Islamic Banking is spreading its wings in Pakistan and is positioning for growth but it is also drawn against challenges owing to the actuality that conventional banking in the country is more penetrative and holds a larger share in the economy. Islamic deposits – held by fully-fledged Islamic banks and Islamic windows of conventional banks – at present stand at 9.7% of total bank deposits in the country; meaning that every 10th rupee is now being deposited in an Islamic bank account.
Correspondingly, assets managed by banks offering Islamic financial services are 8.6% of total banking assets in the country. Net Islamic savings and investments are 8.19% of the total savings and investment in the banking sector of Pakistan.
There are five full-fledged Islamic banks in Pakistan while 14 conventional banks offer Shariah-compliant banking services through their Islamic windows. At the end of first quarter of 2013, deposits in the Islamic banking system were Rs.704 billion, up by 32% from the corresponding period in the preceding year.
However, the current profit rates of Islamic banking are less than conventional banks. The lending rates are superior to those of conventional banks meaning that there is room for more profit making.
Existing market has matured in terms of market share, bringing about low growth and profitability. New markets need to be touched with market specific strategy. Specifically in Pakistan, most of Islamic banks shares are either unlisted or being traded below par value (BankIslami: 8.41, Meezan: 29.12, Burj Bank: unlisted, Arbaraka: unlisted, DIBPL: unlisted) or at small premium, which shows less confidence of investors. It has a bearing on capital adequacy ratios achievement targets as set by SBP which in return affects credit generation power of the bank generally. There is lesser number of products compared to conventional banks and there is lesser faith on “true shariah businesses” by customers as they are commonly blamed for charging late payment penalty on overdue balances which is in contradiction of Islamic shariah laws.
Efficient help desk services are unavailable for customers due to lack of knowledge about the overall concept and functioning of Islamic banking which makes it less competitive than conventional banks. The customers often have limited call centers or website service options and are repeatedly referred from one department to another. Few Islamic banks have relevant, personalized, online communications with the digital realm: Web, email, and mobile meaning that approaching customers from every aspect to get the attention, do business and retain them as a happy customer. The sales people are poorly prepared and have little understanding of the products they are selling. This is more pronounced in Islamic banking where customers may require addition explanations of shariah compliant product structures. There is a need to improve responsiveness as customers do not receive a call from the bank within the promised time, if at all.
Islamic banks are very reluctant to extend credit to the poor, whereas conventional banks are ready to lend to the poor against little security. The terms and conditions are hard as compared to other banks plus there is no less retail banking options such as types of accounts being offered, credit/debit cards, which are mostly used by the poor or average people. Islamic banks are very small as compared to the conventional banks. Relatively less economies of scale is the result.
Such Banks can achieve economies of scales by means of merger and acquisitions, like Islamic banks can be merged to form a bigger bank hence number of branches would increase and optimization can be done, lesser corporate tax as in government can promote Islamic banking by special tax rates etc. Government can also decide to invest its funds in Islamic banks to increase their loan giving power.
Hitherto, it is difficult to find an Islamic investment for an Islamic bank, due to utilization of Unislamic financing commonly by most of the companies. To overcome this, sukuk are introduced but people believe that they are analogous in characteristics as a Term Finance Certificate. There is an immense need of promoting Islamic banking via effectual marketing and conducting seminars so that the populace gets to know more about “what is Islamic banking and how it functions”. Further, government should lend a hand to boost this sector through effective incentives. Islamic banking sector should also work to expand and enhance the existing services so that it is geared up to serve the customer in “real terms”.
The scope of services for user may be extended to such areas as micro finance, agriculture and small & medium enterprises. This will widen the base of socio-economic development in our country and will address to the two vital issues in our country namely, promotion of employment opportunities and alleviation of poverty.
Collective efforts of all Islamic banks are the need of the time to curb the hurdles involved in expansion of Islamic banking.