Islamic finance on the increase in Pakistan


ISLAMIC finance is growing in the Gulf-Pakistan-Asia region, but industry sources say the future potential is massive. The potential of Islamic forms of finance, banking, and insurance in Pakistan and rest of Gulf-Asia region were explored at a two-day Asia Finance conference.
Although Islamic financing sprang  from the Gulf region which is also a prominent vehicle to promote it  elsewhere, Pakistan Asian counties, and rest of the world are caching up.
Islamic products
M.A. Mannan, Deputy CEO of Dubai Islamic bank, says 80 per cent 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 says.  
Mohammad Imaran, Gulf Based Bank Islami's Country head of  consumer banking, has analysed the Islamic wealth management. "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, he says.
What should be the immediate target for Islamic bankers and providers of other instruments to achieve? Dr Shamshad Akhtar, Governor, State bank of Pakistan (SBP), the central bank, is keeping her sights high, and wants the Islamic financial institutions to strive for high volumes, and a greater variety of new products. "Islamic banks should grow annually at the rate of 40 to 50 per cent to raise its share from the existing 3.5 per cent to around 15 per cent over the next few years, she advised delegates to Asia-Finance Conference, at Karachi. This was the third  conference devoted to Islamic Financial Services.
These targets may appear ambitious, but currently, Islamic banking in some of the countries has already achieved these results, she said. I had, sometime ago, asked her what is the future of general banking in Pakistan, although it is in a boom-mode for the last five years, with high profitability and high growth? "Islamic banking and small and medium enterprise banking to fund SMEs is the future, business growth and expansion-wise, she said. That, it looks, like is true of the entire region.
The high growth rate of the banking and financial system, will also require determined efforts to expand Islamic modes. Dr Akhtar, firmly believes and 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 and attractive and alternative of 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 mobilisation in order to raise the domestic saving rates, besides diversification and providing innovative financial structures.   
Such joint efforts will also expand capacities and the level of understanding in fields like risk management by Islamic banks, good corporate governance, development of liquidity management  instruments to raise the level of investors confidence, and promotion and ensuring international standards and  best practices.  
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 per cent market share. Other countries need to catch up.
Dr Akhtar sized up the Islamic banking in detail. The Islamic banks‚ total assets in Pakistan at the moment are Rs 159 billion or 3.4 per cent of the market share. Their deposits  are 3.1 per cent, and financing is 3.3 per cent.
SBP launched its Islamic Banking Policy (IBP) in December 2001. As a result, 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.
She also says 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 says, will conform to standards being promoted by the Islamic Financial Services Board (IFSB). The Board is led by Governors of Central Banks. Dr Akhtar will assume as Chairperson of IFSB in January, 2008.
A number of bankers were of the opinion that Islamic finance will grow phenomenally like cellular phones and mineral water, which quickly took the market by a storm. Islamic finance industry needs to spend money to propagate its products, and to create awareness, to achieve this. Ahmed Shuja Kidwai, of Albaraka Islamic bank, said, over 500 Islamic banking institutions are now working across the world, which shows the growth potential. 
Leading international conventional banks like Citibank and Deutsche Bank have also started Islamic banking  which is 100 per cent based on Islamic Sharia. 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 says, 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 provided finance for all such requirements.
At the same time, some 53 per cent rural population which is engaged in non-form activities, like cottage industry, also need small advances. The participants also focused on Islamic Insurance-Takaful  and its growth potential for the area. Takaful is still new in Pakistan  but has a good potential if it targets the countryside where farmers want insurance 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 Takful and Family Takaful. SBP has fixed paid up capital requirement for General Takaful at Rs300 million, and for Family Takaful at Rs500 million. The paid up capital is just Rs 120 million for General Takaful until December 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 real growth potential for Islamic finance, and a variety of the currently available products, and those which are being developed, offer good profitability. "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 as Dr Akhtar looks at the market. ( Courtesy by Khaleej Times )

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