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Tuesday, 14 October 2014

Pakistan's Islamic banking push faces industry gaps -study

Pakistan's central bank has released a study of Islamic banking, the first of its kind in the country, which shows latent demand for sharia-compliant finance but many obstacles such as small branch networks and a lack of product awareness among consumers.
Consumer outreach, rural banking and the need for stand-alone Islamic banks are among issues that must be addressed if the industry is to reach a regulatory target of 15 percent of total banking assets, from under 10 percent now, the study said.
Pakistan is the world's second most populous Muslim nation and the study, based on a nationwide survey of 9,000 households and 1,000 companies, confirmed widespread consumer acceptance of the ban on interest payments which underpins Islamic finance.
But the study also showed customers' choice of bank was only partly driven by religious belief, with only 23 percent of respondents citing this as the main reason to use Islamic banks, behind customer statisfaction and quality of service.
The findings have policy implications and could influence the strategies of incumbent Islamic banks as well as a number of conventional banks which plan to expand into the sector.
The study found 74 percent of bank customers were willing in principle to switch to Islamic banking, but 69 percent said the lack of an Islamic bank in their area was the reason for not switching.
As of December, Islamic banks had a combined network of 1,304 branches across Pakistan, with half concentrated in the urban centres of Karachi, Lahore and Islamabad.
Meanwhile, over 83 percent of customers of all types of bank did not understand Islamic banking services; unbanked respondents were further behind.
Forty-seven percent of respondents did not see a difference between the terms "sharia-based" and "sharia-compliant", and some said such terms were confusing and should be avoided. Sharia-compliant banking merely obeys the industry's rules, while sharia-based business also follows Islamic principles such as an emphasis on transactions based on real economic activity rather than monetary speculation.
There was also a mismatch when it came to the types of financial products on offer. Islamic banking customers were more familiar with equity-based contracts, even though most products on offer are debt-based; a product known as murabaha accounts for 40 percent of all Islamic financing contracts in Pakistan.
Pakistan introduced Islamic banking in the 1970s but for most people, it remains a new phenomenon: two-thirds of Islamic banking clients have had such a relationship for fewer than three years.
Conventional banks want to retain clients and several plan to offer Islamic financial products, but in doing so they will have to ensure a clear segregation of the two businesses.
More than half of all bank customers and 64 percent of nonbanked respondents, however, said they would "never" become a client of a conventional bank offering Islamic services.
Close to 70 percent of all respondents said lenders should offer Islamic banking either by establishing separate companies, or by converting themselves into full-fledged Islamic banks.
More than half of the companies in the study said they would prefer to raise finance though Islamic products, although most were neutral when it came to using Islamic bonds.

The study, conducted by London-based Edbiz Consulting and financed by Britain's Department for International Development, recommended that the role of sharia scholars be enhanced and made more public to help promote the industry.
(Reuters / 13 October 2014)
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