Islamic banking has 13pc share in overall banking industry

Islamabad—Islamic banking now has a 13pc share in our overall banking industry. But its ability to serve agriculture, small and medium enterprises, poor households and low-cost housing sectors remains low for want of a more diversified range of Shariah complaint products. And, even in corporate financing, Islamic banking institutions (IBIs) are unable to tap unmet requirements because of a lack of needed diversification of financial products. As of March 2016, IBIs’ outstanding financing of the corporate sector was as high as 74.3pc higher than the entire banking industry’s exposure of 68.4pc of the financing mix. Compared to this, their financing of SMEs and agriculture stood at 2.6pc and 0.7pc respectively far lower than the banking industry’s average of 5.8pc in each case.
“Two things keep IBIs from reaching out to the reservoirs of potential clientele,” says a former senior central banker. “First, their branch networks are still concentrated in large urban centres (56pc of all IBIs branches are located in five big cities i.e. Karachi, Lahore, Rawalpindi, Islamabad and Faisalabad). Secondly, the product range of IBIs is a bit narrow and their reliance is too heavy on just two Islamic modes of financing.” As of March 2016, Murabaha and Diminishing Musharaka had a combined 54.5pc share in the financing mix of Islamic banking.
“Both Murabaha and Diminishing Musharaka cover a wide range of Shariah-compliant contracts, with a variety of corporate and non-corporate clients,” says a senior executive of Dubai Islamic Bank. Other modes of financing (like Ijarah, Musharaka (plain), Salam and Istisna) are also used frequently for contracting deals with borrowers. Bank executives agree that “not enough work has been done with a view to enhancing the scope of these modes of Islamic finance to the extent that a variety of banking products based on them can be developed.”
Central bankers say that the five-year (2014-18) strategic plan for Islamic banking does recognise the need for further development and diversification of Shariah-compliant banking products. Since its initiation IBIs’ reliance on Murabaha and Diminishing Musharaka has gradually shrunk from 66.2pc in March 2014, to the current 54.5pc of total Shariah compliant financing. “One must understand that the modes of Islamic financing (that we discuss in terms of product development) are the foundations on which buildings of Islamic banking products are built.’ says an official of SBP well-versed with Islamic banking. “When businesses and individuals deal with IBIs they are introduced to banking products that look, and the names of which sound similar to conventional banking products. So, from a clients’ point of view it’s less important what modes of Islamic financing are being used most often and what modes are being used with lesser frequency or on a limited scale.”—Agencies

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