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Saturday, 1 March 2014

Islamic banking: prospects look much brighter now

Islamic banking in Pakistan has witnessed a significant growth during the last few years. According to the State Bank data, Islamic banks held Rs 926 billion (dollar 8.8 billion) of assets or 9.5 percent of the total at the close of September 2013, up from 8.1 percent a year earlier. At present, there are five full-fledged Islamic banks while 14 others operate Islamic windows. New entrants are also expected as a number of conventional banks aim to grow or spin-off their existing Islamic windows. Summit Bank is all set to convert itself into a full-fledged Islamic bank over a three to five-year period. It has Rs 111.9 billion of assets and 187 branches, which would make it Pakistan's second largest Islamic bank after Meezan Bank, taking second spot away from the Pakistani unit of Dubai Islamic Bank. National Bank added Islamic windows to its 10 branches last year and is planning seven more to reach a total of 25 by the end of this quarter. MCB Bank has been given regulatory approval to spin-off its Islamic windows into a separate subsidiary with Rs 10 billion in paid-up capital, using its existing 27 Islamic banking branches to form a new entity. There has been renewed aggressiveness from existing participants like Alfalah Islamic and Dubai Islamic Bank through expansion of branches and revamping of divisions. Other banks also plan to expand their existing branch networks because they see wider space for Islamic banking industry as 56 percent of the 1161 Islamic bank branches are now located in the five largest cities, leaving smaller cities and rural areas largely under-served. 

Such a growth would not have been possible without the active support of the central bank of the country which has either conducted or sponsored research on the subject and has been encouraging the commercial banks to participate actively in Islamic banking since the inception of the country. Of late, the State Bank has accelerated its efforts to push for the development of Islamic banking, with the aim to double the industry's branch network and reach a 15 percent share of the total banking business in the next five years. Its fresh steps include the appointment of a new deputy governor to focus on Islamic banking and enlisting of renowned scholar Taqi Usmani in its sharia board which could be part of its efforts to improve consumers' perception of the industry. Last year, the central bank had launched a media awareness campaign and said it would revise rules on sharia governance and liquidity management for Islamic banks. 

Although it could be argued whether the present banking system based largely on interest falls within the category of usury or Riba, forbidden in Islam, but since the people at the helm of affairs are of the view that bank interest comes within the definition of Riba and a sizeable number of people and Ulema are in agreement with that view, the only matter which needs to be analysed very carefully is the manner in which to introduce the interest-free banking without disrupting entirely present system and undermining the potential of banking industry for the economic development of the country. If we want to expand and strengthen Islamic banking system, there are definitely certain prerequisites which could only be avoided at great peril to the economy. First of all, we as equity holders or borrowers, have to fashion our lives largely according to Islamic percepts of morality and integrity which could be quite a challenging task in the present environment. Otherwise, the amount of non-performing loans could increase enormously despite employing hordes of supervisors, appraisers and consultants to oversee the loaning business. This could ruin the banking industry overtime. Also, rather than depending on others, we need to devise our own products according to our varied and peculiar requirements. The role of the central bank has to be redefined and its instruments of credit control reshaped to suit the monetary policy in a new situation. To make the new system more attractive and productive, it has also to be theoretically and practically demonstrated that Islamic banking system is superior to the conventional one, based on interest. The existing banking staff, accustomed and trained for the requirements of conventional banking, has, of course, to be retrained and re-educated. Educational institutions, particularly the universities, have to be equipped and remodelled to face the challenges of a new economic order. We believe that if proper ground work is not done seriously and is not entirely convincing, the transition to the Islamic banking system in a hurry could create problems, leading to a backlash in the long-run. As such, it is better to make a steady progress which is irreversible and based on solid research rather than attempting to reach pretentious targets which may ultimately tarnish the image and devalue the role of banking industry in the country's economy. 

(Business Recorder / 03 Feb 2014)
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