- Islamic banking’s market share likely to move up in Pakistan
Global outlook
Islamic financing emerged 50 years ago, in countries with large Muslim populations who were keen to ensure their sources of funding were governed by the requirements of Shariah and the principles of Islam. In 2019, Islamic finance assets amounted to US$2.88 trillion, the highest recorded growth for the industry since the global financial crisis. The prospects look positive: by 2024, this is set to rise to US$3.69 trillion. While Muslim countries have turned to Shariah financing to fund their thirst for capital, another underlying reason for its popularity is that Shariah financing is beginning to broaden its appeal among non-Muslim countries too.
The $2.2 trillion global Islamic finance industry is expected to grow 10 to 12% over 2021-2022 due to increased Islamic bond issuance and a modest economic recovery in the main Islamic finance markets. The industry continued to grow last year despite the COVID-19 pandemic, although at a lower pace than in 2019, with global Islamic assets expanding by 10.6% in 2020 against the growth of 17.3% previous year.
Islamic finance, which bans interest payments and pure monetary speculation, has been on the rise for many years across markets in Africa, the Middle East and Southeast Asia, but it remains a fragmented industry with uneven implementation of its rules. The industry is expected to receive some support in the coming two years in Saudi Arabia, where mortgages and corporate lending are expected to rise as the country pushes ahead with plans to diversify the economy. Investments in Qatar for the 2022 Soccer World Cup and the Expo event in Dubai last year are also expected to support growth. On the other hand, there is pressure on real estate developers, given the drop in real estate prices in the GCC (Gulf Cooperation Council) and building risks in the commercial real estate sector. Similarly, companies related to aviation, tourism, travel, and hospitality sectors that have been severely hit by COVID-19 will take several quarters to recover to pre pandemic levels.
Domestic outlook
2021 has been a remarkable year for the Islamic banking industry. Both assets and deposits have reached new peaks during CY21 witnessing strong growth. Assets have increased by Rs. 1,307 billion whereas deposits have grown by Rs. 822 billion. In percentage terms, this translates to 30.6% and 24.2% respectively. Increase in assets was mainly driven by investments and financing. On the funding side, increase in deposits was mainly because of increase in current and savings deposits. Out of Rs. 1,307 billion in assets, Rs. 591 billion is investments whereas Rs. 716 billion is financing. The breakup of Rs. 822 billion deposits is such that Rs. 457 billion lies in current deposits and Rs. 277 billion is in savings deposits whereas Rs. 88 billion is in other deposits.
Islamic banking industry has played a significant role in implementation of various SBP’s initiatives like Temporary Economic Refinance Facility (TERF), Export Refinance Facility (ERF), Mera Pakistan Mera Ghar (MPMG) and Naya Pakistan Certificates (NPC) under Roshan Digital accounts.
At present, there are 5 full-fledge Islamic banks whereas 17 conventional banks exist with Islamic branches. The market share of Islamic assets is 18.6% whereas that of deposits is 19.4%. The overall market share of Islamic banking at 26% is expected to grow further in times to come.