Pakistan plans to double Islamic banking services in the next three years to meet rising demand as an economic recovery helps boost household wealth, according to a central bank official.
The industry will grow to 12 percent of conventional banking from 6 percent in two to three years, driven by “increasing awareness and interest” within Pakistan for investments that comply with Muslim tenets, Salim Ullah, director for Islamic banking at the State Bank of Pakistan, wrote in an e-mail. The global economic crisis will also bolster appetite for Shariah-compliant products, he said.
Pakistan’s central bank forecasts the $150 billion economy will expand 4.1 percent in the fiscal year ending June 30, rebounding from a 1.2 percent pace of growth in the previous 12 months, the worst performance in two decades.
“Although the growth would be driven by domestic factors, the heightened global interest in Islamic finance, specifically after the recent financial crisis, will also contribute to the growth of Islamic banking in the country,” Ullah said.
The central bank has given preliminary approval to establish two more banks that will offer full-fledged Islamic banking services, taking the total to eight, he said. The biggest of the existing six is Meezan Bank and the nation has another 13 lenders that provide both conventional and Islamic services.
New Investment Products
The South Asian nation introduced Islamic financial services in 2001, and sold its first overseas sukuk notes in January 2005, raising $600 million from international investors. Pakistan had 42.2 billion rupees ($491 million) of outstanding domestic sukuk as of April 30, less than 1 percent of its 4.6 trillion rupees of regular debt, according to central bank data.
The future growth in Islamic financing “will be led by deposits, which will force institutions to diversify their investments,” Ullah said. The central bank plans to support the expansion by providing more Shariah-compliant money-market products, he said.
Islamic financial products, created in the 1970s, must be vetted and approved by recognized scholars to ensure investments and services comply with Shariah law. Sukuk pay returns backed by physical assets because interest payments are forbidden.
The main challenges facing the industry are a shortage of Shariah-qualified bankers and an inadequate supply of liquidity management instruments, Ullah said.
“Most of the bankers are trained in conventional banking and this is putting a strain on the industry’s profitability,” he said. “The sustenance of growth momentum with such a human- resource base will be a huge challenge.”
In addition, the Islamic banking institutions are developing “replicas” of conventional banking products, which is limiting their growth, Ullah said. These institutions need to “think beyond conventional banking products and develop their own based on inherent strengths.”.
Global Islamic bond sales are growing for the first time since 2007. Offerings of sukuk climbed 10 percent to $6.1 billion so far in 2010, the most since a 47 percent increase in the same period three years ago, according to data compiled by Bloomberg.
Assets to Quadruple
The Islamic finance industry’s assets may quadruple to $2.8 trillion by 2015 from about $700 billion in 2005, according to the Kuala Lumpur-based Islamic Financial Services Board, an agency that sets standards.
Gross domestic product in South Asia’s second-biggest economy increased at an average pace of about 7 percent in the five years from 2004 to 2008, boosted by aid from the U.S. and other donor countries that was sent to help fight Taliban militants.
“There was some slowdown in the pace of growth in Islamic financing in the past two years due to the slump in overall economic activity in the country caused by the unfavorable domestic and international business environment,” Ullah said. The pace of economic growth is picking up and a large number of Muslims are placing their funds with Islamic financial institutions, he said.
source : Bloomberg