Growth of Islamic Banking in Pakistan

download Growth of Islamic Banking in Pakistan

of 79

Transcript of Growth of Islamic Banking in Pakistan

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    1/79

    GROWTH OF ISLAMIC BANKING IN PAKISTANGROWTH OF ISLAMIC BANKING IN PAKISTAN

    Supervised by:Supervised by:

    DR.NAILA NAZIRDR.NAILA NAZIR

    Submitted by:AMJAD ULLAH (DAWAR)

    M.Sc Final Year

    DEPARTMENT OF ECONOMICSDEPARTMENT OF ECONOMICSUNIVERSITY OF PESHAWARUNIVERSITY OF PESHAWAR

    Session 2010-2011Session 2010-2011

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    2/79

    GROWTH OF ISLAMIC BANKING IN PAKISTANGROWTH OF ISLAMIC BANKING IN PAKISTAN

    The thesis is submitted to the Department ofEconomics University of Peshawar in thepartial fulfillment of the requirement for theAward of

    Master Degree in Economics

    Submitted by:AMJAD ULLAH (DAWAR)

    M.Sc Final Year

    Department of EconomicsDepartment of EconomicsUNIVERSITY OF PESHAWARUNIVERSITY OF PESHAWAR

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    3/79

    Session 2010-2011Session 2010-2011

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    4/79

    ============================

    It is Recommended That the Thesis Prepared by

    AMJAD

    GROWTH OF ISLAMIC BANKING IN PAKISTAN

    Be accepted as fulfilling this part of the requirement for the degree of

    Master of Science in Economics.

    Supervised By:Supervised By: __________________________________________________

    DR.Naila NazirDR.Naila NazirDeportment of EconomicsDeportment of Economics

    University of PeshawarUniversity of Peshawar

    Approved By:Approved By: ________________________________________________

    DR. NAEEM UR REHMAN

    Chairman,Department of EconomicsUniversity of Peshawar

    External Examiner: ________________________

    Department of EconomicsDepartment of EconomicsUNIVERSITY OF PESHAWARUNIVERSITY OF PESHAWAR

    Session 2010-2011Session 2010-2011

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    5/79

    IN THE NAME OF ALLAH THE MOST GRECIOUS AND MERCIFUL

    We are thankful to Allah who has given us the courage to complete the thesis. After

    ALLAH we thank our Parents who have supported us in the ups and downs of Life bySaying, When the going gets tough, the tough one gets going

    Finally we are thankful to our supervisor DR. NAILA NAZIR whose tremendous support

    has made us able to fulfill the requirements of our thesis.

    AMJAD ULLAH

    ABSTRACT

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    6/79

    The Banking system in economy works like the blood circulation system of aThe Banking system in economy works like the blood circulation system of a

    body. The basic concepts and objectives are common to any banking systembody. The basic concepts and objectives are common to any banking system

    whether it be Islamic or conventional banking. The difference lies in methodologywhether it be Islamic or conventional banking. The difference lies in methodology

    adopted to achieve these objectives.adopted to achieve these objectives.

    In this research study ,growth of Islamic banking ,efforts in the implementation ofIn this research study ,growth of Islamic banking ,efforts in the implementation of

    riba free Banking in Pakistan, performance of Islamic Banking, expansion ,riba free Banking in Pakistan, performance of Islamic Banking, expansion ,

    sectoral concentration, investment in Islamic banking, problems and issuessectoral concentration, investment in Islamic banking, problems and issues

    regarding Islamic banking and different factors that influence the growth ofregarding Islamic banking and different factors that influence the growth of

    Islamic banking has been thoroughly analyzed.Islamic banking has been thoroughly analyzed.

    All the data is arranged according to the data collected using different sources. TheAll the data is arranged according to the data collected using different sources. Thedata was collected from articles and journals, In-depth Interviews from generaldata was collected from articles and journals, In-depth Interviews from general

    public, depositors, and account holders as well as from the officials of differentpublic, depositors, and account holders as well as from the officials of different

    Islamic and conventional banks. In this regard a questionnaire was alsoIslamic and conventional banks. In this regard a questionnaire was also

    distributed, the total population size for questionnaire is 600 persons, i.e. 300distributed, the total population size for questionnaire is 600 persons, i.e. 300

    persons about Islamic banks and 300 persons about conventional banks in persons about Islamic banks and 300 persons about conventional banks in

    Peshawar, Dera Ismail Khan, and Bannu werePeshawar, Dera Ismail Khan, and Bannu were asked to express their views duringasked to express their views during

    this study.this study.

    The replies of the aboveThe replies of the above questionnairequestionnaire show that peoples in Pakistan expect thatshow that peoples in Pakistan expect that

    Islamic banks are more helpful for economic development, social balance andIslamic banks are more helpful for economic development, social balance and

    human prosperity.human prosperity.

    The main finding of the research is that there is a strong need for aThe main finding of the research is that there is a strong need for a riba-riba-freefree

    banking system. People perceive a number of emotional benefits from a productbanking system. People perceive a number of emotional benefits from a product

    that is based on the tenets of Islam. The objective is to alleviate the feeling of guiltthat is based on the tenets of Islam. The objective is to alleviate the feeling of guilt

    by following the tenets of Islam. There is also a belief that Islamic banking willby following the tenets of Islam. There is also a belief that Islamic banking will

    help fight the ills of the economy of the country.help fight the ills of the economy of the country.

    TABLE OF CONTENTSTABLE OF CONTENTS

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    7/79

    S. NOS. NO TITLETITLE PAGE#PAGE#

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    8/79

    i.i. AcknowledgementAcknowledgement ii

    ii.ii. AbstractAbstract iiii

    Chapte#1Chapte#1 INTRODUCTIONINTRODUCTION 11

    1.11.1 IntroductionIntroduction 11

    1.21.2

    Purpose of StudyPurpose of Study

    66

    1.31.3 Research ObjectivesResearch Objectives 77

    1.41.4 Limitation of the StudyLimitation of the Study 77

    1.51.5 Organization of the StudyOrganization of the Study 88

    Chapter#2Chapter#2 LITERATURE REVIEWLITERATURE REVIEW 99

    Chapter#3Chapter#3 RESEARCH METHODOLOGYRESEARCH METHODOLOGY 1616

    3.13.1 Research MethodologyResearch Methodology 1616

    3.23.2 Mode of ObservationsMode of Observations 1616

    3.33.3 Field Data CollectionField Data Collection 1717

    3.43.4 Sampleling DesignSampleling Design 1717

    3.43.4.1.1 Target Population SizeTarget Population Size 17173.43.4.2.2 Sample SizeSample Size 1717

    3.53.5 Data Collection MethodsData Collection Methods 1717

    3.5.13.5.1 Data collected sourcesData collected sources 1717

    Chapter#4Chapter#4 GROWTH AND PROBLEM OF ISLAMIC BANKINGGROWTH AND PROBLEM OF ISLAMIC BANKING 1818

    4.14.1 Growth of Islamic BankingGrowth of Islamic Banking 1818

    4.1.14.1.1 GrowthGrowth 1818

    4.1.24.1.2 Shariah Compliance DevelopmentShariah Compliance Development 20204.1.34.1.3 Shariah StandardsShariah Standards 2222

    4.1.44.1.4 Current Industry ReviewCurrent Industry Review 2222

    4.1.54.1.5 Industry Progress and Market ShareIndustry Progress and Market Share 2323

    4.1.64.1.6 Operating PerformanceOperating Performance 2626

    4.1.74.1.7 Outreach ExpansionOutreach Expansion 2828

    4.1.84.1.8 Asset QualityAsset Quality 3333

    4.1.94.1.9 Financing ProductsFinancing Products 3434

    4.1.104.1.10 Sectoral Concentration of FinancingSectoral Concentration of Financing 3636

    4.1.114.1.11 InvestmentsInvestments 3737

    4.1.124.1.12 Deposits MobilizationDeposits Mobilization 38384.1.134.1.13 Maturity ProfileMaturity Profile 4040

    4.1.144.1.14 ProspectsProspects 4141

    4.1.154.1.15 AgricultureAgriculture 4646

    4.24.2 Problems and IssuesProblems and Issues 4747

    4.2.14.2.1 Taxation IssuesTaxation Issues 4747

    4.2.24.2.2 Financial Reporting and Accounting StandardsFinancial Reporting and Accounting Standards 4848

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    9/79

    4.2.34.2.3 Islamic Export Refinancing SchemeIslamic Export Refinancing Scheme 4949

    4.2.44.2.4 Lack of ExpertiseLack of Expertise 5050

    4.2.54.2.5 Other InitiativesOther Initiatives 5050

    4.2.64.2.6 Network IssuesNetwork Issues 5151

    4.2.74.2.7 Lack of AwarenessLack of Awareness 5252

    Chapter#5Chapter#5 RESULT AND DISCUSSIONRESULT AND DISCUSSION 5454

    5.15.1 Customer PreferencesCustomer Preferences 5454

    5.25.2 Customer UnderstandsCustomer Understands 5656

    Chapter#5Chapter#5 MAIN FINDINGS AND CONCLUSIONSMAIN FINDINGS AND CONCLUSIONS 6060

    6.16.1 Main Findings And ConclusionsMain Findings And Conclusions 6060

    6.26.2 RecommendationRecommendation 6363

    QUESTIONNAIREQUESTIONNAIRE

    REFERENCESREFERENCES

    CHAPTER# 1

    1. INTRODUCTION

    1.1 INTRODUCTION:

    In any economy banks play very important role. A bank is a reliable financial

    institution, which has core business of mobilizing the savings of people for

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    10/79

    investment purposes. It receives the money from one group and lends to other

    group of people. So bank performs the duty of financial intermediary.

    Usually there are two types of banks, conventional banks and Islamic banks. Insimple words Islamic banks operate in interest free system. Prohibition of interest

    is ordained in Islam in all forms and intent. This Prohibition is strict, absolute and

    unambiguous.

    The Holy Qur'an in verse 278 of Surah Al-Baqarah states:

    "O ye who believe! Fear Allah and give up what remains of your demand for riba,

    if ye are indeed believers."

    Verse 2: 279 says:

    "If you do it not, take notice of war from Allah and His Messenger. But if ye turn

    back; ye shall have your capital sums. Deal not unjustly and you shall not be dealt

    with unjustly."

    It therefore, follows that interest is prohibited as it leads to injustices and Islam is

    against all forms of injustices and exploitations and pleads an economic system,

    which aims at securing extensive socio-economic justice1. The Islamic law of

    prohibition of riba, which includes interest, was originally not based on economic

    Theory but on Divine Authority which considers the charging of interest as an act

    of injustice.

    Islamic banks appeared on the world scene as active players two decades ago. Butmany of the principles on which Islamic banking is based have been commonly

    acceptable all over the world for centuries rather than decades, as it is evident that

    Islamic finance was practiced predominantly in the Muslim world throughout the

    middle Ages, promoting trade and business activities. In Spain and the

    1 (Source:1 (Source: Siddiqui, H. Asrar (1975) Practice and Law of Banking in Pakistan. International Institute of Islamic Economics (1999Siddiqui, H. Asrar (1975) Practice and Law of Banking in Pakistan. International Institute of Islamic Economics (1999

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    11/79

    Mediterranean and Baltic States, Islamic merchants became indispensable

    middlemen for trading activities. It is claimed that many concepts, techniques, and

    instruments of Islamic finance were later adopted by European financiers and

    business persons. "Although the western media frequently suggest that Islamicbanking in its present form is a recent phenomenon, in fact, the basic practices and

    principles date back to the early part of the seventh century"

    The main issue here is to know about the differences between operations of a

    conventional bank and an Islamic bank by focusing on the principles and

    instruments of Islamic banking.

    It is difficult to say with accuracy which was the first such company or bank that

    pioneered this concept of Islamic banking in practice. Some analysts and experts

    in the field are of the opinion that, Islamic banking and finance, in the modern

    context, first emerged in 1963, when Mit Ghamr Saving Bank began an

    experimental project offering interest free banking in Egypt. The project was a

    success and lead to the bank opening four new branches by 1967. In the same

    year, eight new banks mushroomed offering interest free banking. Due to the

    political climate prevailing in Egypt during that period, the success of these

    Islamic banks was seen as a threat, and they were forced to close down in 1971.2

    2. (Source: Islamic Banking Conceptual Framework and practical operation P.7 by Abdur Rahim Hamdi)

    As measure of the success of Islamic banks some traditional riba banks have

    started imitating these banks by opening Islamic windows or offering Islamic

    investment funds, unit trusts and or manage Islamic accounts for individuals.Among these banks are kilentwort boston ( unit trust ) credit swisse and first

    boston ( personal investment account ) UBS ( unit trust fund ) and the Austrian

    leaders bank ( unit trust ). Misr bank has Islamic branch. 3

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    12/79

    Some observers are of the opinion that the concept of an "Islamic bank" was born

    at the Islamic Summit of Lahore, Pakistan in 1974 which recommended the

    creation of an Islamic Development Bank. Since then Islamic banking and

    financial institutions have grown rapidly. A 1993 report from the InternationalAssociation of Islamic Banks estimated the then industry to be valued at $80

    billion. A more recent article appearing in the Wall Street Journal estimates the

    potential market for Islamic investments to be up to $150 billion.4

    Malaysia in 1983 passed an Islamic Banking Act to facilitate the growth

    Of indigenous Islamic banks and finance companies thus became the first Muslim

    economy to issue bonds on an Islamic basis. Since then, some 50-60 institutionshave been established, and are now in the process of forming an Islamic inter-bank

    market (i.e. in which banks borrow or lend to each other). Within 10 years of

    introducing the Islamic Banking Act, the Malaysian government has taken further

    steps to popularize Islamic banking and finance, by allowing conventional banks

    to offer Shariah-compliant instruments. The most distinctive feature of Islamic

    banking in Malaysia is that it is being embraced by its Chinese and non-Muslim

    Population who are opting to deposit their savings or borrow money on an Islamicbasis.

    3 Source: http://www .Islamic- finance.net

    4. (Source: www. Islamic - banking.com).

    The momentous decision of the Pakistani Supreme Court, in Ramadan 1420, to

    strike down all laws that condone interest and their orders to the Federal

    government to bring all existing financial organizations in line with Islamic

    principles is truly path breaking. The world is watching with bated breath to see

    how the whole economy faces this challenge.5

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    13/79

    These trends in Malaysia and elsewhere are having a profound effect on the

    banking and financial world as a whole. For example, America's Citibank was the

    first major conventional bank to establish an Islamic bank in Bahrain, with an

    operating capital of $20 million It may be a puny sum, but, it does suggest to somedegree that conventional banks have begun to embrace Islamic banking on a

    moderate scale. Here again the point arises, that, there is some difference between

    the operations of two banking systems and also there is something which is

    attracting conventional banks towards Islamic banking system.6

    A significant proportion of the banking system has been Islamized in Pakistan.

    Recently the state bank of Pakistan has allowed commercial banks to set up

    Islamic banking subsidiaries or provide full Islamic banking facilities through

    dedicated branches.7

    5. Source: www .alrajhibank.com.sa/Islamicebanks.htm

    6. Source: (The Economist, 1996).

    7. Source: Article on Islamic Banking, Finance & Economics by Maryam Ayaz Manager Business Development,

    Apvision (Private) Limited.

    Meezan Bank of Pakistan had conducted a research last year to ascertain, is

    Islamic banking really a need of the people 7 The main findings of the research

    were that there is a strong need for a riba-free banking system. People perceive a

    number of emotional benefits from a product that is based on the tenets of Islam.

    The objective is to alleviate the feeling of guilt by following the tenets of Islam.

    There is also a belief that Islamic banking will help fight the ills of the economy of

    the country.8

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    14/79

    A number of other Western financial institutions have followed suit by Offering

    Islamic mutual funds and other investment products. For example, ANZ Grind

    lays is now offering financial products that meet Islamic criteria. Germany's fourth

    largest bank, Commerz bank, started offering Islamic mutual funds fromDecember 1999. In February 1999, Dow Jones introduced the Dow Jones Islamic

    Market index (DJIM) of 600 companies worldwide that comply with the Shariah

    laws.

    Many Western Academic Institutions are introducing Islamic Economy and

    Banking as Subjects, like Harvard University Center for Middle Eastern Studies

    (CMES), Durham University, UK, Dow Jones University.etc.

    These indicators reflect the rising trend of Islamic banking and finance throughout

    the world. This encourages one to know in detail what Islamic banking is all

    about, what are its principles and how it is different from conventional banking

    system.

    8. Source: Meazan Bank annual report 2008-2009

    The Amana Fund, the LARIBA bank, in USA and the Halal investment Company

    in London is another indicator of the growing salience of Islamic banking

    institutions not just in Muslim countries, but in the West as well. These efforts in

    different countries for Islamic banking present not only an excellent working

    examples for those who did not believe in the practicality of the interest free

    banking but also provide a spade work over which the infrastructure of interest

    free banking for a country could be built up.

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    15/79

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    16/79

    To review the History and growth of Islamic Banking in Pakistan.

    To find out the different factors, how it affect the growth of Islamic

    banking.

    To review the problem of Islamic Banking in Pakistan.

    1.4 Limitation of the Study:

    The research is conducted within the following limitations:

    To keep the study manageable research is conducted on limited grounds.

    The study is conducted on small level and only the important aspects are

    considered.

    The researcher has tried to collect sufficient data to make an effective

    analysis.

    Therefore, in this study the results about Islamic banking should be taken only as

    indicative and perceptive rather than conclusive.

    1.5 Organization of the study:

    The whole study is classified into the following chapters

    Chapter 1st is about introduction, 2nd Chapter is about literature review,

    Chapter 3rd is about research methodology, chapter 4th is about growth and

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    17/79

    problems of Islamic Banking in Pakistan, Chapter 5th is about results and

    discussions and Chapter 6th contains main findings and conclusions.

    CHAPTER# 2

    LITERATURE REVIEW

    Kahf (2002) in his paper, interest free banking disagrees with the interest based

    banking yet interest free banks have the similar credit risk as by the conventional

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    18/79

    banks. Therefore Base I, II have suggested that the calculation of the minimum

    capital requirement should be the same as required by the conventional banks. The

    Islamic Banking is different in nature from traditional banking. This article first

    discusses the Islamic financial operations then analyzes the Islamic procedurewhich has been introduced in Pakistan since 1985. This article revealed that

    islamization has moderate effect on this sector because the banks adopted the

    system that is closely resembles to traditional system. Another reason is that they

    are state owned The Islamic banking has not been applied the fully procedures as

    described by the pillar II of the new Basel Accord. The application of the said

    proposals does not create barriers for the Islamic banking and finance.

    Ahmad & Hassan (2007) explained in their study in Bangladesh regarding

    regulations and performance Islamic banking. The most important finding of this

    research article is that there is lack of regulatory framework for its proper

    functioning according to Shariah. There is also lack of interbank money market

    which also affects the performance of the Islamic banking. The discrimination has

    also been observed regarding legal reserve requirements. The researcher suggested

    that in Bangladesh the independent banking act should be constituted to control,

    guide and supervise the operations and practices of the Islamic banking. So that

    the legal support to the stake holders may be provided.

    Naser & Shahin (2004) have also studied about problems, challenges and

    opportunities facing by the Islamic banking in United Kingdom. The data was

    collected from the senior officials of the banks. The main problem faced in the

    United Kingdom that is heterogeneous and potential clients. Furthermore the lack

    of expert staff and competition from the conventional banks also faced in United

    Kingdom. It has been concluded that the e-banking can play pivotal role for the

    success of Islamic banking. There is need to sit together to the UK officials and

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    19/79

    Islamic banking representatives to discuss the challenges of the Islamic Banking.

    There is need to recruit professional individuals who have the know how about the

    Islamic banking. It is contended that the perceptions of senior. So that such

    problems may be resolved by using such strategy.

    Abdullah (2007) found that Malaysia is the first country who played the vital roll

    in Islamic banking. It also introduced the dual banking as well as pure Islamic

    banking. In this article an innovation has been brought out that is hire purchase

    and also known as alijara WA iqtana. The Islamic banking is going very

    successful but there is still need to bring changes by the policy makers. To make

    strengthen the Islamic banking transactions there is need to develop strong legal

    framework. There is also needed to make strong both the operational regularity

    and substantive laws to resolve problems relating to Islamic banking.

    The shariah should be analyzed to make new innovations instead to impose

    restrictions. There is need to explore the potential and wisdom of Shariah. There is

    immense need of cooperation is required to make collaboration among Shariah

    scholars, researchers, academicians and researchers to conduct the study in depth

    to make strong Islamic products. The government and other agencies should also

    make efforts for the new avenue of Islamic banking and hire purchase. The most

    important is that the government should remove the uncertainty regarding Islamic

    hire purchase.

    Garas (2007) explained in his book that Globalization has affected our life

    politically, economically and financially. There are both aspects in this

    globalization. The positive aspect is that there is the movement of human capital

    and new technology among countries. On the other side of the coin the

    government is unable to control the flow of capital. The oil prices flourished the

    investment in GCC countries and also encouraged the Islamic finance .There is no

    doubt that Islamic financial institutions having potential for growth but still there

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    20/79

    are certain challenges. There are two types of these challenges internal and

    external. Internal challenges include that the customers still rely on the

    conventional banking system and the numbers of the current IFIs are not enough

    to meet the requirements to international transactions. Furthermore the transactionsystem is still premature to attract new clients. There is also lack of unified

    regulatory system for the products and transactions.

    Iqbal and Khan (1998) said in their book that the global growth of Islamic

    banking is taking advantages of its uniqueness to meet the challenges of growth

    though the status of the Islamic banking is growing rapidly. But still the

    institutional arrangement is necessary to take part in the global economy. The

    Shariah compatibility should be judged by qualified Shariah scholar because for

    any medical problem the person will consult with the medical specialist to get best

    solution. Thats why the solution of the problem in Shariah, it can be taken from

    the qualified Sharia scholar to get the exact decision. This way a good institutional

    structure may be developed. I believe it may be the right time to start simply with

    an international association of shariah scholars for the finance industry.

    Hameed and Basheer (2003) have conducted an analysis about the financial

    record of seven banks in Malaysia and Bahrain. The purpose of this article was to

    analyze the Islamic financial products viability to interest based contracts. It

    analyzes that Islamic banks pay Zakat and finance economic activities according

    to Shariah. However it concludes that there is need to make legal frame work so

    that the Islamic financial products may regulate in the Islamic financial market

    Samad, A. Gardner, D. & Cook, J.B. Another article has been written in which the

    author determine the determinants of the Islamic Bank Profitability. This article

    demonstrates that all sources of funds are correlated with the profitability. It has

    also been observed that inflation and interest rate also affect the Islamic financial

    products. This study found that there was no significant variation in earning

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    21/79

    between Islamic banks in competitive and monopolistic market. However there

    was strong evidence that benefit of the investors has been observed in

    monopolistic market. The study demonstrated that banks performed well in

    competitive market then their counterpart. Therefore protectionism policy adoptedby the Muslim governments is inappropriate and could distort future progress of

    Islamic Banking. In the end it has been recommended that establishment of more

    banks will make it more viable and efficient.

    Stefflar and Cornilisse (1995) said in their book that, the process of privatization

    of banks has not been connected with the Islamization. Islamic banks have brought

    no change regarding stability of the banks. The performance of the Islamic banks

    is not up to the mark. Then theoretical comparison has been given of Islamic

    banks and conventional banks. In the end of the article the author concludes that

    the effect of Islamization is greater but less effective.

    Amad and Kahf said that the Islamic banking have discovered Islamic

    economics. Islamic banking is a system which really follows the Shariah rules and

    regulations and Islamic economic system also abide by the Shariah. In 1950 to

    1960 a study was conducted in Egypt and Malaysia regarding interest free

    banking. But this study did not put any face value for Islamic banking. The first

    Islamic bank was established in 1994 in Dubai and international Islamic Banks

    was established in 1976 and now it has 53 member countries. Now a days Islamic

    bank has been established almost in all the countries around the globe. Some

    institutes have been established in America even small in numbers bit they are

    using Islamic financing. The purpose is to create strategic alliance between Ulama

    and Bankers. Further to develop Banking techniques by this Alliance.

    Today Islamic banking is really in immense need of rethinking to compete in this

    rapidly growing world. There is also need to redefine the structure for success in

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    22/79

    future. The Islamic banking has really been appreciated by the conventional

    banking and it also finding ways to become main stream banking. The Islamic

    banks should enhance their efficiency to cope up new projects. Merger of the

    Islamic banks is compulsory for the survival in this era. There is need to increasethe size, capital and should create ability to create assets.

    Haron (2004) Identified the determinants of the profitability are more important

    for the researches. In past decades the researchers has been found determinants for

    the profitability. But all previous study has been conducted for the conventional

    banks. The Islamic banks are still waiting for such kind of study. The Kahf has

    been conducted study about the determinants of profitability of Islamic banking.

    The researcher has been identified the internal and external determinants of the

    profitability of the Islamic Banking. The money supply also plays an important

    role for the profitability of the Islamic banks.

    Zubair and Hassan (2007) defined that the rapid growth with the Islamic

    financial institutions especially banks, assessment of their performance have also

    flourished. The performance should be evaluated with reference to social

    responsibility and legal frame work. This article tells us that Islamic banking is not

    out of fault. Some ratio analysis has been conducted two views the performance of

    the Islamic banks. Traditional banking has also been compared with the ratios of

    current Islamic banking.

    Iqbal (1998) used empirical data for empirical study which has been conducted in

    1990-1998 on Islamic Banking. The analysis in this article revealed that the

    growth of this banking is slow but it is not matter of worry because at the initial

    stage the growth of the institutions is seen slow and when the industry matures

    then it starts goes to up. This study revealed that there was no mobilization of

    funds because the Muslim community does not involve in interest based system.

    Consequently they keep their savings in personal lockers rather than in a bank.

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    23/79

    After that in coming days the Islamic financial institutions attracted these savings

    and deposit growth of these institutions increased. After that some conventional

    banks started to officer the Islamic products. In nineties the Islamic mutual funds

    were also developed and some deposits also converted to that side. Theperformance of the Islamic banks considered quite good and Islamic banks found

    good capitalize, stable and profitable.

    The profitability ratio of these banks is considered reasonable according to

    international standard. But the current rates on assets of these banks do not

    considered good. However some variations have been observed in Islamic banks

    in terms of growth and performance. Another paper concludes that there is no any

    sort of difference in Islamic & conventional banks with respect to profitability and

    liquidity. However the study finds significant difference in credit performance.

    The conventional banking is existed in the whole world. But innovation is the core

    key to survive for the long run. Islamic banking has introduced by following this

    notion. Interest free banking is in the initial stage therefore facing some

    challenges. The regulatory frame work of interest free banking is poor and proper

    interbank money market is not available. The Basal II suggested that Islamic

    banking has the same risk like interest based banking therefore it is suggested that

    calculation of capital is required as desired by interest based banking. In this

    growing world there is need to rethink that how can efficiency of this banking be

    improved. The growth of this banking is bit slowly but there is no need to get

    worry because growth is found slow at infancy stage. In this paper the attempt has

    been made that how the Islamic banking working in Pakistan.

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    24/79

    CHAPTER#3

    RESEARCH METHODOLOGY

    3.1 Research Methodologies:

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    25/79

    This study would explore & review the research done on Islamic banking by

    different researchers and scholars. This research work used data collection direct

    from the financial Statements of the banks, both Islamic and conventional and also

    from the reports of State Bank of Pakistan; another source is direct from thecustomer of the both kinds of banks, documents researches and interviews of the

    relevant authorities. Fieldwork was conducted during the months of December and

    January of year 2010-2011. Although all replies were collected in personnel at the

    allocated areas, the primary data collection applied obtaining the information from

    peoples through filling of questionnaires, observation, and interview methods.

    3.2 Mode of Observations

    In-depth structured interviews have been selected for banking officials and

    questionnaire for observational tools to gather primary data in the form of

    feedback from general public or account holders. Secondary data has been

    collected from State Bank of Pakistan (SBP) and different sources that are

    manipulated later. The logic for using this questionnaire is to insight into the

    growth potential and future prospects of Islamic banking through identifying the

    perception of general public regarding Islamic banking.

    3.3 Field Data Collection

    The data was collected from general public of different Islamic and conventional

    banks and from different Islamic baking officials. The questionnaire was

    distributed, was filled out and was received on same day. During the process when

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    26/79

    they were filling the questionnaire I stay there in order to over come any difficulty

    faced by the respondent in filling out questionnaire.

    3.4 SAMPLELING DESIGN

    3.4.1 TARGET POPULATION SIZE:

    The total population sizes for questionnaire 300 persons at Islamic banks and at

    300 conventional banks in Peshawar, Dera Ismail Khan, and Bannu were asked to

    express their views during this study.

    3.4.2 SAMPLE SIZE:

    The sample size for this study would be 600.

    3.5 Data Collection Methods

    3.5.1 Data collected sources:

    from articles and journals

    from Economics Books

    by Questionnaires

    by In-depth Interviews

    by Internet

    CHAPTER#4

    GROWTH AND PROBLEM OF ISLAMIC BANKING

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    27/79

    4.1 GROWTH OF ISLAMIC BANKING:

    4.1.1 Growth:

    Islam was the basis of creation of an independent state within the undivided Indo-

    Pak Sub- Continent. All Constitutions of Pakistan have incorporated, within the

    Principles of policy, the elimination of Riba as an important objective of the State

    Policy. Quaid-e-Azam, the father of the nation, in his speech at the occasion of the

    Inauguration of State Bank of Pakistan, had expressed the desire for evolving an

    Islamic system of banking. 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

    early 1980s. It was a very bold and comprehensive exercise. Pakistan was among

    the three countries in the world that had been trying to implement interest free

    banking at comprehensive / national level.

    Numerous measures were taken to introduce interest free banking in Pakistan.Banking and other relevant laws viz. State Bank of Pakistan (SBP) Act,

    Companies Ordinance, recovery laws, negotiable instruments act, etc. were

    amended to Facilitate interest free banking system and the industry was given a

    specific Timeline to convert to the Islamic banking system.

    State Bank Pakistan also gave the industry the products which it was allowed to

    use without any change or exception. Islamic banking was rolled out country-

    wide. New regulations were prepared prescribing the modes of financing, profit

    distribution mechanism for deposits, financing facilities by State Bank of Pakistan,

    (SBP) etc. which constituted ground work for Islamization of financial system.

    The mid-80s attempt was a significant step in the evolution of Islamic banking

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    28/79

    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.

    The efforts and practical steps undertaken in the 1980s to Islamize the economy

    at national level are considered As pioneering work in the Muslim world as thisbecame important reference Material for other countries which undertook the path

    towards introduction and establishment of an Islamic banking system. In early 90s

    the whole exercise was challenged in the Federal Shariat Court and the procedure

    adopted by banks in Pakistan since July 1, 1985 was declared un-Islamic by the

    Federal Shariat Court (FSC) in November 1991. The system was based largely on

    mark-up technique with or without buy-back arrangement. The Federal Shariat

    Court (FSC) declared that various provisions of the laws held repugnant to the

    injunctions of Islam in its Judgment dated November 14, 1991 would cease to

    have effect as from July 1, 1992.

    In a meeting held on September 4, 2001 under the Chairmanship of the President

    of Pakistan, attended by officials of the Ministries of Finance and Law, Governor

    State Bank of Pakistan, Chairman and some members of the Council of Islamic

    Ideology and the Chairmen, and the two Task Forces it was decided that the shift

    to interest free economy would be made in a gradual and phased manner and

    without causing any disruptions. It was also agreed that State Bank of Pakistan

    would offer three institutional options.

    1) Setting up subsidiaries by the commercial banks for the purpose of Conducting

    Shariah compliant transactions;

    2) Specifying branches by the commercial banks exclusively dealing in Islamic

    Products with all safeguards to ensure integrity and purity of Islamic banking

    operations,

    3) Setting up a new full-fledged commercial bank to carry out exclusively

    banking business based on proposed Islamic products.

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    29/79

    As a result of these efforts, in 2001, an Islamic Banking Division was established

    in the Banking Policy Department at Sate Bank of Pakistan (SBP). This time

    around, concerted efforts were made by Sate Bank of Pakistan (SBP) to undertakeIslamic Banking in its true spirit and also keeping in view the lessons learnt from

    the experience of Bahrain, Malaysia and Saudi Arabia etc. in this area.

    Accordingly, steps have been taken to set up a parallel banking system, so that an

    enabling environment is ensured for the sector, avoiding any serious repercussions

    of entire transformation of financial sector.

    4.1.2 Shariah Compliance Developments:

    The present re-launch of Islamic Banking in Pakistan by the State Bank of

    Pakistan has been based not only on the lessons learnt from the history of Islamic

    Banking efforts in Pakistan but also on the experiences of other countries in the

    world that are currently known for their leadership role in this banking sector. The

    basic difference, in Sate Bank of Pakistan (SBPS) current policies regarding

    Islamic banking and the previous efforts, is the approach adopted Islamic Bank of

    Pakistan (SBPS) by wherein the introduction of Islamic Banking is being viewed

    more as a change management issue rather than as a religious or a legal issue.

    This basic difference in approach defines the policies on Islamic Banking and is

    primarily responsible for the success achieved so far. It was 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 pronouncement 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 this approach is also helping build a broad based

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    30/79

    financial system in the country to enable all segments of the population to access

    financial services.

    Shariah compliance is the most important aspect of Islamic finance. TheCredibility of Islamic Banking Institutions (IBIs) not only depends on the financial

    health of the institution but also on its adherence to the Shariah.

    Under the current strategy for promotion and development of Islamic Banking as a

    parallel, viable and compatible system, State Bank of Pakistan has put in place a

    comprehensive Shariah Compliance Structure.

    The Shariah Compliance Framework established by State Bank of Pakistan

    consists of:

    1. Shariah Board at Sate Bank of Pakistan

    2. Shariah Advisor

    3. Essentials & Model Agreements of Islamic Modes of Financing

    Instructions and Guidelines for Shariah Compliance in Islamic

    Banking Institutions

    4. Shariah Advisors Forum

    5. Shariah Compliance Inspection

    6. Standardization of Shariah Practices- Adoption of AAOIFI

    (Accounting and Auditing Organization for Islamic Financial Institutions)

    4.1.3 Shariah Standards:

    Each Islamic Banking Institution (IBI) is required to work under the guidance of a

    Shariah advisor. To keep this process more objective, broad based and responsive

    to the market conditions Sate Bank of Pakistan (SBP). Shariah Board has

    approved Fit & Proper Criteria for Shariah advisors of Islamic Banking

    Institutions (IBIs). According to these Criteria, minimum required Shariah and

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    31/79

    contemporary educational qualification as well as experience and Exposure for

    becoming a Shariah Advisor has been defined. Moreover, to minimize conflict of

    interest, it has been specified that a person cannot work as Shariah Advisor for

    more than one Islamic Banking Institution (IBI) in Pakistan. Further, it has beenspecified that a Shariah Advisor shall not hold any executive/non-executive

    position in any other financial institution, except working as Shariah Advisor of

    Islamic mutual funds of the sameIslamic Banking Institution (IBI). In addition to

    that, Shariah Advisors of Islamic Banking Institution (IBIs) have been barred from

    having any substantial interest in or becoming employee of some types of

    organizations like exchange Companies, corporate brokerage houses or stock

    exchange.

    These provisions in Fit and Proper Criteria for Shariah Advisors has ensured

    Objectivity in evaluation criteria, minimization in conflict of interest and

    Induction of new lot of Shariah advisors in the market.

    4.1.4 Current Industry Review:

    This time there has been a shift in the approach from the legal & regulatory

    perspective to that of dealing with the whole affair of introducing Islamic banking

    in Pakistan as a change management issue. As compared to our past experience

    our new approach provides flexibility to the Islamic Banking Institution (IBIs) as

    regard to products, instruments and Shariah compliance methodology. This new

    initiative has witnessed a very encouraging response. As at end of the year 2003

    only one bank operated as a full-fledged Islamic bank and three conventional

    banks were operating Islamic banking branches. Currently there are 6 full fledged

    licensed Islamic banks (IBs) and 12 conventional banks have licenses to operate

    dedicated Islamic banking branches (IBBs). All of the five big banks in Pakistan

    are providing Islamic banking services.

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    32/79

    4.1.5 Industry Progress and Market Share:

    Islamic banking maintained its high growth trajectory during quarter Apr-Jun

    2010. The total assets of Islamic banking institutions (IBIs) increased to Rs 411

    billion in June 2010 from Rs 313 billion in June 2009, showing an impressive

    growth of 31%. The deposits spearheaded the growth with 39% increase during

    the year. The investment and financing however did not show the same pace of

    momentum and have shown comparatively tenuous growth at 21% which is

    indicative of the difficulties being faced by Islamic Banking Institution (IBIs) in

    assets acquisition.1

    1 Source: SBP Data

    Figure 4.1 Shares and Growth of Islamic Banking

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    33/79

    Source: Annual Accounts except for June 2010, data for which is based on Unaudited Quarterly Accounts.

    The assets, deposits and net investment & financing have posted growth rates of

    31, 39 and 21 percent, respectively. The high growth in various components of

    Islamic banks balance sheet has enabled the Islamic Banks to make further inroads

    in the overall banking industry in Pakistan; the shares of assets, deposits and

    investment & financing increased to 6.1, 6.4 and 4.6 percent respectively during

    the quarter ended June 2010. The branch network increased to 667 branches from

    651 in December 2009.

    Table 4.1: Industry Progress and market share

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    34/79

    Rupees in billion and shares and growth in Percent

    June.10 Dec.09 Dec.0

    8

    June. 07 Dec.0

    6

    Dec.05 June.04 Dec.03

    Total Assets

    Share in industry

    Growth (YoY)

    411

    6.1

    31.3

    366

    5.6

    32.7

    276

    4.9

    34

    206

    4

    73.1

    119

    2.8

    65.3

    71

    2

    63.6

    44

    1.5

    238.5

    13

    0.5

    Deposits

    Share in industry

    Growth (YoY)

    330

    6.4

    38.6

    283

    5.9

    39.9

    202

    4.8

    37.4

    147

    3.8

    75

    84

    2.6

    68

    50

    1.8

    66.7

    30

    1.3

    275

    8

    0.4

    Net Financing & Investment

    Share in industry

    Growth (YoY)

    23.5

    4.6

    21.2

    226

    4.5

    21.3

    235

    4.6

    21.2

    138

    3.5

    89

    73

    2.3

    52.1

    48

    1.7

    60

    30

    1.3

    200

    10

    0.5

    Total Islamic Banking

    Institutions 19 19 18 18 16 11 11 4

    Total No. 0f Branches 667 651 515 289 150 70 48 17

    Source: Annual Accounts except for June 2010, data for which is based on Unaudited Quarterly Accounts.

    Growth ratio may slow down marginally largely due to continuously rising base.

    The Islamic Banking Institution (IBIs) are flush with liquidity since last couple of

    years due to continued growth in deposits coupled with the dearth of liquidity

    management instruments. The excessive liquidity in Islamic Banking Institution(IBIs) could also be partly attributed to the cautious approach of Islamic Banking

    Institution (IBIs) in assets acquisition. The prime target market of Islamic Banking

    Institution (IBIs) has usually been the big conglomerates and Multinational

    Corporation (MNCs). This in turn enables them to maintain a sound quality of

    their financial and investment portfolio. However this squeezes the profit margins

    of Islamic Banking Institution (IBIs) as due to the peculiar nature of their

    clientele, clients are able to solicit credit on their own terms. Moreover this also

    leaves the Small and medium enterprises (SMEs) and startup business ventures

    devoid of Islamic financial services. the Islamic Banking Institution (IBIs) have

    fared relatively well during and post 2008 global financial markets crises; however

    the recent floodsworst in the history of Pakistanare likely to adversely affect

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    35/79

    asset quality of banks including Islamic Banking Institution (IBIs.) Consequently,

    the performance of the banking system including Islamic Banking Institution

    (IBIs) during the coming few quarters may remain under stress.

    4.1.6 Operating Performance:

    The operating performance of Islamic Banking Institution (IBIs) remained weaker

    than the banking system. The based on Return on Assets (ROA) and Return on

    Equity (ROE) of Islamic Banking Institution (IBIs) at 0.8% & 6.9% was relatively

    lower than the industry average of 1.1% and 10.6%, the Return on Assets (ROE)

    though improved to 6.9 % in June 2010 compared to 6.0 % in June 2009. The

    major source of Islamic Banking Institution (IBI) income, at around 80 %, is

    mark-up income compared to around 70 percent for the conventional banks, which

    is indicative of low diversification of Islamic Banking Institution (IBIs) sources of

    Income compared to the conventional banks.

    Table 4.2 Performance Indicators

    June.10 Mar. 09 Jan.08 Industry

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    36/79

    Capital

    Capital to Total Assets

    (Capital- Net NPAs) to Total Assets

    7.0%

    12.4%

    11.4%

    9.6%

    10.4

    9.2

    9.9

    8.2

    Assets Quality Ratio

    NPFs to Financing

    Net NPFs to Net Financing

    Provisions to NPFs

    Net NPAs to Total Capital

    Real estate financing to Total Financing

    FCY Denominated Financing to Capital

    5.0%

    2.4%

    54.4%

    11.6%

    10.8%

    11.1%

    7.3%

    3.8%

    50.0%

    15.8%

    11.3%

    5.8%

    6.5

    2.8

    58.8

    11.5

    10.8

    9.6

    12.9

    3.8

    73.2

    17.2

    2.3

    16.1

    Earnings and Profitability

    Net Income to Total Assets (ROA)

    Return on Equity (ROE)

    Net Interest Income to Gross Income

    Non- Interest Income to Gross Income

    Trading & Fx Gains (Losses) to Gross

    Income

    Operating Expense to Operating Expense

    Spread Between Financing & Deposit Rate

    0.8%

    6.0%

    82.0%

    18.0%

    6.1%

    65.1%

    29.7%

    7.1%

    0.8%

    7.0%

    81.1%

    18.9%

    7.0%

    70.2%

    32.2%

    7.7%

    0.8

    6.9

    80.7

    19.3

    8.0

    71.8

    32.1

    7.7

    1.1

    10.8

    74.7

    25.3

    7.8

    52.6

    36.7

    6.9

    Liquidity

    Liquid Asset to Total Assets

    Liquid Asset to Deposits

    Avg. Matunity of Liabilities (Days)

    Avg. Matunity of Assets (Days)

    24.8%

    32.6%

    308.25%

    708.43%

    26.8%

    34.5%

    387.6%1

    638.72%

    25.8

    32.2

    383.55

    595.73

    34.2

    45.3

    417

    594

    Source: Annual Accounts except for June 2010, data for which is based on Unaudited Quarterly Accounts.

    The operating expense to gross income ratio of Islamic Banking Institution (IBIs)

    is also much higher than the industry. Specifically, expense to gross income ratio

    of Islamic Banking Institution (IBIs) is 71.8 % compared to 52.8 % of the

    industry. The high level of operating expenses are however advisable to their

    expansion drive rather than inefficiency. The Islamic Banking Institution (IBIs)

    branch network more than doubled during last two years; the branches opened

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    37/79

    particularly during last one years would be achieving break evens during next 2-3

    quarters, thus enabling the Islamic Banking Institution (IBIs) to improve their

    expense to income ratios. Interestingly personnel expenses of Islamic Banking

    Institution (IBIs) are lower than the industry median (though 7 it has graduallyincreased in last few quarters), which may be indicative of relatively weaker

    quality of human resource of Islamic Banking Institution (IBI).

    The spread (based on actual yield on the financing less deposits) is relatively

    higher for Islamic Banking Institution (IBIs) at 7.7 percent compared to the

    industry average of 6.9 percent as at end-June 2010. The higher spread of Islamic

    Banking Institution (IBIs) is largely coming from a lower level of (NPFs)

    compared with their conventional counterparts. The relative better assets quality

    enabled them to earn better yield on their financing portfolio than the industry as a

    whole. Nonetheless, higher spread remains an area of concern as it reflects sub-

    optimal returns to the deposits, both for Islamic Banking Institution (IBIs) and

    conventional banks.

    4.1.7 Outreach Expansion:

    The branch network of Islamic Banking Institution (IBIs) has increased to 667

    branches by end-June 2010. With addition of 210 and 143 branches in 2008 and

    2009, an increase of 29 branches in during Jan-Jun 2010 does not seem very

    impressive. The slowdown in branch expansion is reflected in both the full-fledged

    Islamic banks (IBs) and Islamic banking branches of conventional banks (IBBs).

    The slowdown is attributable to fast pace expansion of branch network during last

    two years with current focus on making the branches fully operational. Further, the

    growth in branch network during next 1-2 years would largely be emanating from

    conventional banks having Islamic banking branches (IBBs) both through

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    38/79

    conversion of existing conventional branches into Islamic Banking Branches

    (IBBs) and new Islamic Banking Branches (IBBs).

    The Islamic Banking (IBs) accounts for 416 branches and Islamic bankingbranches (IBBs) accounts for 183 branches while the rest 68 are sub branches of

    both Islamic Banking (IBs) and Islamic banking branches (IBBs). The

    geographical coverage of Islamic banking extends across the four provinces, Azad

    Kashmir, Northern areas and Federal capital covering 84 cities. The province-wise

    data reveals that Sindh, Punjab, Balochistan, Khyber-Pakhtunkhwa and Azad

    Kashmir accounts for 223, 297, 73, 34, and 7 branches respectively, while the rest

    32 branches are in the Federal Capital.653 branches are in the banked areas whileonly 14 branches which represent a minuscule 2.3 percent are in the unbanked

    areas.

    The Islamic Banking Institutions (IBIs) branch network is however largely

    concentrated in big cities and banked areas. The need is for Islamic Banking

    Institution (IBIs) to focus more on the unbaked and rural areas so that a larger

    populace can access Islamic banking at their doorsteps. The conventional banks

    having Islamic banking branches are in an advantageous position to convert their

    existing conventional branches in these areas into Islamic banking branches.

    Table 4.3 Islamic Banking Branch Network

    Type

    Islamic Banking

    Name of Bank No of Branches

    Al Baraka Islamic Bank 29

    BankIslami Pakistan Limited 70

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    39/79

    Dawood Islamic Bank Limited 42

    Dubi Islamic Bank Pakistan Limited 36

    Emirates Global Islamic Bank Limited 58

    Meezan Bank Limited 181Sub Total 416

    Islamic Branches of Conventional Banks

    Askari Bank Limited 29

    Bank Alfalah Ltd 06

    Bank Al Habib 60

    Faysal Bank Limited 10

    Habib Bank Limited 11

    Habib Metropolitan bank 04

    MCB Bank Limited 11

    National Bank of Pakistan 08

    Soneri Bank Limited 06

    Standard Chartered Bank 11

    The Bank of Khyber 19

    The royal Bank of Scotland 03

    United Bank Limited 05Sub Total 183

    Sub BranchesAskari Bank Limited 02

    Banklslami Pakistan Limited 32

    Dawood Islamic Bank Limited 08Emirates Global Islamic Bank Limited 02

    Meez Bank Limited 21The bank of Khyber 03

    Sub Total 68

    Grand Total 667Source: Banking Policy & Regulations Department, State Bank of Pakistan.

    Table 4.4 Province wise Break-up of Islamic Banking Branch Network

    Type Islamic Banking

    Type Islamic Branches of Conventional Banks

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    40/79

    The Bank of Khyber 2 12 3 2 19

    The Royal Bank of Scotland 1 2 3United Bank Limited 1 3 1 5

    Faysal Bank Limited 1 2 4 3 10

    SAIBBs Total 2 8 32 83 47 183

    Type Sub Branches

    Source: Banking Policy & Regulations Department, State Bank of Pakistan

    Table 4.5 City wise Break-up of Islamic Banking Branch NetworkS.No Cities No of Branches S.No Cities No of Branches

    Bank Name AzadKashmir

    Bolochistan FederalCapital

    KP NorthernAreas

    Punjab Sindh Grand Tota

    Albaraka Islamic Bank 1 2 3 15 8 29

    Banklsiami Pakistan Ltd 1 8 2 5 1 30 23 70

    Dawood Islamic Bank Ltd 1 2 1 18 20 42

    Dubai Islamic bank Pakistan Ltd 3 2 4 16 11 36

    Emirates Goble Islamic Bank Ltd 3 2 6 27 20 58

    Meezan Bank Limited 2 4 9 17 84 65 181

    IB.Total 4 19 19 36 1 190 147 416

    Bank Name AzadKashmir

    Bolochistn FederalCapital

    KP NorthernAreas

    Punjab Sindh GrandTotal

    Askari Bank Limited 2 1 5 14 7 29

    Bank AL Habib Ltd 1 1 2 2 6

    Bank Alfalah Ltd 1 3 3 39 14 60

    Habib Bank Ltd 1 1 2 4 3 11Habib Metropolitan Bank Ltd 1 3 4

    MCB Bank Limited 1 1 1 5 3 11

    National Bank of Pakistan 2 1 3 2 8

    Soneri Bank Ltd 1 1 1 1 2 6

    Standard Chartered Bank Pak 1 1 3 3 3 11

    Askari Bank Limited 1 1 2

    BankIslami Pakistan Ltd 1 3 3 2 9 14 32

    Dawood Islamic Bank Ltd 3 5 8

    Emirates Global Islamic Bank 1 1 2

    Meezan Bank Limited 1 2 11 7 21

    The Bank of Khyber 1 1 1 3

    Sub Branches Total 1 5 5 24 29 68

    Grand Total 7 34 32 73 1 297 223 667

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    41/79

    12345

    67891011121314151617181920

    212223242526272829303132333435

    363738

    394041424344454647484950

    PunjabArifwalaAttockBahawalpurChahwalDaska

    Dera Ghazi KhanFaisalabadGojraGujar KhanGujranwalaGujratHafizabadJaranwalaJhangJhelumKamokiKasurKhanewalKhushabLahore

    Mandi BahauddinMain ChannuMainwaliMultanOkaraPakpattanPindi GhaibRahim Yar KhanRawalpindiSadiqabadSahiwalSargodheSheikhupuraSialkotTexila

    Taba Tex SinghVehariWah Cantt

    SindhBadinHyderabadKarachiLarkanaMatiariMirpur Khas

    NawabashahSakarandSanghar

    SukkurTando AdamTando Allahyar

    14321

    2271110922341214113

    121242116312363131

    142

    117185113412512

    5152535455

    565758596061626364656667

    68697071727374757677

    78

    79

    8081

    Khyber PakhtunkhwaAbottadadBannuBatkhelaCharsaddaChitral

    Dera Ismail KhanHangedHaripurKohtManshraMardanMingora

    NowsheraPeshawarSwabiTankTimergara

    Balochistan

    ChamanGawadarHub ChowkiKuchlackLoralaiMuslim BaghPishinQilla SaifullahQuettaZhob

    Federal CapitalIslambad

    Northern AreasGiligit

    Azad KashmirMirpur AJKMuzaffarabad

    111111

    3132651329211

    11113111221

    32

    1

    43

    Pujab TotalSindh TotalKP TotalBalochistan TotalFederal Capital Total

    Northern Areas TotalAzad Kashmir Total

    297223733432

    17

    Grand Total 667Source: Banking Policy & Regulations Department, State Bank of Pakistan

    4.1.8 Asset Quality:

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    42/79

    During the quarter Apr-Jun 2010 the non-performing financing has increased

    substantially Year over Year (YoY) basis, however there is a decrease of around

    10 percent on Quarter on Quarter (QoQ) basis. The net non-performing financingshows similar Year over Year (YoY) and Quarter on Quarter (QoQ) trends.

    Table 4.6 Non- performing Financing & Assets

    Rupees in million

    Growth

    Jun-09 Mar-10 jun-10 YoY QoQ

    NPF

    Provision

    Net NPF

    NPA

    Net NPAs

    1,803.2

    788.7

    1,014.4

    1,953.2

    1,030.9

    11,871.3

    5,935.7

    5,935.6

    13.628.6

    6,659.8

    10,649.9

    6,261.8

    4,388.1

    12,454.4

    4,921.1

    490.6

    693.9

    332.6

    537.7

    377.4

    -10.3

    5.5

    -26.1

    -8.6

    -26.1Source: Annual Accounts except for June 2010, data for which is based on Unaudited Quarterly Accounts

    The Non-performing asset (NPAs) and net Non-performing asset (NPAs) also

    have similar inclining trends. However, on a positive note the recovery has

    improved substantially both on Year over Year (YoY) and Quarter on Quarter

    (QoQ) basis. The slowdown in (NPF) and Non-performing asset (NPA) coupled

    with better recovery derive reflects positively on asset management of the IBIs.

    The infection ratio, net infection ratio, and Non-performing asset (NPA) to capital

    ratio, of Islamic Banking Institution (IBI) are better than the industry at end-June

    2010. The assets infection as depicted by (NPFs) to financing ratio at 6.5% is

    almost the half of the industry average which stood at 12.9%. The net Non-

    performing asset (NPFs) to net financing ratio at 2.8% is also much better than the

    industry average of 3.8%. Similarly the net Non-performing asset (NPAs) to

    Capital ratio of Islamic Banking Institutions (IBIs) at 11.5% is also better than the

    industry average of 17.2%. The improved asset quality of Islamic Banking

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    43/79

    Institutions (IBIs) can be evidenced from rapid fall in infection ratio both on gross

    and net basis while there is an increase in provisions against (NPFs). The only

    concern seems to be an increase of 4.7 percentages in foreign currency exposures

    as percent of capital. The foreign currency exposure in financing for IslamicBanking Institutions (IBIs) at 9.6% is also much lower than the industry median of

    16.1% at the quarter end and hasshown a declining trend for the Islamic Banking

    Institutions (IBIs). The exposure ofIslamic Banking Institutions (IBIs) on the real

    estate sector is much higher at 10.8% than the industry average of 2.3% at end-

    June 2010. Nevertheless, the recent economic slowdown due to massive flooding

    in the country can potentially reverse these encouraging trends.

    4.1.9 Financing Products:

    The financing mix remained concentrated in Murabaha financing. In fact, the

    Murabaha financing has rebounded during the quarter under review from 37.1% to

    44.1% of the financing. There is a slight decline in Discount Margin (DM)

    financing, Salam and Istisna modes. Nonetheless, Murabaha, Ijarah and Discount

    Margin (DM) constitute around 87 % of the financing.

    Table 4.7 Financing Mix Rupees in billion

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    44/79

    Source: Annual Accounts except for June 2010, data for which is based on Unedited Quarterly Accounts

    The financing through participatory modes remained at extremely low levels both

    due to low demand and Islamic Banking Institutions (IBIs) reluctance to increase

    their risk appetite. Similarly, use of financing modes like Salam and Istisna, which

    can be used to finance nontraditional sectors like agriculture and Small and

    medium enterprises (SME), remained lack luster.

    4.1.10 Sectoral Concentration of Financing:

    Jun-09 Mar-10 Jun-10

    Murabaha

    Ijarah

    Musharaka

    Mudaraba

    Diminishing Musharaka (DM)

    Salam

    Istisna

    Others

    Total

    58.0

    26.2

    3.7

    0.9

    45.3

    2.9

    4.8

    2.3

    144.3

    60.8

    22.7

    2.8

    0.4

    51.3

    6.5

    10.6

    7.0

    162.1

    72.4

    23.8

    6.0

    0.4

    46.4

    3.2

    6.4

    5.4

    164.0

    Murabaha

    Ijarah

    Musharaka

    Mudaraba

    Diminishing Musharaka (DM)

    Salam

    Istisna

    Others

    Total

    40.2

    18.2

    2.6

    0.7

    31.4

    2.0

    3.3

    1.6

    100.0

    37.5

    14.0

    1.7

    0.2

    31.7

    4.0

    6.6

    4.3

    100.0

    44.1

    14.5

    3.7

    0.2

    28.3

    2.0

    3.9

    3.3

    100.0

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    45/79

    The Islamic Banking Institutions (IBIs) financing concentration does not show

    much sign of improvement and is concentrated in a few sectors. Though the trend

    is in line with the overall banking industrys financing the same cannot be deemeddesirable. The Islamic Banking Institution (IBI) financing is confined to sectors

    like Textile, Chemical & pharmaceutical and Individuals, where Islamic Banking

    Institutions (IBIs) have around 18.3, 9.1 & 19 % concentration compared to 16.9

    & 4.1 and 12.8 % respectively for the rest of the banking industry.

    Table 4.8: Financing Concentration-percent share

    Jun-09 Mar-10 Jun-10 IndustryChemical and Pharmaceuticals

    Agribusiness

    Textile

    Cement

    Sugar

    Shoes and Leather garments

    Automobile and transportation equipment

    Financial

    InsuranceElectronics and electrical appliances

    Production and transmission of energy

    Individuals

    Others

    Total

    7.1%

    1.0%

    20.5%

    2.2%

    2.8%

    1.6%

    2.6%

    1.1%

    0.0%1.1%

    4.5%

    22.8%

    36.4%

    100.0%

    10.5%

    0.6%

    20.6%

    2.8%

    6.0%

    1.2%

    2.0%

    1.0%

    0.0%1.0%

    4.5%

    20.1%

    31.6%

    100.0%

    9.1%

    1.1%

    18.3%

    3.5%

    3.6%

    1.1%

    1.9%

    1.3%

    0.0%0.9%

    4.8%

    19.1%

    36.4%

    100.0%

    4.1%

    5.8%

    16.9%

    2.5%

    2.3%

    0.6%

    1.6%

    1.2%

    0.0%1.6%

    9.4%

    12.8%

    41.1%

    100.0%

    Source: Annual Accounts except for June 2010, data for which is based on Unaudited Quarterly Accounts.

    The concentration in a few sectors implies concentration of risk as well. For

    instance, the likely distress to Textile sector due to expected higher cotton prices

    (resulting from losses in floods) may adversely affect the textile sector and its

    financiers. Moreover, the financing to the individuals is very sensitive to the

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    46/79

    overall economic activity and in times of distress there are higher chances of

    defaults.

    4.1.11 Investments:

    The investments of Islamic Banking Institutions (IBIs) have shown substantial

    growth of Year over Year (YoY) 46% andQuarter on Quarter (QoQ) 7.0% in June

    2010. The Year Over Year (YoY) growth primarily represent the Rs 14.4 billion

    (GoP) Ijarah Sukuk and Rs 6.8 billion PIA Sukuk issued in September and

    October 2009, respectively. There is a substantial decline of 12 percent in

    investment in shares during the quarter, though investments in shares remained

    marginally positive on Year over Year (YoY) basis.

    Table4.9 Investments

    Rupees in million

    Growth

    Jun-09 Mar-10 Jun-10 YoY QoQ

    Federal Government Securities

    Fully paid up ordinary Shares

    TFCs, Debentures, Bonds, & PTCs

    Other investment

    Investment by type

    Held for trading

    Available for sale

    Held to Maturity

    Surplus/ (deficit) on revaluation

    Net investments

    17,073.6

    1,678.5

    19,408.3

    15,891.9

    --------

    127.6

    39,904.9

    11,211.4

    (31.8)

    53,539.8

    27,081.1

    1,997.9

    24,866.2

    19,564.4

    --------

    ---------

    59,147.0

    11,465.8

    254.3

    72,892.7

    27,032.7

    1,757.6

    26,173.8

    23,841.6

    --------

    --------

    64.717.5

    11,697.2

    110.7

    77,999.7

    58.3

    4.7

    34.9

    50.0

    --------

    ---------

    62.2

    4.3

    (447.9)

    45.7

    (0.2)

    (12.0)

    5.3

    21.9

    ---------

    -------

    9.4

    2.0

    (56.4)

    7.0

    Source: Annual Accounts except for June 2010, data for which is based on Unaudited Quarterly Accounts.

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    47/79

    In terms of investment types, investments are largely concentrated in Held for sale

    and Held to maturity categories, while there are negligible securities in Held for

    trading categorylargely a result of lack of Shariah compliant tradable securities.

    The constraint on availability of proper investment avenues is a major constrain on profitability of Islamic Banking Institutions (IBIs). The constraint is more

    disturbing in wake of rapid growth in deposits.

    The State Bank of Pakistan (SBP) and the domestic and international Islamic

    banking community are striving to evolve effective and efficient Shariah

    compliant liquidity management tools.

    4.1.12 Deposits mobilization:

    The deposit mobilization remained strong during Apr-Jun 2010. The Year over

    Year (YoY) and Quarter on Quarter (QoQ) growth in deposits remained robust at

    38.5% and 14.1 % respectively. The YoY growth in deposits is largely coming

    from the customer deposits at 40.6 percent. All the customer deposit typesfixed,

    saving and currenthave shown close to 40 percent YoY growth. Similar trends

    have continued during the quarter ended June 2010.

    Figure 4.02

    Source: Annual Accounts except for June 2010, data for which is based on Unaudited Quarterly Accounts.

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    48/79

    The comparative analysis of composition of deposits of Islamic Banking

    Institutions (IBIs) and industry reveals that the behavior of Islamic Banking

    Institution IBI depositors and conventional banks depositors is almost similar.

    Table 4.10 Breaks of Deposits

    Rupees in million & growth in percent

    Growth

    Jun-09 Mar-10 Jun-10 YoY QoQDeposits

    Customers

    Fixed Deposits

    Saving Deposits

    Current Accounts- Remunerative

    Current Accounts- Non Remunerative

    Others

    Financial Institutions

    Remunerative Deposits

    Non-remunerative Deposits

    Currency WiseLocal Currency Deposits

    Foreign Currency Deposits

    238,168.5

    219,079.4

    88,871.8

    75,176.1

    ---------

    53,165.4

    1,866.1

    19.089.2

    19.039.8

    49.4

    255,474.1

    12,694.5

    289,090.3

    274,106.4

    113,179.6

    94,321.1

    ----------

    64,086.7

    2,518.9

    14,983.8

    14,813.4

    170.5

    272,091.3

    16,999.0

    329,778.3

    308,067.0

    123,484.7

    105,162.7

    -----------

    76,676.9

    2,742.7

    21,711.3

    21,340.1

    471.2

    312,488.5

    17,289.8

    38.5

    40.6

    38.9

    39.9

    ------

    44.2

    47.0

    13.7

    12.1

    651.3

    38.6

    36.2

    14.1

    12.4

    9.1

    11.5

    ------

    19.6

    8.9

    44.9

    44.1

    117.7

    14.8

    1.7

    Source: Annual Accounts except for June 2010, data for which is based on Unedited Quarterly Accounts.

    The similar depositors preferences in Islamic Banking Institutions (IBIs) and

    overall banking industry may reflect that Islamic Banking Institutions (IBIs) need

    to do better with reference to the vast potential of the market. A stronger evidence

    of this assertion came from high level of non-remunerative current accounts in

    Islamic Banking Institutions (IBIs). This implies that the Islamic Banking

    Institutions (IBIs) have to focus more aggressively on their awareness campaign

    together with effective marketing of Islamic banking as offering Shariah compliant

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    49/79

    returns to the depositors. Possibly, a combined marketing campaign by Islamic

    Banking Institutions (IBIs) under a single banner.

    4.1.13 Maturity Profile:

    The maturity profile of assets and liabilities of Islamic Banking Institutions (IBIs)

    closely resembles that of the banking industry at end-June 2010. The average asset

    maturity of Islamic Banking Institution (IBI) as of June 2010 is concentrated in 3-

    month maturity. On the liability side, the average maturity is also concentrated in

    shorter tenor.

    The maturity gaps as of June 2010 depict higher gaps in shorter tenors as

    compared to longer tenors. This trend is also consistent with the industry behavior.

    Table 4.11 Maturities of Assets and Liabilities

    Jun-09 Mar-10 Jun-10 Industry

    Maturing upto 3 months

    Maturing from 3 months to 1 yr

    Maturing from 1 yr to 5 yrs

    Maturing after 5 yrs

    Assets

    37.7 40.1 42.9 43.4

    22.5 22.8 22.6 27.0

    26.4 26.7 25.1 17.8

    13.3 10.4 9.4 11.9

    Maturing upto 3 months

    Maturing from 3 months to 1 yr

    Maturing from 1 yr to 5 yrs

    Maturing after 5 yrs

    Liabilities

    58.6 51.7 54.3 55.8

    25.2 28.2 25.5 21.3

    11.0 14.9 15.0 16.9

    5.2 5.2 5.2 6.0

    Maturing upto 3 months

    Maturing from 3 months to 1 yr

    Maturing from 1 yr to 5 yrs

    Maturing after 5 yrs

    Gap- asset share minus liabilities share

    (20.9) (11.7) (11.4) (12.4)

    (2.7) (5.3) (3.0) 5.7

    15.4 11.8 10.1 0.8

    8.0 5.2 4.3 6.0

    Source: Annual Accounts except for June 2010, data for which is based on Unaudited Quarterly Accounts.

    4.1.14 Prospects:

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    50/79

    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, in light of its past experience, is launching a gradual and steady approachto Islamic banking. Despite rapid expansion in industry, the share of Islamic

    banking in the total banking system is a modest 4.0%. Moreover, it only caters for

    around 32,000 borrowers through around 300 branches relative to the country-

    wide 5 million borrowers (or 4.8 million excluding microfinance borrowers)

    tapped through 7,700 branches by conventional banks. Financing and investment

    levels of Islamic banks barely range around Rs77 billion, which is below 3% of

    the total banking systems advances. On the product side, Islamic banks so far

    offer about 75% of products.

    currently available in conventional banking while clean lending for consumer

    financing products, like personal loans and credit cards, still pose a challenge.

    Islamic banks operate exclusively in large cities with some now venturing into

    secondary cities but they are absent from rural areas where there is great potential

    for business growth. Global interest in Islamic finance industry and Pakistans

    success in laying basic foundation and core infrastructure of Islamic financial

    system lends confidence that the country has good potential and prospects to

    further exploit this industry. Going forward, however, it is important that Pakistan

    adopts a more calibrated and coordinated approach and strategy for the

    development of Islamic finance industry.

    Islamic banking can serve as a key vehicle to improve and strength the access to

    development finance by bringing in financial innovation that can cater adequately

    to diverse demands of the population as well as corporate sectors and countrys

    infrastructure financing requirements, while ensuring that it nurtures faith based

    system of financing consistent with the Shariah principles. Major elements of this

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    51/79

    strategy would require both industry and SBP to closely work together on multiple

    fronts. Some of the key areas of focus include: Aggressive deposit mobilization to

    augment domestic financial savings of the country. Although late starter, Islamic

    banks have phenomenal potential to exploit resource mobilization. Substantialsavings have still not been channeled into the financial system because of

    reservations relating to interest based system or return deficiencies of the

    conventional system. Islamic banks, besides catering to the needs of small

    depositors through profit and loss sharing basic accounts with no Charges need to

    tap high net worth investors and companies which are increasingly being driven to

    the attractive options and returns being offered by more innovative players

    worldwide. Fast adaptation of these practices by the Islamic finance industry will

    be helpful in competing more effectively with conventional banks in raising

    deposits. Resource mobilization is critical for Islamic finance industry to grow

    effectively and meet the alternative requirements of economy and society.

    Despite these issues, it is believed that Islamic banking can grow at a much faster

    pace than conventional banking. This paper outlines and discusses in detail the

    specific steps to be taken. State Bank of Pakistan (SBPs) policies towards Islamic

    Banking will be:

    1. Liberal for branch licensing of Islamic Banking Institutions (IBIs)

    2. Encouraging and supportive of Islamic Banking Institutions (IBIs) in using

    alternate delivery channels in order to extend their outreach

    3. Encouraging foreign Islamic banks to establish Islamic Banks in Pakistan

    4. Encouraging the establishment of Islamic microfinance banks

    5. Providing enabling environment for Islamic Banking Institutions (IBBs) of

    conventional banks to convert into Islamic banking subsidiaries.

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    52/79

    To achieve the target market share of 12%, an increase in coverage of the existing

    banking segments and entry into new segments of microfinance, agriculture,

    infrastructure and Small and medium enterprises (SME) finance will be targeted.

    Based on the above direction of State Bank of Pakistan SBPs policy and feedback

    from the industry, following forecast for the industry has been developed:

    Table 4.12 Annual Growths (In Million)

    2008 2009 2010 2011 2012

    Expected Deposit Size 215,938 340,128 499,036 722,109 907,064

    Annual Growth Rate -------- 58% 47% 45% 26%

    Expected Financing Size 184,641 277,153 413,594 600,014 731,591

    Annual Growth Rate -------- 50% 49% 45% 22%

    Source: Annual Accounts except for June 2010, data for which is based on Unaudited Quarterly Accounts.

    It is forecasted that by 2012 Islamic banking deposits will reach in the range of

    Rs. 900-1000 billion and financing in the range of Rs. 700-800 billion. The

    growth rates of these deposits are expected to be in the range of 45-60% in next

    three years. Thereafter the growth is expected to be around 25% as the market

    would mature having a larger base and greater competition with the conventional

    counterparts. The Islamic Banking Institutions (IBIs) are expected to achieve this

    target on the basis of canalizing funds from huge untapped markets and supportive

    role of State Bank of Pakistan (SBP) in regulations and allowing opening of

    branches in new business places. State Bank of Pakistan (SBP) will follow

    relatively liberal branch expansion policies for Islamic banking or at least at par

    with conventional banking. Based on State Bank of Pakistan (SBPs) projections

    and the feedback from the industry, following are projections for expansion in the

    branch network:

    The IBIs in the next three years will expand their branch network at a faster pace.

    However, after the year 2011, the growth in branch network is expected to settle

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    53/79

    down. Although this is an ambitious plan however the industry is comfortable with

    it and it is also in line with the inspirational market share.

    To increase the outreach of Islamic banking offerings, the industry will beencouraged to enter the Microfinance and Agriculture sectors, in addition to the

    Small and medium enterprises (SME) sector. Some Islamic banks are already

    focusing on the Small and medium enterprises (SME) sector and getting a good

    response from customers. The basic approach to entering these segments would be

    to maximize the leveraging of the existing conventional banking infrastructure and

    introducing Islamic banking products through these. State Bank of Pakistan (SBP)

    will introduce the Shariah compliance mechanism and segregation of Islamic

    banking business on the balance sheet and income statements. The specific steps

    planned for each of these sectors will be as follows:

    The central bank will use the conventional Microfinance strategy and focus more

    on adding the aspects peculiar to Islamic banking. As a first step, State Bank of

    Pakistan (SBP) has already issued guidelines for offering Islamic Microfinance

    Services. According to these guidelines various types of institutional arrangements

    have been suggested for provision of Islamic microfinance services which include.

    1. Establishing full-fledged Islamic Microfinance Bank (MFB)

    2. Islamic microfinance services by full-fledged Islamic Banks

    3. Islamic microfinance services by Conventional banks

    4. Islamic microfinance services by Conventional Microfinance Banks

    For each type of arrangement, a detailed framework has been provided outlining

    the systems and controls to be adopted and application procedure as well as

    different options available toMicrofinance banks bank (MFBs) by which Islamic

    microfinance services can be offered. Going forward help will be provided to the

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    54/79

    banks offering Islamic microfinance for developing products through joint forums

    of experts from State Bank of Pakistan (SBP) as well as the participating banks.

    Incremental volumes for Microfinance will therefore be ensured. At the same time

    some conversion is also expected to take place.

    Recently announced Microfinance strategy envisions 3 million borrowers by year

    2010. It is expected that around 4-5 percent of the borrowers will be using Islamic

    microfinance facilities. SBP expects that growth in Islamic microfinance will pick

    up gradually as Islamic banks will expand to new areas after consolidating their

    position in core sectors like corporate and consumer finance. Moreover,

    establishment of dedicated Islamic microfinance bank(s) and introduction of

    Islamic microfinance services by conventional Islamic Microfinance Banks

    (MFBs) will give a boost to the sector. The estimated market size has been

    forecasted as follows:

    Table 4.13 Microfinance

    Microfinance 2008 2009 2010 2011 2012

    Expected Volume 10 100 500 1000 2000

    % of Islamic Banking 0.01% 0.04% 0.1% 0.2% 0.3%

    Financing ------ ------- -------- --------- ---------

    Annual Growth Rate ------ 900% 400% 100% 100%

    Source: Annual Accounts except for June 2010, data for which is based on Unaudited Quarterly Accounts.

    4.1.15 Agriculture:

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    55/79

    State Bank of Pakistan (SBPs) approach would remain the same as that for other

    development finance sectors. A task force has been constituted that consists of

    experts from participating banks and State Bank of Pakistan (SBP). This

    committee is in the process of developingproducts that can be offered by banksundertaking Agriculture credit. These products are expected to be operationally

    ready by the end of the year. Meanwhile State Bank of Pakistan (SBP) will be

    issuing guidelines and then regulations for this sector. Keeping in view the

    inclination of end users for getting finance through Shariah-compliant products,

    scope of this market is huge; State Bank of Pakistan (SBP) expects the following

    volumes from this sector:

    Table 4.14 Expected Agricultural Growths

    Microfinance 2008 2009 2010 2011 2012

    Expected Volume 370 1400 4100 12000 21000

    % of Islamic Banking 0.2% 0.5% 1% 2% 3%

    Financing ------ ------- -------- --------- ---------

    Annual Growth Rate ------ 278.4% 193% 193% 75%

    Source: Annual Accounts except for June 2010, data for which is based on Unaudited Quarterly Accounts.

    4.2 PROBLEMS AND ISSUES:

    4.2.1 Taxation Issues:

  • 8/6/2019 Growth of Islamic Banking in Pakistan

    56/79

    State Bank of Pakistan (SBP) has put in place a process that is comprehensive and

    provides the necessary groundwork to all the government departments concerned

    to enable them executing their part of the change in rules. This process consists offorming a committee at Institute of Charted Accounting of Pakistan (ICAP) that

    determines the accounting treatment of Islamic transaction modes.

    Based on the accounting treatment, changes needed in the tax rules to provide

    same effective taxation treatment to Islamic transactions as that provided to

    conventional transactions are made State of Pakistan (SBP) initially took up the

    issue of double taxation on Murabaha transactions with the Central Board o