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New strategic plan for the growth of Islamic Banking

Strategic plan for the development of Islamic Banking announced by SBP

State Bank of Pakistan (SBP) has unveiled the third five-year Strategic Plan for the development of Islamic Banking in the country. The plan has set headline targets for Islamic banking to be achieved by 2025. These include: 1) achieving 30% share in both assets and deposits of overall banking, 2) boosting to 35% share in branch network of overall banking, and 3) acquiring 10% and 8% share of SMEs and agriculture financing respectively, in private sector financing by Islamic banking.

In order to steer the growth of Islamic banking on sound footings, SBP has been providing proactive guidance through issuance of Strategic Plans for the Islamic banking industry as two five-year Strategic Plans have already been issued. The third Strategic Plan covering 2021-25 aims at setting a strategic direction for banking to strengthen the existing growth momentum and lead banking to the next level of growth. The plan has been developed in close coordination and consultation with all the key relevant stakeholders.

The Strategic Plan envisages achieving the aforementioned specified targets by focusing on six strategic pillars namely: 1) strengthening legal landscape, 2) enhancing conduciveness of regulatory framework, 3) reinforcing comprehensive Shariah governance framework, 4) improving liquidity management framework, 5) expanding outreach and market development, and 6) bolstering human capital & raising awareness.

Islamic banking has widened its footprint in banking system of the country. Currently, 22 Islamic banking institutions (5 full-fledged Islamic banks and 17 conventional banks having standalone Islamic banking branches) are offering Shariah compliant products and services through a network of 3,456 branches and 1,638 Islamic banking windows (dedicated counters at conventional branches) spread across 124 districts of the country. In terms of share, the Islamic banking has attained a market share of 17% and 18.3% in assets and deposits of overall banking, respectively by end December 2020.

SBP aims at making Islamic banking one-third of the overall banking by 2025. Keeping in view the potential towards ensuring broad based economic growth and development, Islamic banking has remained a top priority area for the SBP. The plan provides a consensus based agenda and strategy to make Islamic banking an efficient and practical solution for consumers. It also contains an extensive focus on improving the public perception of Islamic banking as a distinct and viable system capable of catering to the varied financial services needs of various segments of the society that would significantly contribute to increasing overall financial inclusion in Pakistan.

The plan also emphasizes that Islamic banking institutions must develop innovative products based on distinctive Shariah characteristics to cater to underserved sectors particularly SMEs and Agriculture, which are critical for the growth of the country’s economy.

Islamic banking is expected to fully capitalize on the potential of Islamic finance to attain the shared vision of a vibrant and sustainable Islamic banking sector in Pakistan.


It is heartening to note the details of the plan, but it is also important to emphasize that some concrete steps must also be taken to contain growth of Riba-based banking in the country. In this regard the top priority area should be borrowing by the Government of Pakistan (GoP). It is on record that the GoP is the biggest borrower in the country, but bulk of the borrowing is Riba-based. The latest flotation of US$2.5 billion Eurobonds could have been met through Shariah compliant mode.

Islamic banks have received a lot of appreciation for the issue of Energy Sukuks. However, some of the objections must not be ignored. It may be true that the best efforts are being made to make Energy Sukuks Shariah compliant, but it is in no way aimed at creating new assets or jobs. On the contrary, it is patronizing inefficiencies of the power sector. It is known to all and sundry that ballooning of circular debt is primarily due to pilferage and non-payment of dues. The second objection is that the Energy Sukuks are backed by ‘credible earning assets’, which are being exhausted. It is suggested that the GoP should refrain from issuing more Energy Sukuks.

The share of Islamic banks in lending to farmers has remained low. With the advent of Warehouse Receipt Financing System in the country, enormous opportunities have been created for the construction of modern grain storage silos as well as lending to farmers against the produce. The enormous level of investment can be gauged from the quantum of three crops only, i.e. wheat, rice and maize. It is worth pointing that nearly 15% of these crops go stale before reaching the markets. If this wastage is contained, it will not only increase income of the farmers, but Pakistan will also be able to earn extra foreign exchange by exporting the saved quantities.

Another area needing immediate attention of the central bank as well as the commercial banks is flotation of gold backed exchange traded funds. At present many mutual funds in Pakistan invest in shares and fixed income securities, but there are only a few funds that invest in physical gold.

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