijara, Istasna, Sukuk and Musharqa, he added.
Ahmad said that Islamic finance, with its roots in a moral economic model that supports productive economic activity and discourages excessive leveraging and imprudent risk taking, can play an important role in rebuilding the financial system.
Investment financing has now peeped into Islamic banking, he added. “Islamic banks are now financing large projects such as fertilisers, etc. We are still behind Malaysia and some other Islamic countries in the Middle East where Sukuk market is flourishing and crowding out conventional banking products,” he said, adding that experts predict that the asset-based Islamic banking would largely replace conventional banking in these countries.
“Entrepreneurs in Pakistan are turning towards Islamic banking in large numbers,” said Ahmad, adding that they may change from one Islamic bank to another but they do not go back to conventional banks once they adopt Islamic mode of banking.
Islamic banking established its creditability during the 2008 global financial crisis, he said, adding that all Islamic transactions were backed by assets, while the global financial crisis was mainly due to paper-based assets traded many times over by different parties.
Iftikhar Ahmad, officer in an Islamic Bank, said Shariah-based banks are extremely cautious in their financial dealings.
Even the advertisement given by the Islamic banks are to be approved by its Shariah experts, he added.
The profits distributed by the Islamic banks to their depositors are strictly based on Islamic principles.
This, he said, is the reason that the profit rates of these banks vary every year.
However, the depositors get better return on their deposits than the conventional bank depositors, he said.
Islamic bank keep 50 percent as Mudaris fee on the profit on deposits, while the remaining 50 percent of the profit is given to the depositors, he said.
According to the State Bank of Pakistan (SBP), Islamic banking institutions appear more liquid as compared to the last quarter as depicted by the rising trend of liquidity ratios during the quarter under review.
Liquid assets to total assets (LA/TA) increased from 41 percent to 45 percent during the quarter ended June 2012, while liquid assets/ total deposits also depicted an upward trend from 50 percent to 53 percent during the same period. Both the indicators adopted a reverse trend in case of overall banking industry, he said.
One of the major contributing factors for this rising trend is the deployment of deposits in Sukuk, which constitute more than 70 percent investment of the Islamic banking institutions by the end of the second quarter.
(The International News / 23 Dec 2012)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com