‘Islamic finance set to give conventional a run for its money’

LAHORE: Islamic banking is ultimately going to overtake commercial banks, which currently control major deposits of the 20 percent of the banked population in the country, while the remaining 80 percent is poor-to-lower-middle income that prefers banking without ribah (interest).

Islamic bankers are positive that financial inclusion would accelerate as the Islamic Banking system expands its network around the country.

Ali Mahoon, president MCB Islamic Bank, says the Islam is more penetrated among the poor and low strata of society that abhor interest (ribah).

This perhaps is the reason that even the high-tech mobile banking has not penetrated much in the population.

Islamic banking was initiated in Pakistan 18 years back and currently accounts for 13 percent of total banking. One drawback in this regard is that most of the Islamic bank branches are located in urban areas, while the unbanked population is in rural regions.

Still in the urban areas these banks are gradually increasing their share at the expense of commercial banks.

Currently there are 5 fully independent Islamic Banks operating in the country having 1,366 branches spread all over the country. Then there are 1191 standalone Islamic Banking branches of 16 conventional banks.

Some conventional banks have also established Islamic banking windows in 128 branches. Total assets of Islamic banks reached Rs2,484 billion at the end of the last fiscal, while deposits hit Rs2,033 billion by June 2018.

Mahoon sees Islamic banks embarking on high growth path. He said the main impediment in this regard in the last few years was the absence of government financing instrument. He said commercial banks could buy treasury bonds in order to ensure banks always have 19 percent of their deposits as Statutory Liquidity Requirement (SLR).

The government did not have any shariah-compliant bond for the Islamic banks to invest, which limited their ability to mobilise deposit, he added.

Mahoon said now the government has floated Rs200 billion worth of sukkuk for power sector, opening a much-needed window for Islamic Banks to grow.

Islamic bankers see technology as the main source of penetration among the poor. The poor needed microfinance and it was beyond the capability of banks to provide services particularly in remote areas.

Each borrower has to be attended by the bank staff for microfinance especially in the rural regions.

Mahoon said his bank is employing digital technology for that reason. The MIB has developed a microfinance product involving some sugar mills, under which, the bank provided inputs to the farmers on behalf of the sugar mills and the latter paid the loan amount back to the bank after deducting it from farmers’ sugarcane payments.

This way, he said, the bank ensured the quality inputs including fertiliser and certified seeds instead of giving out cash to the farmers.

Islamic banks are now in microfinance, consumer banking, small and medium enterprises (SME) and commercial banking. The huge devaluation has impacted the foreign banks heavily. It has diluted their equity and foreign sponsors are not prepared to provide more equity.

Currently, corporate sector with a 74.5 percent share is the leading borrower from Islamic banks, while consumer financing accounts for 10.5 percent.

Agriculture, which should have had a very high share, accounts for only 0.4 percent. It is likely to increase after the aforementioned experience.

The SMEs also account for 3.2 of Islamic finance off-take. Among the industries, 11.8 percent of the financing goes to textiles.

For the depositors the rate of return of Islamic Banks has remained a little lower than the commercial banks in the last three years. Otherwise traditionally the rate of return on deposits has remained higher from Islamic banks.

All Islamic banking products are shariah-compliant and monitored by strong relevant boards of each bank.

The main mode of Islamic financing is musharka, of which 17.9 percent is normal musharka and 29.6 percent is diminishing musharka.