Challenges To Islamic Banking

Posted on July 21, 2017

Islamic Banking-lot Needs to be Done

Islamic banking has now become a reality but still it needs to be developed a lot.

Islamic Banking and Finance based on Islamic economics comes from the trading activities of any society with the objective to achieveits welfare goals.

As provided in advertisements of Islamic Banks that for Falah and getting better place in Yome Akhrat you should place your deposit with Islamic Banks is not enough. General perception about Islamic banking is that it is nothing but ConventionalBanking with change of name. This perception is required to be changed by taking practical steps and devising products and techniques to make it a part of overall economy in the light of Quran and Sunnah.

People are not interested that how much growth Islamic Banking have achieved and how much well-furnished buildings they did make but they want to know that how far these institutions are playing their role in betterment of economy that is not up to the mark in most of the Islamic Countries and particularly in Pakistan.

PM Nawaz Sharif in his address to 9th world Islamic Forum held at London in the October last year, very rightly pointed out that at present the bottom half of the global population owns only 1% of the global wealth. On the other hand, the richest 10% own 86%, and the richest 1% own a staggering 46% of the global wealth.

Going forward he pointed out that The Islamic world comprises a population of more than 1.5 billion people which is 23 % of the worldpopulation, including more than 835 million youth under the age of 24 years. It has a combined GDP of$6.6 trillion, which is only 8 percent of the world GDP. These countries are spread over a landmass whichis 1/3rd of the world and possesses vast amount of world’s natural resources. They connect East with theWest yet their exports are only 14 % of the global exports. Average GDP per capita in 57 Islamic countriesis $ 4,900 which is less than half of the global average of $10,400. Despite sporadic efforts overthe last 50 years Islamic world have failed to realize their true potential. They need to make sustained efforts for rapid social and economic development.

With addition to what Nawaz Sharif said it is a fact the richest country of the world with $ 70000 per capita is a Muslim statei.e.Qatar and the poorest country in the world with per capita of $ 250 is Gunnie Bissau. So with this position we have to address our home first by denting poverty in these areas. Islamic Banking started developing from 1977 and in Pakistan from 2000 onward. It should have remained the main tool for bringing welfare to the people in these countries otherwise its  growth seems meaningless for them.

Taking example of Pakistan like old rhetoric,Islamic banking industry (IBI) continued its growth momentum during the third quarter of CY13. Bothassets and deposits registered growth as asset base of the industry reached to Rs. 926 billion whiledeposits reached to Rs. 775 billion by end September 2013 In terms of market share inoverall banking industry, share of both assets and deposits increased during the review quarter to reach9.5 percent and 10.1 percent respectively. Profitability of the Islamic banking industry reached above Rs6.8 billion by end September 2013 from Rs. 4.3 billion by end June CY13,

On financing side it contributed in Agribusinessas 8.5% and in other financing around 44%. Majorinvestment went to Gov. securities i.e. Rs 319 billion. 73% of financing is in Murhabah and Diminishing Musharkah which are not liquid kind of financing. So in nut shell its financing is not focused on 23% of our GDP which is the back bone of Pakistan i.e. Agriculture. Further most of financing is based on debt based financing rather than in Musharkah and Mudarbah.This makes no chance for creationof Islamic Money Market. SBP is not interested to account for Islamic Banks for its monetary policy operations. In this regard like Indonesia or Malaysia no serious efforts seems to be on agenda. Liquidity support mechanism from SBP to Islamic Banks is yet notavailable. Even Government has not yet devised any short term liquid security to replace Ijarah based security for 3 years to create Islamic benchmark rates. No legislation on Islamic Banking is available.

Going forward lot is required to be done. Unfortunately IslamicBanking Department of SBP cannot do this. For that proper Staff is to be placed there.

Viable alternative can be to form an independent forum for bringing clarity on the subject. Banks like Meezan Bank, Burj Bank, Khyber bank and now Sindh Bank with other banks can play some role in this regard. New DG of SBP Mr. Saeed have also been brought for this job. The Financial Daily is also planning tocomplement these efforts.

Islamic banking has now become a reality but still it needs to be developed a lot.

Islamic Banking and Finance based on Islamic economics comes from the trading activities of any society with the objective to achieve its welfare goals.

As provided in advertisements of Islamic Banks that for Falah and getting better place in YomeAkhrat you should place your deposit with Islamic Banks is not enough. General perception about Islamic banking is that it is nothing but Conventional Banking with change of name. This perception is required to be changed by taking practical steps and devising products and techniques to make it a part of overall economy in the light of Quran and Sunnah.

People are not interested that how much growth Islamic Banking have achieved and how much well-furnished buildings they did make but they want to know that how far these institutions are playing their role in betterment of economy that is not up to the mark in most of the Islamic Countries and particularly in Pakistan.

PM Nawaz Sharif in his address to 9th world Islamic Forum held at London in the October last year, very rightly pointed out that at present the bottom half of the global population owns only 1% of the global wealth. On the other hand, the richest 10% own 86%, and the richest 1% own a staggering 46% of the global wealth.

Going forward he pointed out that The Islamic world comprises a population of more than 1.5 billion people which is 23 % of the world population, including more than 835 million youth under the age of 24 years. It has a combined GDP of $6.6 trillion, which is only 8 percent of the world GDP. These countries are spread over a landmass which is 1/3rd of the world and possesses vast amount of world’s natural resources. They connect East with the West yet their exports are only 14 % of the global exports. Average GDP per capita in 57 Islamic countries is $ 4,900 which is less than half of the global average of $10,400. Despite sporadic efforts over the last 50 years Islamic world have failed to realize their true potential. They need to make sustained efforts for rapid social and economic development.

With addition to what Nawaz Sharif said it is a fact the richest country of the world with $ 70000 per capita is a Muslim state i.e. Qatar and the poorest country in the world with per capita of $ 250 is Gunnie Bissau. So with this position we have to address our home first by denting poverty in these areas. Islamic Banking started developing from 1977 and in Pakistan from 2000 onward. It should have remained the main tool for bringing welfare to the people in these countries otherwise its  growth seems meaningless for them.

Taking example of Pakistan like old rhetoric, Islamic banking industry (IBI) continued its growth momentum during the third quarter of CY13. Both assets and deposits registered growth as asset base of the industry reached to Rs. 926 billion while deposits reached to Rs. 775 billion by end September 2013 In terms of market share in overall banking industry, share of both assets and deposits increased during the review quarter to reach 9.5 percent and 10.1 percent respectively. Profitability of the Islamic banking industry reached above Rs6.8 billion by end September 2013 from Rs. 4.3 billion by end June CY13,

On financing side it contributed in Agribusiness as 8.5% and in other financing around 44%. Majorinvestment went to Gov. securities i.e.  Rs 319 billion. 73% of financing is in Murhabah and Diminishing Musharkah which are not liquid kind of financing. So in nut shell its financing is not focused on 23% of our GDP which is the back bone of Pakistan i.e. Agriculture. Further most of financing is based on debt based financing rather than in Musharkah and Mudarbah.This makes no chance for creationof Islamic Money Market. SBP is not interested to account for Islamic Banks for its monetary policy operations. In this regard like Indonesia or Malaysia no serious efforts seems to be on agenda. Liquidity support mechanism from SBP to Islamic Banks is yet not available. Even Government has not yet devised any short term liquid security to replace Ijarah based security for 3 years to create Islamic benchmark rates. No legislation on Islamic Banking is available.

Going forward lot is required to be done. Unfortunately Islamic Banking Department of SBP cannot do this. For that proper Staff is to be placed there.

Viable alternative can be to form an independent forum for bringing clarity on the subject. Banks like Meezan Bank, Burj Bank, Khyber bank and now Sindh Bank with other banks can play some role in this regard. New DG of SBP Mr. Saeed have also been brought for this job. The Financial Daily is also planning tocomplement these efforts.

 

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