Growth of Islamic banking and finance in Pakistan

LONDON: 

A pre-publication copy of the Global Islamic Finance Report 2014, which is expected to be released on April 13 in Washington DC on the occasion of the Global Donors Forum, reveals that Pakistan ranks number nine in the world in terms of development of the Islamic financial services industry in the country.

A London-based Islamic financial advisory company, Edbiz Consulting, has formulated the Islamic Finance Country Index (IFCI), which ranks about 50 countries of the world in terms of their role in developing, promoting and advocating Islamic banking and finance. Pakistan comes after eight countries, namely Iran, Malaysia, Saudi Arabia, Bahrain, Kuwait, United Arab Emirates (UAE), Indonesia and Sudan.

The Global Islamic Finance Report 2014 estimates the size of the global Islamic financial services industry at $1.813 trillion at the end of 2013. This represents 12.3% annual growth over 2012, an increase of $182 billion in absolute terms.

Many Islamic financial institutions appear among top five banks in their respective countries. In Pakistan, the largest Islamic bank is Meezan Bank, which is fast assuming mainstream prominence.

Growth of Islamic banking in the country has been over 30% in the last few years, which is certainly above the average global growth rate of Islamic banking and finance. If this trend continues, then one should expect that in the next three years Islamic banking assets will at least double from its current size of Rs926 billion.

New strategy

The newly unveiled Islamic banking strategy by the State Bank of Pakistan attempts to double the number of Islamic banking branches from 1,200 in the next four years, and to increase its market share from 10% to 15%.

Given the huge potential the country has in terms of Islamic banking, increasing the share to 15% is a modest aim. Indeed, if Islamic banking fails to achieve 20% share in the market by 2018, by all indicators, it has failed to reach its potential.

Given that a number of banks are showing renewed interest in Islamic banking, the industry should target an increase of 2% in market share every year through Brownfield growth, ie cannibalisation of conventional banking and through conversion of conventional into Islamic banks.

Once Summit Bank is converted into a full-fledged Islamic bank, it will become the second largest Islamic bank in the country, taking the number two position from BankIslami (assuming that BankIslami does not grow further). Only this will give 8% additional market share to Islamic banking over the next four years.

If Islamic banks exhibit Greenfield growth, more than the growth in conventional banking, it should be able to double its market share. Greenfield growth is not only possible but is in fact needed in Pakistan where there is widespread financial exclusion.

If Islamic banking is used as a tool for promoting financial inclusion, there is no reason that Islamic banking should not be able to achieve the important milestone of 20% market share.

If that happens, the country will stand next to a number of Gulf countries and Malaysia where Islamic banking represents between 20% and 30% of the market share. Pakistan, however, will become the most important player in Islamic banking and finance, if it attains 20% market share. This is so because the country is the second largest Islamic market (population-wise) after Indonesia.

The writer is an economist and a Phd from Cambridge University

Islamic finance 

Country                                  IFCI Rank

Iran                                            1

Malaysia                                     2

Saudi Arabia                               3

Bahrain                                       4

Kuwait                                        5

UAE                                            6

Indonesia                                    7

Sudan                                          8

Pakistan                                      9

Qatar                                           10

Bangladesh                                 11

Turkey                                        12

United Kingdom                        13

Egypt                                          14

USA                                            15

Jordan                                        16

Brunei Darussalam                    17

Yemen                                        18

Lebanon                                     19

Singapore                                   20

(The Express Tribune / 02 March 2014)

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Zakat is the only way to effectively fight poverty

Poverty in the simplest terms can be defined as a lack of basic necessities like food, clothing and shelter. In other words, it is the absence of the means, of course money, to fulfill those needs. 

It is a matter of great concern that poverty is rampant in the Muslim world. What is the reason behind that and how to eradicate poverty? Muslim intelligentsia must think about this issue. 

As a matter of fact, poverty among Muslims should have been nonexistent because Islam strongly advocates helping others and encourages philanthropy. There are five pillars of Islam. Of them, four deal with one’s relationship with Allah. The fifth, which unfortunately Muslims tend to forget, deals with ties between fellow Muslims. In numerical order, it is third in number. It is Zakat. Although, it is also between Allah and His servant but directly impacts others. As a matter of fact, Islam has created this institution to fight poverty. This is why Allah has put Zakat after Shahadah and prayer but before Fasting and Haj.

As all of us know the five pillars of Islam are: 

l Shahadah: There is no god but God and Muhammad is the messenger of God.

l Salah: The five daily prayers.

l Zakat: Social responsibility is considered part of one’s service to God; the obligatory act of Zakat enshrines this duty. Zakat prescribes payment of fixed proportions of a Muslim’s possessions for the welfare of the entire community and in particular for its neediest members. It is equal to 2.5 percent of an individual’s total net worth, excluding obligations and family expenses.

l Sawm: Fasting from sunrise to sunset during Ramadan.

l Haj: A once in a lifetime pilgrimage to Makkah if one can afford it.

After understanding the concept of Zakat a bit, the question arises as to why then there is poverty among Muslims. Despite being rich in all kinds of natural resources and with a fairly large number of billionaires, majority of Muslims are living in poverty. Zakat on one billion dollars is around $25 million and this amount can go a long way in helping many to manage for food, clothing and shelter. Zakat can eradicate poverty and when you eradicate poverty, you can eradicate corruption, social injustice, human trafficking, reduce crimes and and most important is that you save the dignity of a human being. 

There are many countries in the Muslim world that are rich in resources but poverty is beyond imagination. Somalia and Yemen are examples of how poverty is destroying the social fabric. In the past, these two countries were the main food and livestock exporters of the region. We can also cite the examples of Iraq and Libya, which are two of the richest countries in natural resources and still people are suffering from poverty. 

Poverty can be eradicated from the Muslim world if all Muslims start taking the institution of Zakat seriously, which is mandatory. It would be pertinent to mention here that Sadaqah is not obligatory but a form of charity that even the poor can give the poorer. Muslims around the world have simply forgotten the third pillar of Islam.

Zakat and Saqdah cannot only help eradicate poverty but can also bring people closer — not only Muslims but also even people from other faiths. Omar Bin Khattab, one of the rightly guided caliphs of Islam, helped an old Jew from the Bait Al-Mal. Omar Bin Al-Khattab once said: If poverty were a man, I would have killed him. It is a shame to see many cities across the Muslim World full of beggars. And I am not talking about the organized phony beggars. I am talking about those who are left with no other choice. The Muslim world is full of resources and has many rich people but it is very important to be part of society and pay our dues. It is our responsibility to fight poverty and Zakat is the Islamic solution to this problem.

(Arab News / 26 Feb 2014)

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Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Dubai to develop integrated halal zones

DUBAI: Dubai plans to develop two world-class Halal Zones to position itself as a hub for the trillion - dollar global halal product markets.

The Economic Zones World (EZW) will develop the clusters in collaboration with Dubai Islamic Economy Development Centre (DIEDC) at Jafza and TechnoPark to serve international and regional markets respectively.

"Since Halal products and services are one of the key components of Islamic Economy, the EZW's move is a major step forward in that direction. EZW aspires to become one of the world?s key hubs for halal products trading, services, and manufacturing," said Chairman of the EZW Hisham Abdullah Al Shirawi while formally rolling out the initiative.

He said the move will meet the longstanding demand of the EZW's existing over 700 leading companies in food & beverages, pharmaceutical and cosmetics sectors.

"A large number of these companies are engaged in the business of production, marketing and distribution of halal products in their respective sectors," he said.

Chairman of Dubai Financial Market, EssaKazim said halal sector was one of the key pillars in the global islamic economy.

"The importance of Halal to the overall Islamic economy can be gauged by the fact that the global Halal market is valued at USD 2.3 trillion and it is estimated that one out of every four human beings consumes halal products.

"Given the latent demand, the potential market for Halal products and services is huge and will continue to grow," he said.

Multi-phased EZW Halal Zone Development Plan will also identify laws, regulations, and licencing needs of the Zone and draft laws and regulations accordingly. It will also setup the internal processes and systems to automate different processes.

The trillion-dollar global halal market accounts for 20% of the total food sector in the world.

(The Times Of India / 28 Feb 2014)

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

Everybody wants a piece of the Islamic finance action

When Fiona Woolf, Lord Mayor of London, visited the Arabian Gulf region in February, Islamic finance was top of her agenda.

Last year, the British prime minister, David Cameron, said that he wanted the United Kingdom to be the first sovereign government outside the Islamic world to use sukuk, suggesting he believes it will be an increasingly important part of global finance.

The move reflects London’s effort to compete in the Islamic finance business, which is led by the Arab Gulf states and Malaysia.

The rise of sukuk is driven by customers who want investment and savings products compliant with Islamic law and principles (sharia). Interest is strong in the Gulf Cooperation Council (GCC) member states and in growing economies such as Malaysia and Turkey. For those seeking finance, offering shariah-compliant debt offers access to the large pool of capital in oil-rich countries in the Middle East.

While Islamic principles are at least 1,400 years old, modern Islamic finance emerged after the oil price rise in the 1970s, which transferred wealth to the Gulf energy producers and led to the founding of large Islamic banks. The IMF estimates that the global market for Islamic financial services has risen to US$1.46 trillion in 2012, with corporate banking and sukuk products developing fast.

Sukuk in Arabic is the plural of sakk, a certificate showing ownership of an asset. The Ottoman Empire is believed to have first issued a sukuk in 1775, when it borrowed money against future income on tobacco customs levies.

Islamic law prohibits the payment of interest. Instead, those who invest in sukuk – for example, to help fund the building of an airport – gain a share in owning the asset and so are entitled to a share in the airport’s revenues. Once the sukuk is issued, it can be traded on local capital markets.

The need for large investment in infrastructure – roads, railways, ports and housing – offers opportunities, notably in Asia and emerging markets in general.

Since Malaysia began issuing sukuk in 2000, they have grown in importance, while they are also becoming popular in Saudi Arabia and the United Arab Emirates, particularly Dubai. Recent entrants to the market include Kazakhstan, Egypt and Turkey, which could become a big market because of its need for infrastructure.

Like all financial services, Islamic finance needs an appropriate supervisory framework, and legislation is often the first step towards opening a new market. Financial institutions also need to ensure they have sufficient sharia expertise and advice to develop appropriate products.

Three factors are driving the market’s growth.

First, it is becoming part of normal retail and corporate banking in core Islamic countries, such as Saudi Arabia, where its share of the banking market has doubled in recent years to more than 50 per cent. The current market dynamics in the Gulf are favourable.

Second, its growth appeals to other markets, particularly in the Muslim world, where borrowers are attracted by the prospect of cross-border flows from the Gulf countries.

The third driver is innovation. Two years ago, the sukuk market was limited and bonds were mostly restricted to five years or less. Now there are longer-term offers, perpetual bonds, and “hybrid capital” issues allowing a mix of debt and equity.

Since 2008 Malaysia has led global sukuk issues, followed by Saudi Arabia and the UAE. Dubai aims to become the global “capital of the Islamic economy” and also to expand in takaful (Islamic insurance).

London is targeting cross-border flows, helped by its scale as a financial centre and its legal system, which is recognised internationally. Sukuk issues on the London Stock Exchange have raised more than US$49 billion.

For some, using sukuk is a matter of principle, for others the question is pragmatic; they will do so if the terms are better than for a conventional bond. During the global downturn in 2008, sukuk issues hit a low. But they have recovered strongly, rising from US$19.5bn in 2008 to US$42.8bn in 2013. Issuance since 2008 is US$196.8bn.

Looking forward, the Islamic Economy is developing quickly. From finance to entertainment, to food, fashion and family travel, the growth of an economy that adheres to faith-based values is growing in importance. Taken together, the world’s Islamic economies currently represent more than US$8 trillion in GDP with a large (1.6 billion), young (average age 24) population growing at twice the rate of the global population. As consumption drives increased trade and economic links between these countries and the Islamic economy grows, new opportunities will require financing.

Greater availability of sukuk offers more choice to companies and investors and allows issuers to offer products tailored to specific needs. This has underpinned the growth of the market both inside and outside its core countries.

Mohammed Dawood is global head of sukuk financing at HSBC.

(The National / 01 March 2014)

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

Malaysia: AmIslamic bank issues RM200m Tier 2 Sukuk Murabahah

KUALA LUMPUR, Feb 28 — AmIslamic Bank Bhd, the Islamic banking arm of AMMB Holdings Bhd, successfully issued its inaugural issuance of RM200 million Basel III-compliant Tier 2 Subordinated Sukuk Murabahah (Tier 2 Sukuk Murabahah) today. 

In a statement today, AMMB said the sukuk is the world's first Basel III-compliant Tier 2 Subordinated Sukuk to be issued under the Shariah principle of Murabahah based on commodity trading (via a Tawarruq arrangement).

“The RM200 million Tier 2 Sukuk Murabahah, with a maturity of 10 years and callable at the end of year five, carries a semi-annual profit payment of 5.07 per cent per annum,” it said.

AmInvestment Bank Bhd acted as the sole Principal Adviser, Lead Arranger and Lead Manager for this Tier 2 Sukuk Murabahah (2014/2044) issuance which was made under the RM3 billion Subordinated Sukuk Murabahah Programme, it said.

AmBank Group Managing Director Ashok Ramamurthy said the successful closing of this landmark transaction represents a significant milestone for the Malaysian Sukuk market.

“At the same time, this issuance saw the engineering of a Shariah mechanism that is acceptable to both the regulators and the Shariah scholars.

“This is the first Basel III-compliant Tier 2 Sukuk issuance by a Malaysian issuer which demonstrates our capability in Sukuk structuring and profound track record in product innovation,” he added.

AmIslamic Bank was upgraded to AA2 by RAM Rating Services Bhd in November 2013 along with AmBank (M) Bhd and AmInvestment Bank.

The Tier 2 Sukuk Murabahah has been assigned an AA3 rating by RAM Ratings, one notch below AmIslamic Bank’s long-term financial institution rating, which reflects their lower ranking in the priority of claims upon bankruptcy or liquidation, relative to senior unsecured creditors.

(The Malay Mail Online.Com / 28 Feb 2014)

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

Islamic banking: prospects look much brighter now

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

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

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

(Business Recorder / 03 Feb 2014)
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Islamic Finance Poised To Develop In North Africa

PARIS, Feb 27: After tremendous global success over the past decade, with total assets estimated at about $1.4 trillion, Islamic finance could develop in North Africa, says Standard & Poor’s Ratings Services today in a report titled “Islamic Finance Could Make Inroads Into North Africa.”

Large current account deficits and declining conventional financing sources have prompted governments from Arab spring countries to look at opportunities offered by Islamic finance.
“Sharia-compliant banking previously presented an attractiveness that was at best exotic for regulators and banks active in these markets. Now, the perception is changing and public awareness is increasing,” said Standard & Poor’s credit analyst Mohamed Damak.

Policies

We have observed this development in the North African countries where we rate banks—Egypt, Tunisia, and Morocco. These sovereigns have recently taken steps to implement policies to support the development of Islamic finance: Tunisia plans to issue sukuk to attract new class of investors; Egypt implemented new regulatory frameworks for sukuk issuance; and Morocco is laying the legal foundation for Islamic banks.

Nevertheless, we believe that Islamic finance in this region has yet to demonstrate its economic added value beyond enabling products abiding with Islamic law. Such added value could materialize through creating access to a new class of investors or by offering Sharia-compliant products at costs comparable with their conventional counterparts. The stiff price competition in some of the North African markets indicates that customers in these regions are relatively more sensitive to the costs associated with banking products.

“Islamic finance in North Africa remains underdeveloped but regulatory changes are laying the groundwork for its growth,” said Damak. “However, we believe that success will depend on their ability to offer products at a cost competitive with conventional banking activities.”
We also believe that Islamic finance can be a good fit for infrastructure and project finance, as banks lack long-term funding capability required by these projects. Several projects in renewable energy, transport infrastructure, and communication are ongoing or expected to be launched in the future in North African countries. Using sukuk to finance some of these projects could help diversify investor bases and tap additional pools of resources.

(Arab Times / 01 March 2014)

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