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Growth of Islamic Banking in Pakistan

Statistics show that in Pakistan the composition of Islamic banking industry (IBI) stayed similar with 22 Islamic banking institutions comprising 5 full-fledged Islamic banks (IBs) and 17 conventional banks having standalone Islamic banking branches (IBBs) at the end of December 2020. Despite Covid-19 pandemic condition in Pakistan experts reveal that the Islamic banking sustained a strong growth during previous year as the Government of Pakistan borrowed over Rs 700 billion from Shariah-compliant banks during the year to partly finance its budget deficit and to reduce circular debt in the energy sector. Statistics released by the State Bank of Pakistan (SBP) explained that overall assets and deposits of IBI showed tremendous growth of 30 percent and 28 percent respectively during 2020. The Branch Network of IBI saw a quarterly expansion of 153 branches and rose from 3,303 branches to 3,456 branches (spread across 124 districts of the country). During the year 2020, 230 branches were added to the branch network. During the last quarter, 252 new windows were added to the network of Islamic banking windows operated through conventional banks having IBBs and reached a total of 1,638 Islamic banking windows by end December 2020. The Asset base enlarged from Rs. 3,809 billion by end September 2020 to Rs. 4,269 billion by end December 2020, mainly because of rise in investments. Assets of IBI witnessed a quarterly rise of Rs. 461 billion as against to a rise of Rs. 289 billion during the same quarter of previous year.

Mode Wise Islamic Financing In Pakistan (Share in %)
Mode Dec-19 Sep-20 Dec-20
Murabaha 12.9 13.3 13.7
Ijarah 5.8 5.3 4.8
Musharaka 19.8 23.5 22.7
Diminishing Musharaka 34.2 34.5 33.6
Salam 2.6 1.5 1.9
Istisna 9.6 7.9 8.3
Others 14.8 13.9 15.0
Total 100.0 100.0 100.0

SBP unveiled its 3rd 5-year strategic plan for IBI. The strategic plan included 30 percent share in both assets and deposits of overall banking industry, 35 percent share in branch network of overall banking industry, and 10 percent and 8 percent share of SMEs and Agriculture financing respectively, in private sector financing of IBI. SBP has been offering proactive guidance by issuance of strategic plans for IBI; so far, two 5-year strategic plans have been issued, to steer the growth of Islamic banking on sound footings. No doubt, SBP aims at making Islamic banking one third of the overall banking industry through 2025. The plan also emphasizes that Islamic banking institutions must develop innovative products based on distinctive Shariah characteristics to cater to underserved sectors mainly SMEs and Agriculture, which are critical for growth of Pakistan’s economy. SBP has targeted to raise Islamic banks’ market share (in terms of deposits) to 25 percent through 2023.

Similarly, present Prime Minister of Pakistan has set a target to raise the market share of Islamic banks to 30 percent through 2025. Furthermore, it is identified that IBI had left behind conventional banking on multiple fronts. For instance, it holds a 60 percent market share in the housing and construction loans. Similarly, it enjoys almost 50 percent market share in car financing. It is also suggested that the Government of Pakistan wants to raise its borrowing from Shariah-compliant banks to 30 percent of the total shortly. This share, however, stands at a nominal 2.5 percent at present. According to SBP on a yearly basis, assets of IBI were increased by Rs. 986 billion, recording a YoY growth of 30 percent. The surge in asset base enabled IBI to reach a market share of 17 percent in terms of overall banking assets. At the quarter ending December 2020, assets of IBs witnessed a rise of 11.8 percent to reach Rs. 2,499.4 billion from Rs. 2,235.9 billion by end September 2020.

Whereas, assets of IBBs recorded a surge of 12.5 percent and increased to Rs. 1,770 billion from Rs. 1,572.9 by end September 2020. Further, the share of IBs and IBBs in overall assets of IBI stood at 58.5 percent and 41.5 percent, respectively. At the quarter ending December 2020, investments (net) made by IBI recorded substantial rise of 17.9 percent and were registered at Rs. 1,261.2 billion as compared to rise of 0.3 percent in same period of 2019. This rise is chiefly attributed to investments made by IBI in GoP Sukuk during the period under review. It is worth mentioning that GoP issued domestic sovereign Sukuk of Rs. 201.2 billion during the period under review. An analysis of investments made through IBs & IBBs during the quarter revealed that Investments (net) made by IBBs recorded a growth of 20.4 percent, which was greater than the growth of 15 percent made by IBs in last quarter. Profit before tax of IBI was registered Rs. 88.4 billion at the quarter end December 2020. While, earnings ratios like ROA and ROE (before tax) were reached at 2.4 percent and 36.4 percent, respectively.

During the period under review, operating expense to gross income of IBI was registered at 47.5 percent. On the other hand, Moody’s hopes that the growth in Islamic banking is going to greatly benefit the banking sector in Pakistan. Because attracting previously unbanked customers facilitates deposit and loan growth while reducing funding costs because of the banks’ access to a large pool of non-remunerated deposits.

In Pakistan, Moody’s expects Islamic banking to continue growing by targeting customers who prefer Islamic products or are voluntarily excluded or underserved because of their religious belief. It is also important to note here IMF and ADB had also suggested to the Government of Pakistan to focus on Islamic financing for budgetary borrowing following the trend and awareness of Shariah compliance surged in society.

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