ISLAMABAD, 24 September 2007 — Islamic finance is on the upswing in the Middle East-Gulf-Pakistan-Asia region, a two-day Asia Finance Conference observed, and industry sources say the future potential is massive.
They said that though Islamic financing sprang out of the Gulf region, Pakistan, Asian countries and the rest of the world are caching up.
M.A. Mannan, deputy CEO of Dubai Islamic Bank, said “80 percent of Pakistanis prefer Islamic products if all things are equal.” If an Islamic product has the same world standard, same return on the product and the same facility like a competitive conventional banking product has, people will get Islamic product instead of the conventional product,” he said.
Dr. Shamshad Akhtar, governor, State Bank of Pakistan (SBP), said “the global interest in Islamic finance and Pakistan’s success in laying the basic foundation and core infrastructure for the industry has lent confidence that the country has a good growth potential.” But still a cautious, calibrated and coordinated approach and strategy for development of the sector is required. Pakistan, she said, will conform to standards being promoted by the Islamic Financial Services Board (IFSB).
“Islamic banks should grow annually at the rate of 40 to 50 percent to raise its share from the existing 3.5 percent to around 15 percent over the next few years,” she advised delegates to Asia-Finance Conference at Karachi, the third conference devoted to Islamic financial services.
Leading international conventional banks like Citibank and Deutsche Bank have also started Islamic banking which is 100 percent based on Shariah.
The two big segments that need to be tapped for Islamic banking are the masses and the rural clients. Nadeem Hussain, president and CEO of Tameer Micro Finance Bank, said “there is a huge gap in banking in the rural areas. The rural population needs credit for seeds, fertilizers, land, tractors and other farm inputs. Islamic banks should provide finance for all such requirements.” At the same time, some 53 percent of rural population which is engaged in non-form activities, like cottage industry, also need small advances.
The participants also focused on Islamic insurance or Takaful, and its growth potential in the area. Takaful is still new in Pakistan but has a good potential if it targets the countryside where farmers want insurance to cover for their crops and cattle and other requirements.
There are two Takaful companies currently operating in Pakistan, while more are getting ready to start their business. The two companies offer General Takaful and Family Takaful. SBP has fixed paid-up capital requirement for General Takaful at Rs.300 million, and for Family Takaful at Rs.500 million. The paid-up capital is just Rs.120 million for General Takaful until Dec. 31, 2007.
Waqaruddin, CEO of Pak-Qatar General Takaful, said “serious efforts have been made to popularize Takaful as an Islamic alternate insurance but a number of issues are still under research to find out solutions.”
Takaful has better growth chance compared even to Islamic banking. Insurance companies get re-insurance in the existing financial system. Islamic insurance will follow the same re-insurance for Takaful. Islamic re-insurance companies are already working in Dubai and Malaysia.
“The interest in this industry stems from its strong economic, financial and social considerations, backed by its unique features, dominant among which is its appeal to tap oil revenues of Islamic countries and savings of nearly 1.6 billion Muslims around the globe,” Akhtar said.
Mohammad Imaran, Gulf-based Bank Islami’s country head of consumer banking, said “Islamic bankers are targeting those who are already the target of conventional banking. There is a need to target those who are not accessed by the banking industry.”
Akhtar is confident that conventional banking, as a whole, has been “growing at a substantially fast pace which means “the level of efforts required for Islamic banks will have to be steeper to clinch its share.” The bankers will need to chart out a strategy with a major forward thrust to offer an attractive and alternative financial intermediation. It will have to promote an efficient allocation of resources in an equitable way. Above all, it will have to be competitive.
The central banks and Islamic bankers will have to coordinate strategies and join hands in some key fields. These include an aggressive deposit mobilization in order to raise the domestic saving rates, besides diversification and providing innovative financial structures.
The central banks and the Islamic bankers should launch combined efforts for capacity building to cope with the potential growth of the sector.
The growth in Malaysia has been much faster where Islamic banking has a 12 percent market share.
The Islamic banks’ total assets in Pakistan at the moment are Rs.159 billion or 3.4 percent of the market share. Their deposits are 3.1 percent, and financing is 3.3 percent.
After SBP launched its Islamic Banking Policy (IBP) in December 2001, Pakistan now has six full-fledged Islamic banks. Thirteen existing conventional banks operate Islamic windows. Two hundred branches of various banks now offer Islamic banking.
