Dubai: Buoyant Islamic banking market

Rising demands for Shariah-compliant financial services are widely seen to have steered the swift expansion of Islamic banking in recent years.

The future growth of this particular segment of the banking industry is, however, expected to be driven by the government’s plans to use Islamic financial instruments like Sukuk for financing the bulk of large infrastructure projects.

Islamic banking in Pakistan has grown rather quickly in the last five years, at an average annual rate of 30 per cent. Its share in the total banking industry has jumped from a little more than four per cent in 2007 to 9.5 per cent by the end of the third quarter of 2013, with five specialised banks exclusively providing Shariah-compliant services and 14 conventional banks running these operations through their dedicated branches and windows.

This segment of banking is projected to double in size and its share is expected rise to 20 per cent of the total banking industry in the next five years.

“The finance minister has repeatedly expressed his intention to issue Sukuk — an Islamic debt instrument — to fund mega development projects. This has buoyed the Islamic banking market,” notes Dr Shahid Zia, a Lahore-based financial analyst.

Nevertheless, he feels that the sentiment could reverse unless the government implements its plans. “The use of Islamic financial solutions for large public sector infrastructure projects can provide the kind of impetus the Islamic banking industry requires to tap its true potential.”

With the eight-month-old government focusing on the development of Islamic finance, rival banks are bracing themselves to grab a bigger market share. MCB Bank, for example, is already in the process of setting up a wholly-owned Islamic banking subsidiary by June-July.

Summit Bank will convert its entire core conventional banking operations into Islamic banking in three years. Bank Alfalah is also reported to be considering the option of following MCB Bank.

Pakistan was 8th among 20 Islamic finance countries ranked in 2012 according to their ‘involvement and leadership role played in the global Islamic financial services industry’.

“There is a huge untapped potential of Islamic banking in the country,” said Syed Rashid Rahman, MCB Bank’s Group Head of Islamic Banking.

“It is growing at a very fast pace. We expect our Islamic banking subsidiary to grow an asset base of Rs200 billion [from the existing Rs14.4 billion] in five years, and plan to add 25-30 branches annually to our network for the next several years. Most branches will be opened beyond major cities like Karachi and Lahore, in places where demand for Islamic finance is much stronger,” said Rahman, who has a 14-year experience in Islamic banking.

MCB Bank was the first conventional bank to start Shariah-compliant banking in 2003, and will also be the first to have a full-fledged Islamic banking subsidiary.

Though Islamic banking is expanding, no specialised bank, apart from Meezan Bank — the largest player in the industry with deposits of Rs268 billion — is making money. Most of them also remain under-capitalised.

“These banks are under-capitalised because of poor economic conditions for investment prevailing in the country for the last 5-6 years,” a senior branch manager of Meezan Bank said.

Banking sector analysts like Bilal Qamar, nevertheless, feel that Islamic banks may not be making money at present, but trends suggest that they will become profitable in a few years as this segment grows and expands.

He also suspects that conventional banks may now be expanding into Islamic banking to avoid the central bank’s requirement on minimum deposit rate. “It could be one factor that is driving growth in Islamic banking, because there’s no such restriction in Islamic mode.”

MCB Bank’s Rahman said there has been renewed interest in the revival of Islamic banking industry, and concerted efforts are being made by the regulator and the government to help it expand in size.

“Islamic banking has the potential and financing solutions to meet the needs of all kinds of customers, ranging from small businesses to mega projects, both in the private and public sector. The banks can do syndicate financing of mega infrastructure projects and provide tailor-made solutions to borrowers according to their business requirements,” he said.

Dr Shahid thinks that Islamic finance can also help reduce speculation in the economy, increase financial inclusion, cut poverty, create jobs and curb inflation. But, he says, specialised Islamic banks as well as conventional banks engaged in Shariah-compliant banking need to re-invent their operations before they can attract a larger chunk of depositors, and to deploy their assets in a profitable manner.

“At present, one finds little distinction between the way conventional and Islamic banking is done in the country. Most people feel that Islamic banks haven’t completely done away with riba [interest], and only labeled their conventional products as Islamic,” he says.

“Hence, they are skeptical of using the services being provided to them in the name of Islamic finance. The desired growth in Islamic banking will remain elusive unless the users are convinced that they are getting what they want and what they are told.

(Dawa.Com / 27 Jan 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com