Islamic Banking industry in Pakistan has grown at fast pace: Governor SBP)

ISLAMABAD: Yaseen Anwar, Governor, State Bank of Pakistan (SBP) said that the Islamic Banking industry in Pakistan has grown at a fast pace, maintaining an average growth rate of 30 percent for over the past six years.

He said this while addressing at International Conference on Islamic Banking & Finance organized by Riphah International University (RIU) here Tuesday.

Governor SBP said the industry’s asset base has reached Rs. 641 billion constitute almost 8 percent of the overall banking industry while deposits representing 8.5 percent of the banking system’s deposits. He said the Islamic banking network has also spread all across the country at a significant pace with total number of branches reaching 886. Given the well sustained growth, the industry is all set to double its market share over the next five years, he said, adding, notwithstanding this optimism, the industry is still facing challenges and constraints that need to be addressed to sustain the growth momentum

He said modern Islamic banking has spread over the last four decades and the industry now has systemic importance in the global financial order. Given its relatively short history the industry has over US $ I trillion assets with presence in over 75 countries across the globe, he informed. He termed the growth as the result of activities of pure Islamic financial institutions.

One of the key challenges facing the industry is that of preference of Form over Substance in current practices of the industry, he said. He added Islamic banks at global as well as at the domestic level are working in the shadow of conventional finance i.e. adoption of conventional products that have been tailored to comply with Shariah principles.

He said agriculture and SME sectors of paramount importance in terms of their contribution to GDP but both remain largely ignored despite their huge potential and financing appetite. For example, he said Agriculture comprises 21% of GDP and 45% of the work force, Pakistan is also the fifth largest milk producer in the world but does not export any dairy products as does New Zealand. This represents huge Sharia compliant opportunities for an Islamic Bank. Reaching out to such sectors will not only be beneficial for Islamic financial industry but will also guarantee economic welfare of the society, he added.

Realizing the significance of Shariah compliant agriculture financing the State Bank is working rigorously with the industry to develop standardized products and has issued a model Salam based product recently to facilitate financing in this sector, he said.

He elaborated that financial exclusion is of two types; voluntary and involuntary and Islamic banks can focus on both. In Pakistan, SBP is incentivizing and facilitating Islamic banks to expand to 2nd and 3rd tier cities, he said. He said SBP has revised the definition of rural and underserved areas, according to which any district having less than 10 Islamic Banking Branches (IBBs) will be termed as underserved with respect to Islamic banking facilities. Islamic banks need to be more aggressive in increasing their network to these areas as more than 70 percent of their presence is still concentrated in around 12 cities.

In order to encourage existing Islamic banking players and incentivizing new entrants, SBP has not only allowed the establishment of full-fledged Islamic micro Finance banks and permitted full fledged Islamic banks and Islamic windows to offer Islamic micro finance services but has also issued guidelines for Islamic microfinance business, he said.

Governor SPB noted that absence of a secondary market and Lender of Last Resort facility in many countries, including Pakistan, further creates barriers for Islamic financial institutions in managing their operations effectively.

Acknowledging the dire need of an Islamic Money Market, SBP is focused on developing a comprehensive solution that would provide Islamic interbank money market, Islamic Interbank Offered Rate (IIBOR) as a benchmark for pricing of various Islamic banking products, the development of Shariah Complaint portfolio at SBP to offer as a placement facility to Islamic banks and the provision of lender of last resort facility, he said, adding this mechanism can also help the government bridge their financing needs.

He noted that shortage of trained and certified experts in Islamic finance is limiting the ability of Islamic banks to expand their outreach. He assured the SBP will remain committed to these objectives. He was very optimistic about the future of the Islamic financial industry both globally and in Pakistan. He appreciated RIU for organizing the event.

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