Study shows Huge Demand for Islamic Banking in Pakistan

A study sponsored by the State Bank of Pakistan and DFID reveals that there is an overwhelming demand for Islamic banking in Pakistan as over 95 per cent people believe in the prohibition of interest besides considering the contemporary practice of interest by banks as prohibited.

It admits that the current size of Islamic banking sector in the country cannot meet the demand from households and businesses in the country. The report urges the State Bank of Pakistan to devise a policy to increase the size of the sector to meet the growing demand for Islamic banking products.

It also recommends that conventional banks with large Islamic banking operations must be persuaded to convert their conventional operations into full-fledged Islamic banking or at least consider setting up independent Islamic banks subsidiaries.

The 65-page study entitled ‘KAP Study; Knowledge, Attitude and Practices of Islamic Banking in Pakistan’ and based on nationwide survey reveals that over 98% non-banked believed in the prohibition of interest whereas over 93% considered the interest charged and given by banks as prohibited.

The study shows that 94.5% of banked respondents believed in the prohibition of interest, and 88.41% considered that the contemporary practice of interest in banks is prohibited. The report underlined that the demand for Islamic banking is primarily a religious phenomenon.

“The findings of the report identify an overwhelming demand for Islamic banking in the country that is evenly distributed amongst rural and urban areas,” the report said, adding, “According to the analysis overall demand for Islamic banking is higher (95%) amongst household (retail) than the businesses (73%)”.

The study recommends that the role of Sharia scholars needs to be further enhanced and made more public in promoting Islamic banking and finance. It says limited number of Sharia scholars are involved in Islamic banking. It is important that scholars are trained in Islamic banking so that they are able to offer concrete perspective on the issues related to the field.

The report identified that there is lack of general awareness about Islamic banking in Pakistan, as the vast majority of respondents do not understand the Islamic banking model, the nature of deposits, nature of contracts and Sharia compliance mechanism. “The knowledge about Islamic contracts and terminology is almost non-existent.”

The report emphasised that educating the masses on basic Islamic terminology and the way Islamic banking products work remain an important challenge for the Islamic banking industry. It added that without a robust awareness campaign about Islamic banking, the task of promoting Islamic banking would be difficult.

Given the overwhelming demand for Islamic banking in Pakistan, the report said that the government and its related institutions particularly the State Bank of Pakistan being banking regulator could not miss these development.

The report asks the State Bank of Pakistan to devise a policy to increase the size of the industry to meet the growing demand for Islamic banking products. “This can be done by widening the scope of Islamic banking by way of helping the industry to develop more products to retail as well as business sectors.

The report also seeks deepening the penetration of Islamic banking through extending its branch network beyond big cities into rural areas; and aggrandising the size of current Islamic banks by requiring them to increase their capital basis.

It also recommends that conventional banks with large Islamic banking operations must be incentivised to convert their conventional operations into full-fledged Islamic banks or at least consider setting up independent Islamic banks subsidiaries.