The swift growth of Islamic banking is amazing economists in Muslim-majority Pakistan, a boom analysts predict to grow further due to the big potentials of the sector.

“In given circumstances, this is an amazing growth,” Muzzamil Aslam, a Karachi-based economist, told OnIslam.net.

“But it does not amaze me a lot. Not because it is not a big achievement, but because the growth could me much higher if the potential of Islamic banking is actually exploited.”
Total deposits of Islamic banks in Pakistan have grown by 35 percent in 2012 compared to the previous year, according to the State Bank of Pakistan.

Assets of Islamic banks have also increased by 30 percent in the past five years, taking their assets to 8.5 billion dollars.

The financing in different sectors by Islamic banks have also shot up by 14 percent in 2012.

Currently, the volume of Islamic banking in Pakistan is estimated at 7.6 trillion rupees (7.8 billion dollars), which stands 10 percent of the total capital size of the banking sector in the country.

Aslam opines that due to growing investment in Islamic banks, the overall share of Islamic banking is increasing in the banking sector.

“Being an economist and a banker, I know that a majority of Pakistanis do not prefer interest-based banking,” he said.

“Therefore, in order to avoid that, their majority maintains current accounts in commercial banks, which make up 40 percent of the total deposits of these banks.

“These deposits (in current accounts) have turned the Pakistani commercial banks into one of the highest profit rate earners.”

He said that the growing drift towards Islamic banking has forced all commercial-local and international-banks in Pakistan to introduce Islamic banking branches in order to retain their clients.

Meezan Bank was the first Islamic bank in Pakistan, which kicked operations in 2003.

In 2004, The State Bank established a dedicated Islamic Banking Department (IBD) by merging the Islamic Economics Division of the Research Department with the Islamic Banking Division of the Banking Policy Department.

A Shari`ah Board was also appointed in 2004 to regulate and approve guidelines for the emerging Islamic Banking industry.

In the same year, the government awarded the mandate for debut of international Sukuk (Bond) offering for 500 million dollars.

Currently, six full-fledged Islamic banks are operating in Pakistan with over one million customers.

Meezan bank is the largest bank with 250 branches in 63 cities across the country.

A total 1079 branches of Islamic banking – owned by both Islamic and commercial banks- are operating across Pakistan.

Big Potentials

Despite the growth, economists believe that the actual potential of Islamic banking in Pakistan is yet to be exploited.

“The current growth (in Islamic banking) is amazing in terms that just a couple of years ago, the total share of the Islamic banking was 5 percent in the banking sector, and now it has been doubled within two years,” Jabbar Khan, a Karachi-based economic analyst, told OnIslam.net.

“But still, it is not getting what it should have.”

He says if the Islamic banks increase their capital investment size, they can lure more and more customers of commercial banks.

Currently, five major commercial banks enjoy a combined share of 70 percent in the banking industry, taking advantage of current accounts system.

Though these banks too have introduced Islamic banking branches, they are restricted to big cities and urban areas.

“These commercial banks have not only much heavier capital size, but much more number of branches across the country, especially in rural areas, which make up 70 percent of Pakistan,” Aslam said.

“The booming business of these (commercial) banks mainly relies on current accounts system, which they do not want to lose. That’s why they have not opened Islamic banking branches in rural Pakistan, where Islamic banks do not exit.

“This is a very tactical move. These commercial banks have opened Islamic banking branches in urban areas to counter the Islamic banks, but because Islamic banks do not exist in villages and small towns, therefore they (commercial banks) do not care about Islamic banking there,” he said.

“If they do that, they will lose the benefits of current accounts because Islamic banking system does not exist on the foundation of profit but profit and loss.”

Islam forbids Muslims from usury, receiving or paying interest on loans.

Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Islamic banks have proved a success because of rules that forbid investing in collateralized debt obligations and other toxic assets that cause financial crises.
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