Pakistan Central Bank Plan to Boost Islamic Banking

Dubai: State Bank of Pakistan’s (SBP) five-year strategic plan will drive strong asset growth in the Islamic finance sector, given the high domestic demand for Islamic banking, according to global rating agency Moody’s.

SBP’s plan targets a 15 per cent share of banking system assets for the sector by 2018, up from around 10 per cent as of December 2013.

“We believe that this strategic initiative will lead to strong growth and consolidation in the sector, given the relatively small size of market participants and capital bases needed to support growth,” said Khalid Howladar, Moody’s Global Head of Islamic Finance.

The National Bank of Pakistan will convert around 6 per cent of conventional branches into Islamic-banking branches over the next two years. In April, following MCB Bank Limited’s aborted efforts to buy a majority stake in “Burj Bank” it is instead setting up its own Islamic banking subsidiary. Allied Bank Limited has also launched Islamic banking operations in 2014 through branches.

“We believe that the push for Islamic banking services will help to expand overall banking system penetration, which is currently low in Pakistan where consolidated banking system deposits accounted for only 36 per cent of GDP as of end-2013,” said Melina Skouridou, Moody’s Analyst for Pakistani banks.

Growth opportunities

Strong asset growth is expected to drive the growth of Islamic banking in Pakistan. With annual growth rates of above 30 per cent between 2009 and 2013, Islamic banking assets have been growing significantly above the industry from a much smaller base given their 10 per cent market share. Loan growth accelerated to 34 per cent in 2013 against 7 per cent for the industry with Islamic loans increasing to 8 per cent of total system loans.

“We believe that the push for Islamic banking services will help expand the overall banking system penetration, which is currently low in Pakistan where banking system deposits accounted for only 36 per cent of GDP as of year-end 2013. As the world’s second most populous Muslim country, with a population of around 180 million, Pakistan offers vast growth opportunities for Islamic banking,” said Howladar.

Although the sector is expanding rapidly, the Islamic operations of the top five banks — National Bank of Pakistan, Habib Bank, MCB Bank, Allied Bank, and United Bank are small and currently account for less than 2 per cent of their assets on average. Given their branch network dominance, these banks have the operational infrastructure to grow their Islamic operations faster.

Currently the majority of the rated banks’ deposits are low cost, current and savings accounts. However, banks’ deposit costs rose in the last two years following the SBP’s increases to the minimum rate payable on saving deposit accounts.

While the overall trend is positive for Islamic banking in Pakistan, rapid growth in the sector is likely to weaken asset quality. “Although the asset quality of Islamic banking is currently better than that of conventional banking — with a non-performing financing ratio of 5.7 per cent as of end-2013 versus 13 per cent for conventional banking — the high rate of financing growth may eventually lead to higher delinquency ratios in the absence of a prudent approach to expansion”, said Skouridou.