KARACHI – Driven by faith which prohibits usury, Pakistanis are increasingly turning to Islamic banking, making it one of the fastest growing sectors in the South Asian Muslim country.
“The first and foremost reason behind growth of Islamic banking is religion,” Muzzamil Aslam, a Karachi-based economist, told OnIslam.net.
“The introduction of Islamic banking has provided a window of opportunities to the people who were forced to maintain current accounts for security reasons, but were not earning even a single rupee against their accounts”, Aslam said.
“Whereas, the (conventional) banks were in total profit.”
Pakistan has six Islamic banks, Meezan Bank, Bank-al-Islami, Global Islamic Bank, Al-Barka Bank, Dawood Islamic Bank and Global Emirates Islamic Bank.
The six Islamic banks have around 500,000 customers in consumer financing and deposits sectors and hold 5 percent share in the overall banking sector in the country.
Meezan Bank was the first full-fledged Islamic bank, which was issued license by the State Bank of Pakistan in 1997.
The bank is currently working under a Shari’ah advisory board led by renowned Muslim scholar Mufti Taqi Usmani.
Islamic banking has shown overwhelming growth in Pakistan over the past five years.
The share of the Islamic banking in the banking system has shot up to over 7 per cent from just 0.5 percent in 2002.
“Though, a couple of full-fledged Islamic banks have been operating for last over ten years, however people were sceptical about their sustainability. That’s why their initial response was slower,” ”, Zia Qureshi, another Karachi-based economist, told OnIslam.net.
“But when they saw that the Islamic banks could compete with the conventional banks, they chose the Islamic banking.”
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.
Pakistan, home to 180 million Muslims, plans to double its share to 12 percent by 2015.
To help achieve this, Pakistan has ordered Islamic lenders to open 20 percent of all new branches in rural areas, where clients traditionally shun conventional banks due to concerns over interest.
Islamic banking currently accounts for 497 billion rupees ($5.74 billion), or 7.3% of Pakistan’s overall banking system.
The Asian country also has twelve conventional banks with Islamic operations, creating a network of 800 branches in Pakistan.
Another 150 branches are expected to open in Pakistan by the end of the year.
Despite a fast growth, Islamic banking is still facing various constraints.
“The major constraint for the industry is its small base,” Muzzamil Aslam told OnIslam.net.
He says that the ratio between Islamic banking and the conventional banking is still 1-10, which shows that the industry still has a small base.
“Because of this small base, the growth appears to be overwhelming, otherwise, it is (small base) considered a disadvantage in conventional banking industry,” he added.
However, Aslam admitted that a conventional bank usually starts earning profits after 15-20 years of its establishment, but Islamic banks have done that much earlier.
“But this too is due to a small base,” he insisted.
Experts cite another factor that the industry still lacks the backing of big players.
“Conventional banks, whether local or international, have big players behind that, which have strengthened their base,” Aslam said.
He observes that Islamic banks do not have such advantage, which is hampering its base-growth.
“All the conventional banks in Pakistan still have or had government support in past that is why their base is much stronger that the Islamic banks, which are newcomers,” he said, referring to six major local banks, of which five have been denationalized in recent past.
Experts also cite the lack of vibrancy as yet another constraint for Islamic banks.
“So far, the ordinary people are being lured by the label of Islamic banking, otherwise there is nothing exceptional introduced by Islamic banks,” said Shahid Hassan Siddiqui, an expert on Islamic banking.
“They are still following various principles of conventional banking, which raises doubts.”
“Though, there are Fatwas (religious decree) issued by renowned Islamic scholars in favor of current Islamic banking, however due to adoption of various principles of conventional banking by Islamic banks, have created doubts in the minds of many people,” he opined.
Aslam believes that Islamic banks lack avenue to invest as well.
“The entire banking system, including loans, sales, and purchase, is based on interest. Therefore, it is hard for Islamic banks to find ample avenues to invest,” he said.“Even if all the Pakistanis today decide to deposit their money in Islamic banks, they would not have avenues to invest that money.”
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