RIPHAH UNIVERSITY, ISLAMABAD

Event
RIU International Conference: February 8-9, 2011, Islamabad

Topic for Presentation

The Challenges and Prospects of Islamic Banking in Pakistan

Date & Venue

February 09, 2011, NIBAF, Islamabad
Presentation by
Prof. Dr. Khawaja Amjad Saeed
Professor Emeritus & Founder Principal, Hailey College of Banking & Finance, University of the
Punjab, Lahore Pakistan (2003----), Member Governing Council, International Federation of
Accountants (IFAC), New York (1997-2000), President, South Asian Federation of Accountants
(SAFA) (1997), President, Institute of Cost and Management Accountants of Pakistan (1997-2000),
President, Association of Management Development Institutions of South Asia (AMDISA) (1993-96),
Pro Vice-Chancellor University of the Punjab, Lahore (1994-1996), Founder Director, Institute of
Business Administration (IBA), University of the Punjab, Lahore (1973-1996). 1
 PRESENTATION FRAME
A. Islamic Banking-Inretrospect in Pakistan

B. Growth of Islamic Banks in Pakistan

C. IBIs Deposits & Financing

D. IBIs Investments

E. Selected Performance Indicators: IBIs & Banking

Industry of Pakistan

F. Future Prospects

2
 A: ISLAMIC BANKING - INRETROSPECT IN
PAKISTAN
1. Vision and Mission of Islamic Banking Department of SBP

2. Strategy for Islamic Banking in Pakistan

3. Historical Rundown

3
 A-1: Vision & Mission of Islamic Banking
Department of SBP

State Bank of Pakistan, in its role as central bank, has developed

the following vision and mission:
1. VISION
“To make Islamic Banking the banking of first choice for the
providers and users of financial services”.
2. MISSION
“To promote and develop Islamic Banking industry in line with the
best intersectional practices, ensuring Shariah compliance and
transparency”.

4
A-2: STRATEGY FOR ISLAMIC BANKING IN
PAKISTAN
THREE PRONGED STRATEGY
In Pakistan, SBP has developed the following three point strategies
relating to development of Islamic Banks:
1.Full fledged banks can be established in Pakistan.
2.Islamic Banks can set up their subsidiaries.
3.Stand-alone Islamic Banking branches can be opened by
conventional banks in Pakistan.
Therefore, flexibility exists in respect of starting and
expanding Islamic Banks in Pakistan.

5
A-3: HISTORICAL RUNDOWN (Continued)

1. Pakistan was created out of Islamic Ideology. Therefore Islamic

Banking gets support for its development.
2. Quaid-e-Azam Mohammad Ali Jinnah, father of the Nation,
while inaugurating SBP on July 01, 1948 had guided Research
Department of SBP to help develop Islamic Economic System
which is based on equality and brotherhood.
3. Constitution of Pakistan
Article 38 (f) of the 1973 Constitution of Pakistan is quoted
below:
“The state shall eliminate riba as early as possible”.

6
A-3: HISTORICAL RUNDOWN (Concluded)
4. 1970s to 21st Century
a. 1970s: efforts, in their initial stages, started to eliminate riba.
b. 1980s: Bold and comprehensive initiatives were under-taken. Pakistan
joined the race of three countries in the world for interest free
banking. Several existing laws were reviewed. New financial instruments were
introduced, Twelve Non-Interest Based (NIB) modes were released to replace
riba based practices, Profit & Loss Sharing concept was introduced.
c. 1990s: Court battles were on. Instructions were issued by courts for a
time framework for implementation of replacing conventional banks into
Islamic Banks. However the system did not positively respond for
implementation.
d. 2000s: In January 2002 Commission for Transformation of Financial
System was constituted in SBP. Task Force was set up to suggest ways to
eliminate interest from government financial transactions.
However, the end conclusion has been to continue parallel banking ie.
Conventional and Islamic Banks. This system is going on in Indonesia
and Malaysia also.
7
B: GROWTH OF ISLAMIC BANKS IN PAKISTAN
1. Some Growth of Islamic Banks: Important Indicators
2. Growth of Islamic Banks Branches
3. Islamic Banking Branches Network-Three Aspects
4. Islamic Banking Branches Network-Seven Aspects
5. Full Fledged Islamic Banks
6. Islamic Branches of Conventional Banks
7. City wise break-up of Islamic Banking Branches
8. Islamic Banks sub-branches
9. Maximum & minimum braches network of Islamic Banks
10. City wise Islamic Banking Branches network as on September
30, 2010.

8
 B-1: GROWTH OF ISLAMIC BANKS:
Some Important Indicators
December 2003 to September 2010

Year Total Assets Deposits Net financing investment

(December) Total Rs.b Share of IBIs % Total Rs.b Share of IBIs % Total Rs.b Share of IBIs %

2003 13 1 8 1 10 1
2004 44 2 30 1 30 1
2005 71 2 50 2 48 2
2006 119 3 84 3 73 2
2007 206 4 147 4 138 4
2008 276 5 202 5 186 4
2009 366 6 283 6 226 5
2010 (Sept) 424 6 338 7 233 5

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, September 2010, P.4.
9
 B-2: GROWTH OF ISLAMIC BANKS BRANCHES
December 2003 to September 2010

Year (December) Number Base Index Number of Times

2003 17 100 1
2004 48 300 3
2005 70 412 4
2006 150 882 9
2007 289 1,700 17
2008 515 3,029 30
2009 651 3,829 38
2010 (Sept) 684 4,023 40

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, September 2010, P.4.

10
 B-3: ISLAMIC BANKING BRANCHES NETWORK
As on September 30, 2010

Number of
Particulars
Branches %
A: Full Fledged Islamic Banks 437 64
B: Islamic Branches of Conventional Banks 197 29
C: Sub-Branches 50 07
Total 684 100

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, September 2010, Table 8, P.8.

11
 B-4: ISLAMIC BANKING BRANCHES NETWORK
As on September 30, 2010

S. No. Province Number %

1. Punjab 306 44
2. Sindh 231 34
3. Khyber Pakhtoonkhwa 73 11
4. Baluchistan 33 05
5. Federal Capital 33 05
6. Azad Kashmir 07* 01
7. Northern Area 1* -
684 100
*As on December 31, 2009

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, September 2010, Table 9, P.8.

12
 B-5: FULL FLEDGED ISLAMIC BANKS
As on December 31, 2009

S. No. Banks Number of Branches %

1. Meezan Bank Ltd 166 41
2. Bankislami Pakistan 70 18
3. Emirates Global Islamic Bank Ltd 58 15
4. Dawood Islamic Bank Ltd 42 10
5. Dubai Islamic Bank Pakistan Ltd 35 9
6. Al Barka Islamic Bank 29 7
400 100

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P.16.

13
 B-6: ISLAMIC BRANCHES OF CONVENTIONAL BANKS
As on December 31, 2009
S. No. Banks Number of Branches %
1. Bank Alfalah Ltd 60 36
2. Askari Bank Ltd 29 17
3. The Bank of Khyber 18 10
4. MCB Bank Ltd 11 6
5. Standard Chartered Bank 11 6
129 75
6. National Bank of Pakistan 8 5
7. Bank Al-Habib Ltd 6 4
8. Faysal Bank Ltd 6 4
9. Soneri Bank Ltd 6 4
10. United Bank Ltd 5 3
11. Habib Metropoltian Ltd 4 2
12. The Royal Bank of Scotland 3 2
13. Habib Bank Ltd 1 1
39 25
168 100
Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P.16. 14
 B-7: CITY-WISE BREAK-UP OF ISLAMIC BANKING
BRANCHES
As on December 31, 2009

S. No. Province Number %

1. Punjab 38 47
2. Khyber Pakhtoonkhwa 17 21
3. Sindh 12 15
4. Baluchistan 10 13
5. Azad Kashmir 2 2
6. Federal Capital 1 1
7. Northern Area 1 1
81 100

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, December 2009, P.18.

15
 B-8: ISLAMIC BANKS SUB BRANCHES
As on December 31, 2009

S. No. Banks Number of Branches %

1. Bank Alfalah Ltd 35 44
2. Bankislami Pakistan Ltd 32 40
67 84
3. Dawood Islamic 8 10
4. Askari Bank Ltd 2 2
5. Emirates Global Bank Ltd 2 2
6. Dubai Islamic Bank Ltd 1 1
7. The Bank of Khyber 1 1
14 16
81 100
Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of
Pakistan, December 2009, P.16.

16
B-9: MAXIMUM & MINIMUM BRANCHES NET WORK
OF ISLAMIC BANKS
AS on December 31, 2009
Number
S. No. Province
Maximum Minimum
1. Sindh/Karachi (Five Cities) 180 1
2. Punjab/Lahore (Twelve Cities) 109 1
3. Federal Capital/Islamabad 31 -
4. Khyber/Pakhtoonkhwa (Eight Cities) 28 1
5. Baluchistan/Quetta (Eight Cities 21 1
6. Azad Kashmir/Mirpur AK Muzafarabad 4 3
7. Northern Area/Gilgit 1 -

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, December 2009, P.18.

17
B-10: CITY WISE ISLAMIC BANKING BRANCHES NETOWRK
As on September 30, 2010

S. No. City Number %

1. Karachi 193 28
2. Lahore 117 17
3. Rawalpindi 33 5
4. Peshawar 29 5
5. Faisalabad 28 4
6. Multan 24 3
7. Quetta 22 3
446 65
8. Others 238 35
684 100
Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of
Pakistan, September 2010, Table 9, P. 8.

18
 C: IBIs DEPOSITS & FINANCING

1. Deposits

2. Sectoral Composition

3. Products

4. NPFs Time Series

5. Deputy Governor of SBP Suggested Investment Portfolio

for IBIs

19
 C-1: IBIs Deposits
As on September 30, 2010
S. No. Particular Rs. Billion %
A: CUSTOMERS
Fined Deposits 128 39
Saving Deposits 113 33
Currents Accounts-non-Remunerative 74 21
Others 03 01
318 94
B: FINANCIAL INSTITUTIONS
Remunerative 20 06
338 100
C: CURRENCY WISE BREAKING
Local Currency Deposits 320 95
Foreign Currency Deposits 18 05
338 100
Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of
Pakistan, September 2010, Table 7, P. 7. 20
C-2: IBIs FINANCING: SECTORAL COMPOSITION
September 30, 2010

S. No. Sectors IBIs% Industry %

1. Individuals 18.83 12.5
2. Textile 17.91 16.8
3. Chemical & Pharmaceuticals 9.91 4.3
4. Energy: Production & Transmission 6.40 9.6
5. Cement 3.63 2.7
6. Sugar 2.30 1.6
58.98 46.5
7. Other Sectors (Including 34.41% and 41.7% 41.02 53.5
for industry others)
100 100

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, September 2010, Table 5, P. 6.

21
C-3: IBIs FINANCING PRODUCTS (Total Rs. 162b)
September 30, 2010

S. No. Products %
1. Murabaha 43.3
2. Diminishing Musharaka 32.1
3. Ijarah 13.6
89
4. Others (Istisna: Salam, Musharaka, Mudarba) 11
100

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, September 2010, Table 4, P. 6.

22
 C-4: IBIs NPFs TIME SERIES

Period NPF Net NPFs

Rs. b Rs. b
September 2009 8.95 4.03
July 2010 10.65 4.39
September 2010 13.51 6.21

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, September 2010, Table 2, P. 5.

23
 C-5: DEPUTY GOVERNOR OF SBP SUGGESTED
INVESTMENT PORTFOLIO MIX FOR IBIS
1. Large Unserved Agriculture Sector:
- GDP Share 22%
- IBIs have not yet entered in the market
2. SME Sector:
- Expand their outreach to smaller towns & rural/semi rural
areas
- Total SMEs 3.1 million
- Served by IBIs 2,300 clients
- Consequential Deficit: very low coverage
3. Housing Finance:
- Six million housing units deficit in the country
- untapped markets awaits IBIs to exploit
- Focus: low cost housing
Source: Extracted from: Deputy Governor of SBP, Mr. Yasin Anwar, Key note
Address on “Opportunities for IBIs” delivered in Al-Huda International
Conference on Islamic Banking & Takaful, Lahore, Nov. 02, 2010 24
 D: IBIs INVESTMENTS

1. Composition

2. Types

25
 D-1: IBIs INVESTMENTS: COMPOSITION
As on September 30, 2010

Particulars Rs. b %
1. Federal Govt Securities 27.03 33
2. TFCs, Debentures, Bonds & PTCs 28.51 35
3. Fully Paid up Ordinary Shares 1.81 02
57.35 70
4. Others 24.14 30
Total 81.49 100
Shown in the table 81.62 100

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, September 2010, Table 6, P. 7.

26
 D-2: IBIs INVESTMENTS TYPES
As on September 2010

Particulars Rs. b %
1. Available for Sale 66 83
2. Held to Maturity 12.93 17
3. Surplus deficit on revaluation 0.29 -
Total 79.22 100
Shown in the table 80.69 100

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, September, 2010, Table 7, P. 6.

27
E: SELECTED PERFORMANCE INDICATORS IBIs &
BANKING INDUSTRY OF PAKISTAN

1. Capital

2. Assets Quality

3. Earnings & Profitability

28
E-1: SELECTED PERFORMANCE INDICATORS: IBIs
& BANKING INDUSTRY (Continued)
S. No. Particulars September, 2010
1. CAPITAL IBIs Industry
(Capital to Total Assts) 12.4 9.9
2. ASSETS QUALITY
NPLs to Financing 6.5 14.0
Net NPLs to Net Financing 3.0 4.5
Provisions to NPEs 55.0 71.1
Net NPFs to total Capital 13.4 21.6
Real Estate Financing to total Financing 8.6 2.1
3. EARNINGS & PROFITABILITY
Net Income to total Assets 0.7 1.0
ROE, after tax 5.4 9.9
Net Income Financing to Gross Income 21.0 24.4

29
E-1: SELECTED PERFORMANCE INDICATORS: IBIs
& BANKING INDUSTRY (Concluded)
S. No. Particulars March, 2010
Trading & Exchange Gains/Losses to Gross Income 8.9 7.4
Operating Expenses to Gross Income 67.2 53.6
Personnel Expenses to Operating Expenses 29.1 35.5
Spread between Financing and Deposit Rates 6.9 6.8

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, September 2010, Table 2, P. 5.

30
 F: FUTURE PROSPECTS

1. Forecasts

2. Challenges

31
 F-1: FORECASTS

1. By 2012, total of Islamic Banking industry is forecasted as

Rs. 1 trillion.

2. In the next five years, 1200 branches of Islamic Banks are

vitalized

3. The hope is that it will be 12% of total banking industry

4. Determined efforts needed by all of us to push forward the

process of Islamic Banking in Pakistan

32
 F-2: CHALLENGES
We visualize the following future challenges:
A. 15,000 people are needed in the next five years to equip Islamic Banks. In
this respect Universities in Pakistan must respond to this challenge.
Curricula must be changed in management education. High Education
Commission should provide motivation in this respect for Universities to
positively respond.
B. Islamic Banks must demonstrate growth with profitability. The top
management must evolve the process to translate the above challenges.
C. 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.
D. Sharia compliant financial services be expanded. Awareness be created in
this respect and logistics be developed as cushion to achieve the above
objective.
E. Differentiated products be developed. Some Islamic Banks have taken
correct initiative in this respect. This areas needs to be logistically well
cushioned with demonstrated results. 33
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