Islamic banking in Pakistan gets new concessions
11.4%
Islamic banking in Pakistan will sustain fast track growth with new concessions and facilitation announced last week. The Sate Bank of Pakistan (SBP), the central bank, has exempted Islamic banks from using he benchmarks deployed by the conventional banks to work out the pricing of their products and instruments. The announcement said it has been decided that the financing provided on the basis of participatory ‘Musharakah’ and ‘Mudaraba,’ and ‘Wakalah’ (agency) modes by the Islamic banking institutions, shall be exempted from the requirement of using Karachi inter bank offer rate (Kibor), as the benchmark rate. The SBP had, in 2004, advised all the commercial banks in Pakistan to deploy Kibor as the bench mark rate — like -- London inter bank offer rate (Libor).
“The Islamic banks desirous to avail this exemption need to take measures to mitigate equity investment risk in participatory modebased products,” the SBP notification said, adding that “for ‘Mudarabah’ and ‘Musharakahproducts IBI’s should ensure compliance with minimum ‘Shariah’ requirement.”
For ‘Wakalah’-based products, Islamic Baking Institutions (IBIs) should use Arabic version of Accounting and Auditing Organiztion for Islamic Financial Institutions (AAOIFI) Shariah Standard No. 23 on agency as a guideline in consultation with their Shariah board.
The Islamic banks have will also submit details of Mudarbah, Musharkah, and Wakalah-based products, for de-linking with Kibor benchmark to SBP’s Islamic Banking Department. The IBIs’ shall comply with all other regulatory and Shariah-related instruction issued by SBP from time to time.
“The above instructions shall be applicable with immediate effect. All other instructions on the subject shall remain the same,” the SBP said.
Such decisions and concessions, offered by the SBP are helping the year-on-year growth in home finance during January-August 2015 Islamic banking financing sector to move ahead on a fast track. This is proved by the latest growth statistics of this, still new, sector. Islamic banking has, by now, moved to carve its market share in a big ways. The announcement said the SBP and the government are keen to promote Islamic banking industry which is at the evolutionary stage.
For instances, its share of banking assets is now as high as 11.4 per cent of the overall banking industry. At the same time, its share of the deposits has risen to 13.2 per cent, as of June 30, 2016, SBP reported last week. Islamic banking growth was recorded at 7.4 per cent in April-June quarter of calendar year 2016. The sector’s assets rose to a whooping Rs1.745 trillion in this period. Meanwhile, its deposits have risen to Rs1.461 trillion.
The number of Islamic Baking Institutions (IBI) has, by now, risen to 22. It includes six full-fledged Islamic banks, while conventional banks have now stand alone bankbranches. The branch network is growing fast and has gone up to 2,146 branches located in 98 districts across Pakistan, as of June 30 this year.
In order to realise the size and volume of Islamic banking, one should go back to 2003. Its total deposits then were as little as 0.4 per cent of the deposits of the entire banking sector. Now these are 13.2 per cent. But the growth has also raised more demands on the sector, like lending to the farm sector and small and medium enterprises, which need huge amounts of cash for new investment, up-gradation of units, and working capital.
What will ensure the fast growth of Islamic Financial System (IFS) in a big way is the fact that the powerful business community, which is habitually used to conventional banking, is hugely supporting it.
Shaikh Khalid Tawab, senior vicepresident of Federation of Pakistan Chambers of Commerce & Industry said Islamic banking is the need of the hour because but it is risk-sharing and asset-backed. It remains unaffected by periodic global financial crisis.
Tawab applauded the role of SBP in promoting Islamic banking and launching Islamic Share Index, and laying down the policy framework for establishment of Islamic banking subsidiaries in Pakistan. He proposed that steps should be taken to improve the return provided by Islamic banks to the depositors, is lower than what is paid by conventional banking. He also mentioned that the foreign banks in Pakistan have started operating Islamic windows. The writer is based in Islamabad. Views expressed are his own and do not reflect the newspaper’s policy.