Islamic banks provide cheaper financing: industry officials

KARACHI: Islamic banks offer affordable financing to the government and competitive rates for housing and auto loans, according to officials in the Islamic finance industry.

Islamic banking has had a significant impact in Pakistan, benefitting over 10 million customers. The sector has shown impressive growth, expanding at a rate of 24.4 per cent per year in the country.

The growth of Islamic finance is not only due to religious adherence but also its practical, asset-based investment model, which provides a competitive alternative to conventional banking.These remarks from officials in the Islamic banking industry came after the Senate Standing Committee on Finance and Revenue called for greater transparency in Islamic financial institutions’ operations and a detailed comparative analysis of profits charged to consumers and the overall profitability of Islamic banking compared to other countries.

The committee highlighted concerns about Islamic banks charging excessively high interest rates, which are often higher than those of conventional banks.To address concerns that Islamic banks may charge higher rates compared to their conventional counterparts, a recent review of the government of Pakistan’s auctions for Ijarah Sukuk -- a Shariah-compliant financial instrument -- provides deeper insights, according to bankers.

In the auction held on July 25, one-year Sukuk was issued at a rate of 17.22 per cent, which is1.02 per cent lower than the 18.24 per cent rate of a comparable one-year T-bill issued just a day earlier. Similarly, Sukuk issued on August 16, were priced at 15.99 per cent, outperforming the 17 per cent rate of a one-year T-bill issued on August 21, by 1.01 per cent. This pattern of lower rates continued with three-year and five-year Sukuk, which were priced more competitively than their conventional equivalents.

On the consumer front, Islamic banks are increasingly gaining market share. An average Islamic car financing product offers an average profit rate of 21.25 per cent, which aligns closely with the industry standard. Given that conventional banks have an average profit rate of around KIBOR plus 4.5 per cent, equivalent to approximately 21.5 per cent with today’s KIBOR rates, Islamic banks are competitively priced.

Islamic banks have historically set benchmarks, with their lowest profit rate last year being 0.5 per cent below the KIBOR rate, prompting other banks to adjust their rates accordingly.

In the housing finance sector, Islamic banks’ diminishing Musharaka product maintains an average profit rate of 20.56 per cent, consistent with industry rates. Since 2022, Islamic banks have offered a unique fixed profit rate with an average of 15.75 per cent across all segments, which is below the current KIBOR regime by nearly 3.0 per cent. This competitive pricing has influenced other banks to adopt similar strategies.

It is important to note that Islamic banks are subject to rigorous oversight by their Shariah compliance departments, ensuring adherence to Islamic principles while maintaining international standards in other financial functions, the bankers said.

Islamic banking plays a crucial role in the housing sector, with around 55 per cent of all housing cases, including low-cost options, being financed through Islamic financial institutions. Islamic housing and auto finance lead the industry, providing competitive rates that help consumers make informed financial decisions while adhering to Shariah law. Today’s Islamic financial products are increasingly sophisticated, meeting diverse needs while ensuring compliance with Islamic law.

The proliferation of Shariah-compliant equity indexes across various geographies and sectors further illustrates the market’s expansion and the growing sophistication of Islamic finance, according to the bankers.