Muhammad Arif
Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan.

Islamic Banking and Finance in 2018-19-An Overview

In 2018/19, the number of jurisdictions with a systemically important Islamic banking sector remained unchanged at 12 with Pakistan at No 10. Nonetheless, with the exception of one jurisdiction that experienced a marginal decline, all the jurisdictions, including two with a dual banking system, recorded an increased share of Islamic banking assets relative to their total banking sector assets. Banking assets in total stood at $ 1,571 billion in 2018-19.

In Pakistan Assets of Islamic banking industry stood at Rs. 2,995 billion ($20 Billion) by September 30, 2019. Deposits of Islamic banking industry were recorded at Rs. 2,407 billion ($ 16 Billion) by end September, 2019. Market share of Islamic banking assets and deposits in the overall banking industry was recorded at 13.8 percent and 16.1 percent, respectively by end September, 2019. Profit before tax of Islamic banking industry was recorded at Rs. 46 billion ($ 307 million) by end September, 2019.

The GCC region, despite recording a marginal growth in Islamic banking assets, still accounts for the largest share of the global Islamic banking assets. It is followed by the Asian region, which recorded a reduced share. Although the sub-Saharan Africa region’s share of global Islamic banking assets remains low, its prospects seem bright given the various efforts and initiatives towards entrenching the IFSI in the region. On a country-by-country basis, 11 out of the 22 jurisdictions covered in the IFSB database recorded a double-digit growth in assets, while at least nine jurisdictions recorded a similar feat in financing growth. In terms of growth in deposits, one jurisdiction recorded a double-digit growth rate, while at least eight other jurisdictions recorded improvements of at least 2 percentage points compared to 2017.

As regards share of Islamic Banking assets of Pakistan among these jurisdictions it stand at no 10 with 1.3% among Iran with 32 % Saudi Arabia with 20% Malaysia with 11% UAE with 9.8% Kuwait with 6.3% Qatar with 6.3% Turkey with 2.6% Bangladesh with 1.9% Indonesia with 1.9% (IFSB).

The growth trend in ṣukūk issuance continued in 2018-19, with sovereign issuances from 13 jurisdictions accounting for the majority of issuances in 2018. Moderation is observed in sovereign issuances, especially from the GCC on account of a positive rebound in the price of oil. This also saw a change in the structure of ṣukūk issuances, where the hybrid structure (which was the most preferred and most prominent structure for sovereign ṣukūk in 2017) was the third preferred structure in 2018-19 after murābaḥah and ijārah contracts. Another notable difference from is the remarkable 55% increase in corporate ṣukūk, with issuances in 10 jurisdictions – including three non-OIC member countries. Malaysia maintained its position as the jurisdiction with the largest volume of ṣukūk outstanding and, together with Indonesia, Saudi Arabia, Turkey and the United Arab Emirates, accounted for a 91% share of total ṣukūk outstanding. The share of ṣukūk issuance by multilateral development banks and international organizations declined, as only the Islamic Development Bank (IsDB) and the International Islamic Liquidity Management Corporation (IILM) issued ṣukūk in 2018. Moreover, on a sector-by sector basis, the government and financial services sectors maintained their relative prominence in 2018. Worldwide Sukuk in total stood at $530 billion in 2018-19.

Pakistan was not able to issue any Sukuk externally in 2019. Comparatively it has outstanding balance of $ 6.3 billion in Government Sukuk. On Corporate side Pakistan Energy Sukuk-I (PES-I) worth of Rs200 ($1.33) billion was issued in 2019. The government is eyeing to generate at least $1 billion or more from the issuance of sukuk bond. Up till now, Government has already issued 3 years Ijarah Sukuk in the domestic market to the amount of Rs 385 ($2.57 billion) billion. From external sector it had earlier raised $ 7.3 billion through Sukuk.

 In 2018, the performance of the Islamic funds subsector was mixed. While it recorded contraction in certain aspects, notable improvement was recorded in some others. For instance, returns across all asset classes except real estate contracted compared to 2017 and recorded the Islamic funds subsector historical lowest rate in the past five years. In addition, the average size of funds also recorded a contraction, from USD 79.8 million in 2017 to USD 75.02 million as at the end of 2018 and now $ 62.00 million in 2019. The biggest decline is recorded in the commodities asset class due to, among other reasons, a stronger US Dollar and concerns arising from trade tensions. The Sharpe ratio of Islamic mutual fund (SR=0.026) is higher than the Non-Islamic mutual fund (SR=0.003506) which shows the better performance of Islamic mutual funds. Portfolio return of Islamic mutual fund is higher than the nonIslamic mutual fund and risk-free rate (= 6.25%). This shows that the Islamic mutual funds are giving better return as compared to the non-Islamic mutual fund. Systematic risk = 0.784) of Islamic portfolio is less than the non-Islamic portfolio (= 1.9393) which means that Islamic mutual funds are not only giving the better returns but also bearing the minimum risk level. The results of the Teynor ratio shows the same findings as Sharpe ratio in which Islamic mutual funds are shown with better performance as compared to the non-Islamic mutual funds.

The total contributions of takāful markets grew on average by 4.3%, estimated at USD 26.1 billion, in 2017. As was the case in 2016, the GCC remains the largest global takāful market in 2017 with a contribution worth about USD 11.71 billion, accounting for 45% of the total global takāful contributions. Generally, most jurisdictions recorded a high retention ratio. This high retention was observed for all personal lines (motor, medical and health, and personal accident), which accounted for more than 80% of the total contributions written in 2017 thus highlighting the importance of retakāful/reinsurance in reinforcing underwriting capacity, by spreading the risks at the industry level and enhancing the capacity to underwrite complex risks. This is without prejudice to the capacity of some takāful operators with significant underwriting strength to develop tailor-made products and lesser dependence on facultative retakāful/ reinsurance markets.

Assets under management of Takaful companies, which are allocated to Shariah-compliant investments only, were around 35 billion at the end of 2015, were expected to grow to over 50 billion by 2020, however they are at $28 billion in 2019. There are, as mentioned, a number of challenges exist for the takaful market in general.

Those are tighter regulations across all jurisdictions, particularly in the GCC and Malaysia, as regulators increase their focus on consumer protection and the implementation of risk-based capital.

Takaful companies also are pressured to increase profitability of their operations amid increasing competition in the market space. Currently, many Takaful operators are burning capital by failing to implement processes for cost efficiency and productivity and improve operational, sales and marketing strategies by embracing new technologies and tap into new markets to increase revenue.

The existing portfolio of general and family Takaful needs to be extended towards investment-linked Takaful, retirement Takaful, travel Takaful, community Takaful, legal Takaful, products for certain client target groups such as high-net worth individuals and products for special risk groups, such as sports persons or heavy workers, as well as new variants for corporate insurances for executives, start-ups, entrepreneurs and small and medium enterprises. The size of Takaful worldwide is $ 28 billion.

Financing and related assets (net) of Islamic banking industry in Pakistan increased to reach Rs. 1,546 billion ($10.3 billion) by end September, 2019. Diminishing Musharaka continued with its share in overall financing of Islamic banking industry with its share recorded at 35 percent, followed by Musharaka (20 percent) and Murabaha (13.0 percent). Internationally Kuwait Finance House and Qatar Islamic Bank stood best as finance providers in 2019.


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