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  • Shariah-compliant financing likely to move faster than conventional funding

According to S&P Global Ratings the global Islamic finance industry is expected to grow by approximately 10 per cent in 2023-24 despite the economic slowdown, after recording a similar expansion in 2022 chiefly led through the GCC countries.

Statistics showed that the sector in 2022 continued to enlarge, with assets up by 9.4 per cent compared with 12.2 per cent in 2021, supported by growth in banking assets and the Sukuk industry.

Financing Products By Islamic Banks (per cent Share)
Mode of Financing CY17 CY18 CY19 CY20 CY21 CY22
Murabaha 13.2 13.6 12.9 13.7 13.6 12.0
Ijara 6.4 6.2 5.7 4.8 4.4 4.2
Musharaka 22.0 19.9 19.8 22.7 24.9 25.2
Mudaraba 0.0 0.0 0.0 0.0 0.0 0.0
Diminishing Muskaraka 30.7 33.3 34.1 33.6 33.8 34.8
Salam 2.8 2.4 2.6 1.9 2.0 1.6
Istisna 8.2 9.1 9.5 8.3 8.3 9.3
Qarz/Qarz-e-Hasna 0.1 0.0 0.0 0.0 0.0 0.1
Others 16.7 15.5 15.4 15.0 13.0 12.8
Total 100.1 100.0 100.0 100.0 100.0 100.0

GCC countries, chiefly Kuwait and Saudi Arabia, spurred 92 per cent of the growth in Islamic banking assets previous year. In Saudi Arabia, the biggest Arab economy, the implementation of its ambitious diversification strategy, Vision 2030, and continued growth in mortgage lending supported the industry’s growth.

In other parts of the world, however, the Islamic finance industry’s growth was either muted or held back through local currency depreciation. In 2023 global Sukuk issuance is forecast to level off in the range of $170 billion to $175 billion, after a 10 per cent fall in 2022 to $178 billion, Moody’s Investors Service said in a research report in March. It is also recorded that the demand for Shariah-compliant financing is set to outpace conventional funding in 2023, driven through strong economic growth and development agendas in key markets. S&P also registered that corporates are probably to contribute to issuance volumes, mainly in states like Saudi Arabia, where governments have proclaimed transformation plans.

After Indonesia, Pakistan is the second-largest Muslim nation. Pakistan’s Islamic banking industry has received overwhelmingly positive responses from the populace, with religious factors leading the way.

Pakistan’s Islamic banking portfolio beyond mere statistics, has triumphed in capturing a substantial market share, significantly altering people’s financial inclinations.

In a nation where deeply held religious beliefs shape lives, Islamic banking isn’t a mere financial alternative; it symbolizes a genuine alignment of personal values and economic choices.

As per the statistics showed by the State Bank of Pakistan (SBP) that in Pakistan the network of IBI comprised of 22 Islamic Banking Institutions (IBIs), including 5 full-fledged Islamic Banks (IBs) and 17 Conventional Banks having Islamic Banking Branches (IBBs). During September 2022, 105 branches were added to the branch network of IBI. With this addition, the branch network of IBI reached to 4,191 (spread across 129 districts of the country) by end September, 2022. During the period under review, assets of IBI increased by Rs 121 billion and stood at Rs 6,902 billion as against to Rs 6,781 billion in the previous quarter. Market share of IBI’s assets in overall banking assets also grew to 20 per cent by end September, 2022 as against to 19.5 per cent in the last quarter. The Expansion in asset was chiefly backed by investments (net) that exhibited a quarterly upsurge of Rs 149 billion. Likewise, financing (net) of IBI experienced an escalation of Rs 24 billion during the period under review. The Share of investments (net) and financing (net) in the total assets of IBI was registered at 40.9 per cent and 43.3 per cent, respectively by end September, 2022.

Researchers recorded that the concept of Islamic banking was introduced roughly two decades ago. Since that pivotal introduction, the Islamic banking industry has grown extraordinarily. In terms of its footprint, Islamic banking holds almost 20 per cent of the total assets within the financial sector. This translates into a figure of about Rs 7 trillion. This Influence enlarges even further, claiming a substantial 25 per cent share in advances, almost Rs 3 trillion. It also accounts for a 22 per cent share of deposits of the overall banking industry, amounting to around Rs 5 trillion. Financing & related assets (net) of IBI rose by Rs 24 billion during the period under review and stood at Rs 2,985 billion by end September, 2022. The YoY growth of financing of IBI was registered at 31.7 per cent by end September, 2022. Breakup of financing and related assets (net) among IBs and IBBs divulges that financing & related assets (net) of IBs experienced a quarterly raise of Rs 33 billion to reach Rs 1,527 billion by end September, 2022.

However, financing and related assets (net) of IBBs declined by Rs 9 billion and were registered at Rs 1,458 billion by end September, 2022. Unluckily there is no doubt that Islamic banking faces multiple problems at regulatory, institutional and consumer levels. From the perspective of Islamic banks, the biggest challenge appears to be the deployment of assets. One of the biggest problems for the government is the lack of infrastructure projects, or even land, that are unencumbered and therefore can be utilized as underlying assets for Islamic bonds.

Another problem is the perceived lack of trained human resources also the notion that full conversion may adversely affect Pakistan’s relationship with international financial institutions, although industry experts say these are basically cited as excuses to slow down the pace of transition.

No doubt, SBP is actively involved in the promotion and capacity building of IBIs in addition to establishing an accommodating regulatory and supervisory framework. SBP has also taken various initiatives to issue rules and guidelines to level the playing field for IBs. Along with these activities, the government of Pakistan has put up a variety of regulations and rewards to promote Islamic banking.