PAGE NO

TABLE OF CONTENT:
1.
2.

3.
4.
5.

Introduction 1
Regulatory/ Government support .2
2.1. State Bank of Pakistan (SBP) .........2
2.2. Composition of SBPs Sharia board ..2
2.3. Role and Responsibilities of SBP Sharia board ........3
Types of product offered ............4
Islamic Banking Branch Network .........5
Islamic Banking Industry In Pakistan: Performance, Growth And Prospects 6
5.1 Meezan Islamic Bank ...........6
5.1.1 Financial Performance Higlights of Meezan Bank ..8
5.2 BankIslami Pakistan 9
5.2.1 Financial Performance Highlights of BankIslami Pakistan ......10
5.3 Burj Islamic Bank (Formerly Dawood Islamic Bank Limited) ......11
5.3.1 Financial Performance Highlights of Burj Islamic Bank .......11
5.4 Al Baraka Islamic Bank (Formerly Emirates Global Islamic Bank Limited) .......12
5.4.1 Financial Performance Highlights of Al Baraka Pakistan .........13
5.5 Dubai Islamic Bank .14
5.5.1 Financial Performance Highlights of Dubai Islamic Bank Pakistan ....15

6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.

Performance of Islamic Banking Industry In Pakistan From 2003 T0 2013 ...16

Islamic Banking Industry- Progress & Market Share Overview- for the year ended Dec, 2103. 16
IBI Network Expansion 17
Asset & Liability Structure: .18
Investments ............18
Financing ....19
Liabilities ...20
Earnings & Profitability ..........21
Problems and Challenges faced by Islamic banks and financial Institutions in Pakistan .....22
Other Challenges ...........23
Strategies Plan Will Focus In The Following Key Reform Areas .23
Opportunities in Islamic Banking and finance Industry in Pakistan ..24
Prospects of Islamic Banking and Finance Industry in Pakistan .24
Conclusion ..25
References ...26

1. INTRODUCTION TO ISLAMIC BANKING INDUSTRY IN PAKISTAN

Pakistan, with more than 95 percent Muslim population, and a constitutional obligation of ensuring a riba
free economic system, has had a favorable response to Islamic finance. The steps for Islamization of banking
and financial system of Pakistan were initiated in 1977.Pakistan is amongst the pioneers of Islamic finance
and was among the first three countries of the world that had been trying to implement interest-free banking
at national level.
0

In early 1980s numerous measures were taken to introduce interest-free banking in Pakistan. Banking and
other relevant laws were amended to facilitate interest free banking system in Pakistan whereas the industry
was given a specific timeline to convert to the Islamic banking system. However, these efforts could not
produce desired results due to absence of Sharia compliance mechanism in place, lacking proper homework
at the level of central bank as well as that of the financial institutions to enable such a sudden shift.

Considering the lessons learnt from the earlier efforts, Islamic Banking in Pakistan was re-launched in 2001
when the Government of Pakistan decided to promote Islamic Banking in a gradual manner and as a parallel
and compatible system in line with the best international practices. Accordingly, Islamic Banking
Department was established at SBP on 15th September 2003 with the mandate of developing and
strengthening regulatory and Sharia compliance framework for Islamic banking industry and taking
initiatives for the promotion of Islamic Banking as a parallel and compatible banking system in line with the
best international practices.
Since its re-launch in 2001, the progress of Islamic Banking industry in Pakistan has been tremendous
yielding the growth of more than 30% on yearly basis in terms of assets. Currently there are five licensed
full-fledged Islamic banks and fourteen conventional banks with standalone Islamic Banking Branches
operating in the country. Various steps have been taken to make Islamic banking industry in Pakistan a
viable alternative to conventional banking.
Hence the aim of this paper is to assess the development of Islamic banking financial institutions of this
country. Most specifically the paper will highlight regulatory, products offered by Islamic banks in Pakistan,
government support and performance of Islamic banking institutions in Pakistan. Furthermore, Problems,
challenges, opportunities and prospects will be explained. Finally recommendations to further promote the
Islamic banking financial institutions will be given.

2. REGULATORY/ GOVERNMENT SUPPORT

1. STATE BANK OF PAKISTAN (SBP)

State Bank of Pakistan (SBP) regulates and supervises the financial system to ensure its soundness and
stability as well as to protect the interests of depositors. Furthermore, SBP also regulates Islamic Banking
Institutions (IBI) through its Sharia Board.

SBP Vision is to make Islamic Banking, the Banking of First Choice for the providers and users of
financial services and the mission is promoting and developing Islamic Banking industry with the Best
International Practices ensuring Sharia compliance and transparency.
In Pakistan, the banks are authorized to offer products based on Islamic modes under the Banking
Companies Ordinance, 1962
Each Islamic banking institution (IBI) is required to appoint a Sharia Advisor who is responsible to give
approval regarding Sharia compliance of all products of IBIs and issue Sharia rulings.
2. COMPOSITION OF SBPS SHARIA BOARD

The Sharia Board comprises members drawn from fields such as Islamic Sharia, banking, accounting,
law and other relevant fields.

It has a minimum of five members and was formally established in 2003

At least two members have to be Sharia scholars, one member to be a Chartered accountant, one a
lawyer and one representing the bankers and the State Bank to be the Director of Islamic Banking
Department of SBP, who also serves as the secretary of the Sharia Board.

The Chairman of the Sharia Board has to be from among the Sharia scholars. The technical members, i.e.
the lawyer, the accountant and the banker give their opinion in the relevant areas of their expertise to the
Sharia scholars, who consider their views while giving a Sharia ruling on issues under review

The initial term of office of all members of the Sharia Board is of two years. All members, excluding the
ex-officio member, shall have a term of two years and shall be eligible for reappointment.

The Chairman and members of the Sharia Board shall remain in office until their successors are
appointed.

3. ROLE AND RESPONSIBILITIES OF SBP SHARIA BOARD

The SBP Sharia Board advises State Bank in formulation of regulations on Islamic banking.

Review and approve for Sharia compliance the products/instruments developed by State Bank of
Pakistan for conducting its central banking and monetary management functions under the Islamic
modes.
2

Advise State Bank of Pakistan on Prudential regulations developed for Islamic banking sector.

Approve the fit and proper criteria for appointment of Sharia advisors of institutions conducting Islamic
banking activities.

SBP s Sharia board keeps an edge over the Sharia board or governing bodies of Islamic banking in other
countries in a way that it contains members from other professional areas like law and accountancy in
addition to Islamic scholars while the governing bodies of Islamic banks in other countries only includes
Islamic scholars

Due to this composition, SBPs Sharia Board cover and understand almost all aspects of any issue
discussed in the meetings which gives comprehensiveness to its decisions. The rulings given by the
Board are not only Sharia compliant but are also workable as they take into consideration the legal and
financial infrastructure of the country and the business needs.
Further, SBP has recently developed a five year Strategic Plan (2014-18) for the Islamic banking
industry in Pakistan in consultation with all key stakeholders, which gives a consensus agenda and
strategy to take the industry to its next level of growth and development. The plan has an extensive focus
on improving public perception of Islamic banking as a distinct and viable system capable of catering to
the varied financial services needs of various segments of the society. It envisages intensifying the
awareness creation efforts, strengthening consultation mechanism with stakeholders, removing confusion
and inconsistencies in legal, regulatory and taxation environment, deepening and broadening of product
offerings by Islamic banks, doubling the outreach of Islamic banks during the next five years and
increasing the market share to 15 percent of the banking system.
Pakistan has been an active member of leading global International Islamic finance institutions like the
Islamic Financial Services Board (IFSB), the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI), and the International Islamic Financial Market (IIFM) that are all
playing a key role in developing prudential and Sharia standards for the industry. Being part of the global
efforts for the development of global standards for the industry has certainly helped Pakistan in
improving its presence on the global Islamic finance map and adopting the prudential and Sharia
standards in Pakistan.
In addition, SBP is also a key member of the recently constituted steering committee for the promotion
of Islamic banking by the government which is mandated to devise a comprehensive policy framework
for the Islamic financial system, suggest practical steps needed to be taken for implementing Shariabased financial system, and propose solutions for the Islamic secondary market / money market for

liquidity management. These initiatives on part of the government sends a clear signal that the present
government views Islamic banking and finance as an integral part of the overall financial system.
2. TYPES OF PRODUCT OFFERED
Islamic banking and financial institutions in Pakistan almost offering all Islamic financial products with less
controversial issues, some of which are listed as follow:
1. Musharakah
2. Mudarabah
3. Diminishing Musharakah
4. Murabaha
5. Salam
6. Istisna
7. Istijrar
8. Ijarah
9. Ijarah wa Iqtina
10. Sukuk

3. Islamic Banking Branch Network (As of December 31, 2013)

Islamic Banks

Type

Name of Bank
AlBaraka Bank (Pakistan) Limited

108

BankIslami Pakistan Limited

112

Burj Bank Limited

74

Dubai Islamic Bank Pakistan Ltd

124

Meezan Bank Ltd

349
Sub Total

Islamic

No of Branches
(As of Dec 31, 2012)

767

Askari Bank Limited

39

Bank Al Habib Ltd

Bank Alfalah Ltd

17
139
4

Branches of Conventional Banks

Faysal Bank Limited

53

Habib Bank Ltd

38

Habib Metropolitan Bank

MCB Bank Ltd

27

National Bank of Pakistan

20

Silkbank Limited

10

Soneri Bank Ltd

Standard Chartered Bank

10

The bank of Khyber

44

The Bank of Punjab

United Bank Limited

22

Sub-Branches

Sub Total

288

AlBakara Bank (Pakistan) Limited

Askari Bank Limited

BankIslami Pakistan Limited

89

Habib Bank Limited

United Bank Limited

Sub Total

96

Grand Total

1304

4. ISLAMIC BANKING INDUSTRY IN PAKISTAN: PERFORMANCE, GROWTH AND

PROSPECTS
Islamic Banking refers to banking system based on principles of Islamic law (Sharia) and its practical
implementation through development of Islamic economics. It promotes risk sharing between Provider of
capital (investor) and user of funds (Entrepreneur). Pakistan has emerged as one of potential growing
Islamic Banking market and till to date five full-fledged Islamic banks are operational in accordance to
Sharia principles and looking forward to seeing more of these in the future. Moreover, there are total twelve
conventional banks having their Islamic branches accumulating total number of 441 branches (as of Dec,
2013) in Pakistan.
Whereas, the five full-fledged Islamic banks are operating total of 767 branches all over in Pakistan. These
five Islamic banks are listed below:
i.

Meezan Islamic Bank

ii.

BankIslami Pakistan
5

iii.

Burj Islamic Bank

iv.

Al Baraka Islamic Bank

v.

Dubai Islamic Bank

5.1. Meezan Islamic Bank

Meezan Bank Limited, a publicly listed company, is the first and largest Islamic Bank in Pakistan and one of
the fastest growing banks in the history of the banking sector of the country having the largest network with
349 (CY 2013) branches and a wide product range. In 2003, Meezan Bank establishes itself as the pioneer of
Islamic Banking in Pakistan and quickly establishes branches in all major cities of the country. A wide range
of products are developed and launched consolidating the Banks position as the premier Islamic Bank of the
country Al Meezan Investment Management Limited (AMIM), the asset management arm of Meezan Bank,
introduces Meezan Islamic Fund (MIF), the countrys first open-end Islamic Mutual Fund. Meezan Bank
bears the critical responsibility of leading the way forward in establishing a stable and dynamic Islamic
banking system replete with dynamic and cutting-edge products and services. Meezan Bank aims to fulfill
its prime objective of providing customers accessibility and convenience, within an atmosphere and culture
of dedicated service and recognition of their needs.
Since its inception as an Islamic commercial bank in 2002, Meezan Bank has been one of the fastest
growing banks in the history of the countrys banking sector. The Banks deposits grew at an average rate of
46% p.a. from December 2002 to December 2012 while its branch network grew from 6 branches in 2002 to
328 branches in October 2013, an average growth rate of 48% p.a. The Bank has established a strong and
credible management team comprising of experienced professionals that has achieved a strong balance sheet
with excellent operating profitability and strong ratios. The JCR-VIS Credit Rating Company Limited has
upgraded the Banks long-term entity rating to AA (Double A) from AA- (Double A minus) and short term
rating at A1+ (A One Plus) with stable outlook. The short term rating of A1+ is the highest standard in short
term rating. Meezan Bank is the only Islamic bank with AA credit rating in the Islamic banking industry in
Pakistan.
The Banks main shareholders are leading financial institutions of the Region namely, Noor Financial
Investment Company, Pak-Kuwait Investment Company, and the Islamic Development Bank of Jeddah. The
established position, reputation, strength and stability, of these institutions add significant value to the Bank
through Board representation and applied synergies.
The Bank has an internationally renowned Sharia Supervisory Board Chaired by Justice (Retd.) Maulana
Muhammad Taqi Usmani, an internationally renowned figure in the field of Sharia, particularly Islamic
Finance. He holds the position of Deputy Chairman at the Islamic Fiqh Academy, Jeddah and in his long and
illustrious career has also served as a Judge in the Shariat Appellate Bench, Supreme Court of Pakistan. The
6

Board also includes Sheikh Essam M. Ishaq (Bahrain), Dr. Abdul Sattar Abu Ghuddah (Saudi Arabia) and
Dr. Imran Usmani who is also the resident Sharia Advisor of the Bank. Dr. Imran is assisted by a team of
professionals who strictly monitor the regular transactions of the Bank and are also responsible for Product
Development.

5.1.1.

FINANCIAL PERFORMANCE HIGLIGHTS OF MEEZAN BANK (AS OF MARCH 31, 2014)

5.2. BANKISLAMI PAKISTAN

The epochal idea of BankIslami was conceptualized by Jahangir Siddiqui & Company Limited and
Randeree family in late 2003. On May 26, 2004 a detailed business plan was prepared and a formal
application was submitted to the State Bank of Pakistan. On September 26, 2005, Dubai Bank joined the
Sponsors and became one of the founding shareholders of BankIslami by investing 18.75% in the total
Capital. BankIslami Pakistan Limited was the first Bank to receive the Islamic Banking license under the
Islamic Banking policy of 2003 on March 31, 2005. The Bank envisioned to focus primarily on Wealth
Management as the core area of business in addition to Sharia compliant Retail Banking products,
Proprietary and Third party products, and Integrated financial planning services.
BankIslami Pakistan Limited made a public offering of Rs. 400 Million, at par, from 6th to 8th March 2006.
This was the first primary issue by a Bank in over a decade in Pakistan. The Initial public offering (IPO) of
BankIslami received overwhelming response from the general public as the applications received were 9
times higher than offered, fetching nearly Rs. 3.5 Billion, against the demand of Rs. 400 Million. The State
Bank of Pakistan declared BankIslami Pakistan Limited as a Scheduled Bank with effect from March 17,
2006. BankIslami started its Banking operations on 7th April 2006 with its first branch in SITE, Karachi. By
the end of 2006, the Bank had 10 branches, nine in Karachi and one in Quetta. The Bank further
concentrated in building a nationwide network and by the end of year 2007; its branch network grew to 36
branches in 23 cities. In 2008, the Bank opened 66 new branches nationwide which expanded its network to
102 branches in 49 cites. By the end of 2013, the Bank has achieved the target of 201 branches in 77 cities
nationwide; this gives BankIslami the distinction of having the fastest expanding network in Pakistan as well
as offering the widest network by any Islamic Bank in Pakistan.

5.2.1.

FINANCIAL PERFORMANCE HIGHLIGHTS OF BANKISLAMI PAKISTAN (AS OF DECEMBER

31, 2012)

10

5.3. BURJ ISLAMIC BANK (FORMERLY DAWOOD ISLAMIC BANK LIMITED)

Burj Bank Limited (formerly Dawood Islamic Bank Limited) was incorporated in Pakistan as a public
limited company on August 29, 2005 under the Companies Ordinance, 1984 to carry out business of an
Islamic Commercial Bank in accordance with the principles of Islamic Sharia. The State Bank of Pakistan
(SBP) issued a "Scheduled Islamic Commercial Bank" license to the Bank on March 16, 2007 and granted
approval for commencement of Islamic Banking Business on April 9, 2007. The Bank is principally engaged
in commercial, consumer and investment activities. At present the Bank is operating through its 74 branches.

11

5.3.1.

FINANCIAL PERFORMANCE HIGHLIGHTS OF BURJ ISLAMIC BANK (AS OF MARCH 31, 2014)

12

5.4. Al Baraka Islamic Bank (Formerly Emirates Global Islamic Bank Limited)
Al Baraka Bank (Pakistan) Limited (ABPL) is the result of a merger between Al Baraka Islamic Bank
Pakistan (AIBP), the branch operations of Al Baraka Islamic Bank (AIB) Bahrain and Emirates Global
Islamic Bank (Pakistan). The merged entity commenced operations on November 1st 2010. The merger, a
first in the Islamic Banking sector in Pakistan, positions ABPL to play an important role in further growing
an industry which has witnessed tremendous growth over the last 5 years.
With assets in excess of Rs. 85 billion; a workforce of 1400 professionals and a network of 110 branches in
58 cities and towns across Pakistan, Al Baraka Bank (Pakistan) Limited is devoted in providing customers
13

with a range of Sharia compliant products to suit their banking needs. Al Baraka Bank (Pakistan) Limited,
offers a wide array of Islamic financing products such as Murabaha, Ijarah, Musharakah and Islamic Export
Refinance etc., catering to a diverse cross-section of the economy including the Corporate, SME and
Consumer sectors.
Moreover, various Sharia compliant deposit schemes are also available for customers to invest their funds
in, along with a variety of other ancillary services such as online branch banking, ATM/debit card, SMS
banking, and electronic statement of accounts, safe deposit lockers and utility bill payments. The Pakistan
Credit Rating Agency (PACRA) has assigned long-term and short-term rating entity A, and A1 respectively.
These ratings denote a lower expectation of credit risk emanating from a strong capacity for timely
payments of financial commitments.
ABPL is a subsidiary of Al Baraka Banking Group (ABG), a Bahrain Joint Stock Company, listed on
Bahrain and NASDAQ Dubai stock exchanges. It is a leading International Islamic bank with Standard &
Poors long and short-term credit ratings of BBB- and A-3 respectively and offers retail, corporate and
investment banking, and treasury services strictly in accordance with the principles of Islamic Sharia. The
authorized capital of ABG is US$ 1.5 billion; asset base of US$ 19.5 billion and total equity of US$ 1.95
billion. The group has Banking units and representative offices in 15 countries spanning from Europe to
MENA and Asia, with a network exceeding 460 Branches.

5.4.1. FINANCIAL PERFORMANCE HIGHLIGHTS OF AL BARAKA PAKISTAN (AS OF MARCH

31, 2014)

14

5.5. DUBAI ISLAMIC BANK

Dubai Islamic Bank Pakistan Limited (DIBPL), commenced operations in 2006. Since then, DIBPL has
undertaken major initiatives to expand its branch network across the country. Under its consumer banking
division, the bank is offering state-of-the-art Sharia compliant products that effectively compete with those
being offered in the market by conventional banks. It also has expertise in providing Retail, Private, Small
15

and Medium Enterprises, Corporate, Investment Banking and Advisory services. The Bank launched
Pakistan's first Islamic Visa Debit Card and introduced financial products covering Home Financing, Auto
Financing, and Depository products.
DIBPL has also introduced Priority Banking and Internet Banking, both of which are being recognized as
benchmark products in their respective categories. Besides regular banking services, the Bank is committed
to bringing foreign investment to the country. DIBPL's corporate wing has actively pursued foreign investors
and convinced world renowned giants from the GCC to be part of Pakistan's economy. DIBPL is 100%
owned by Dubai Islamic Bank PJSC (Public Joint Stock Company) and its nominated shareholders. The
parent company is a listed company in Dubai.

5.5.1. FINANCIAL PERFORMANCE HIGHLIGHTS OF DUBAI ISLAMIC BANK PAKISTAN (AS

OF DECEMBER 31, 2013)

16

6. PERFORMANCE OF ISLAMIC BANKING INDUSTRY IN PAKISTAN FROM 2003 T0 2013

Table 1: Growth of Islamic Banks: Some Important Indicators (December 2003- Dec 2013)
17

Year
(December

Total

)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

Rs.b
13
44
71
119
206
276
366
477
641
837
1014

Total Assets
Share of IBIs in
industry %
1
2
2
3
4
4.9
5.6
6.7
7.8
8.6
9.6

Total

Deposits
Share of IBIs in

Net financing investment

Total
Share of IBIs in

Rs.b
8
30
50
84
147
202
283
330
521
706
868

industry %
1
1
2
3
4
5
6
6.4
8.4
9.7
10.4

Rs.b
10
30
48
73
138
186
226
236
475
626
709

industry %
1
1
2
2
4
4
5
4.6
7.4
8.1
8.9

7. ISLAMIC BANKING INDUSTRY- PROGRESS & MARKET SHARE OVERVIEW- FOR THE YEAR
ENDED DEC, 2103.

The Islamic banking industry (IBI) finished CY13 with an asset base of Rs. 1014 billion by growing at 21.2
percent (YoY) ( see Table 1) while the quarterly growth of assets was 9.5 percent in the last quarter of CY13
compared to 2.5 percent in the previous quarter (Jul-Sep 13). Similarly deposits of Islamic banking industry
(IBI) by growing at quarterly growth of 12 percent in the quarter under review compared to less than 1
percent growth of the previous quarter reached to Rs. 868 billion (see Table 1). Consequently the market
share of Islamic banking assets and deposits in overall banking industry increased from 9.5 percent and 10.1
percent by end Sep 13 to 9.6 percent and 10.4 percent respectively by end Dec 2013. In terms of
profitability, there was an increase of Rs. 2.61 billion in profit in the quarter under review, however
remained lower compared to the profit (Rs 9.9 billion) earned by the industry by the end Dec, CY 12. The
industry also witnessed an increase in return on equity (ROE) during the quarter under review; however,
return on assets (ROA) remained unchanged compared to the previous quarter.

8. ISLAMIC BANKING INSTITUTIONS (IBI) NETWORK EXPANSION

The last quarter of CY13 witnessed expansion in Islamic banking industrys branch network with addition of
143 branches. These additional branches were spread across all regions except FATA, however, even these
18

new branches are concentrated in three big provinces and Federal capital ; Punjab leads with 64 branches
followed by Sindh with 48, Khyber Pakhtoonkhawa (KPK) with 15 and , and the Federal Capital with 10
branches (see Table 2). Importantly, four new districts i.e. Jamshoro and Umer Kot in Sindh, Buner in
Khyber Pakhtoonkhawa (KPK) and Baltistan in Giligit-Baltistan were added to the list of districts having
Islamic banking branches.

9. ASSET & LIABILITY STRUCTURE

Asset: Assets of the Islamic banking industry registered quarterly growth of 9.5 percent during October to
December quarter 2013 to reach Rs. 1014 billion from Rs. 926 billion in the previous quarter. Consequently,
the market share of Islamic banking assets in overall banking industry reached 9.6 percent by end December
2013. This increase in assets was mainly contributed by financing that witnessed quarterly growth of almost
18 percent. On the other hand, investments, the second major contributor in assets, witnessed decline during
the review quarter.
10. INVESTMENTS
Investments of Islamic banking industry declined to Rs 394 billion by end December 2013 from Rs 445
billion by end September 2013 reflecting quarterly negative growth of 11.5 percent (see Table 3). The fall in
19

investments can be mainly attributed to non-issuance of GoP Ijara Sukuk over the last nine months that has
generally been the key investment option for Islamic banking industry. This is also reflected by the outflow
of more than Rs. 52 billion in Federal government securities (negative quarterly growth of 16.4 percent)
during the quarter under review though this still remain the highest contributor in investments.

11. FINANCING
Financing (gross) by Islamic banking industry witnessed growth of 17.9 percent during the quarter under
review to reach above Rs 330 billion by end December 2013.This is in line with the seasonal pattern
generally witnessed during the last quarter of a calendar year mainly due to the nature of business cycle of
most industries; industries usually utilize their financing quota in second and fourth quarter while off load
their financing in first and third quarter. This seasonal trend is also reflected while analyzing the financing

20

conce
ntration among various sectors; Textile, the major recipient of financing for overall
banking industry including Islamic banks, registered positive growth in its financing
during the quarter ending December 2013 compared to the previous quarter. Among
other sectors, sugar and shoes & leather garments also witnessed an increase in their
shares in overall financing portfolio during the quarter under review (see Table 4).

In terms of financing mix, all modes of financing, except others, registered increase
during the review quarter (see Table 5 (a)). However, like previous quarters,
21

Murabaha and Diminishing Musharaka remained the most concentrated modes as

these collectively contributed more than 70 percent in overall financing mix (see
Table 5 (b)).

12. LIABILITIES
Deposits of Islamic banking industry reached Rs. 868 billion by end December 2013 depicting a quarterly
growth of 11.9 percent. Similarly, share of Islamic banking industry deposits in overall banking industry
increased from 10.1 percent in September 2013 to 10.4 percent by the end December 2013. Both customers
deposits as well as financial institutions deposits with IBIs registered positive growth during the review
quarter. The significant increase in deposits of financial institutions in the quarter under review along with
almost similar increase in the category of due from financial institutions on assets side depicts the
cosmetic arrangements of the industry for increasing their balance sheet at the end of the calendar year.
Table 6: Break up of Deposits

Within customers deposits, fixed deposits as well as saving deposits registered

positive growth during the period under review though fixed deposits grew at a faster
pace compared to saving deposits (see Table 6). It is worth mentioning that this is the
first time since June 2012 that growth in fixed deposits has remained higher than
growth in savings deposits. This was mainly due to Islamic banking divisions (IBDs)
whose fixed deposits witnessed growth of nearly 18 percent compared to 9.3 percent
growth in saving deposits. On the other hand, fixed deposits of Islamic banks (IBs)
witnessed slightly lower growth (3.1 percent) compared to saving deposits (3.6
percent). In terms of currency wise deposits, local currency deposits continued to
dominate overall deposits with 95 percent share in overall deposits.

22

13. EARNING & PROFITABILITY

Profitability of the Islamic banking industry registered at Rs 9.4 billion by end December 2013 remained
lower compared to Rs 9.9 billion profit in December 2012. This can be attributed to relatively lower share of
investments1 in overall assets of Islamic banks during December 2013 (38.9 percent) compared to
December 2012 (47.1 percent). Among indicators of earnings and profitability return on equity (ROE)
witnessed an increase during the quarter under review while return on assets (ROA) remained unchanged
compared to the previous quarter (see Table 7). Non-Markup Income to Total Income of Islamic banking
Industry also registered increase during the last quarter of CY13. ROA, ROE and Non-Markup Income to
Total Income of Islamic banking industry are however lower than those of overall banking industry. On the
other hand Net Mark up Income to Total Income (78.5 percent) declined during the quarter ending
December 2013 but continued to stay above overall banking industry averages. In line with general trend
Operating Expense to Gross Income of Islamic banking industry remained higher than that of overall
banking industry.
Table 7: Earning and Profitability

14.

PROBLEMS AND CHALLENGES FACED BY ISLAMIC BANKS AND FINANCIAL

INSTITUTIONS IN PAKISTAN

Domestically much like internationally, Islamic banking and financial industry in Pakistan has proved a
huge success, since from it re-launch in 2001 as the industry started from almost scratch now has acquired
approximately 10 percent of the total market share of the banking and financial industry in Pakistan with 19
banking institutions offering Islamic banking products and services.
However, despite the industry is growing at a fast pace, there still some problems, issues and challenges that
need to be tackled, addressed and reformed or changed in the architecture of the industry. These are as
follow:
23

There is blurring distinction between conventional banks and the Islamic banks in terms of legal
frame work. Both conventional banks and Islamic banks were treated under same Banking

Companies Ordinance (BCO) 1962.

There is severe concern that Islamic banking is largely providing alternates to conventional products
and services and is not providing differentiated solutions.
Arbitration and legal proceedings are usually costly and time consuming.
Ineffective liquidity management framework in Islamic Banking Industry.
The lack of investment avenues, especially shortterm, has been one of the major problems faced by
Islamic Financial Institutions (IFIs) in Pakistan(Umer Ahmed
2010). IFIs cannot invest in conventional interestbased sovereign debt instruments such as Tbills
and Pakistan
Investment Bonds. Therefore, short term liquidity management has been a key challenge. Although
Government of Pakistan IjarahSukuk in 2008 provided
some relief as an alternative to PIBs; however, due to limited supply and increasing
demand from Islamic Treasuries, these Sukuk are rarely traded in the secondary market. A short term

liquidity solution is still awaited from the government.

The lack of public awareness and buy-in from the masses stands out as one of the key concerns

surrounding the industry.

Lack of enabling adequate business environment
Current Islamic banking financial accounting and reporting architecture is based on conventional
banking & finance transactions, whereas Islamic banking is substantially different from conventional
banking.

15. OTHER CHALLENGES

Low Islamic Banking Literacy (emerging field, misconceptions)
Limited Human Resource Capacity
Low Product Innovation and diversification
Islamic Pricing Benchmarks.
Lack of adequate legislative Framework at some jurisdictions
Lack of developed Islamic Money Market and Capital Market
Un-tapped Markets (SME, Micro, Agri)
Making Islamic Banking a part of National Agenda
To resolve the above mentioned issues and challenges, and keeping moving forward State Bank of Pakistan
(SBP) has worked closely with stakeholders, practitioners to initiate three-prong strategy plan in 2001 and
facilitated setting up of:
(i) Islamic Banks
(ii) Islamic Banking subsidiaries of commercial banks and
(iii) Dedicated Islamic banking branches by the conventional commercial banks.

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During the period, SBP has issued detailed licensing criteria, instructions and guidelines for Sharia
compliance, instructions for Profit & Loss Distribution and Pool Management and also adopted few IFSB
prudential and AAOIFI Sharia standards.
16. STRATEGIES PLAN WILL FOCUS IN THE FOLLOWING KEY REFORM AREAS

A. ENABLING POLICY ENVIRONMENT

Enabling legal, regulatory, supervisory, liquidity management framework, taxation regime and
financial accounting & reporting framework

B. SHARIA GOVERNANCE & COMPLIANCE

The focus in this area will remain on standardization and harmonization of Sharia practices, as well
as on creating distinct Islamic banking products and services.

C. AWARENESS & CAPACITY BUILDING

Efforts will be made for coordination and collaboration amongst internal and external stakeholders,
enhancing awareness about Islamic finance, and building capacity of the stakeholders

D. MARKET DEVELOPMENT

Initiatives will be undertaken for product diversification and financial inclusion with the
collaboration of stakeholders.

17. OPPORTUNITIES IN ISLAMIC BANKING AND FINANCE INDUSTRY IN PAKISTAN

Majority of 180 million populations is Muslim (more than 95%).

There is a general disliking for interest (Riba) based banking and financing system;
Large financial exclusion due to Riba based financial system
Islamic banking also offer competitive solutions
Only 0.2 million SMEs availed financing out of 3.1 million SMEs across the country; the IBIs have

just around 2,300 SME clients

About 1.85 million farm households obtained bank loans (outstanding) out of more than 6 million

farm households in the country with almost negligible from IBIs

Grossly low level of mortgage financing- less than 1% of GDP; IBIs can tap this market through DM

like products
Huge potential for Islamic Microfinance

18. PROSPECTS OF ISLAMIC BANKING AND FINANCE INDUSTRY IN PAKISTAN

Today, the Islamic banking in the financial market is about 10%. Pakistan is the 6th most populous nation in
the world, a country with over 180 million people which continues to grow rapidly. Till date the banking
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sector has only been able to tap roughly 20 million customers. According to one analysis an untapped
banking market of over 40 million customers still exists within Pakistan. According to estimation in the next
5 years, the Islamic Banking market may be expected to double its market share from 15% to roughly 20%.
19. RECOMMENDATIONS

1) Differentiated products should be developed. Some Islamic Banks have taken correct initiatives in
this respect. This areas needs to be logistically well cushioned with demonstrated results.
2) Dedicated learning centers at University level to train and develop competent workforce and Sharia.
Curricula must be changed in management education. Higher Education Commission should provide
motivation in this respect for Universities to positively respond.
3) Sharia compliant financial services to be expanded. Awareness should be created in this respect and
logistics be developed as cushion to achieve the above objective.
4) The scope of services for users 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 self-employment
opportunities and alleviation of poverty.
5) R & D efforts should be made in order to develop viable short term liquidity products for the
industry.
6) State Bank should take measures for uniformity of Islamic banking contracts and products
7) Dedicated research and product development teams should be developed at all Islamic Financial
Institutions.
20. CONCLUSION
The aim of this paper is to assess the development of Islamic Banking financial
Institutions in Pakistan.

We have shown above from the recent data we have

collected for Islamic banking and financial institutions in Pakistan, it is evidenced that
Islamic Banking and Financial Institutions (IBFI) are flourishing dynamically in Pakistan
like all other Muslim and non-Muslim countries as a result of Islamization of banking
and finance sectors by introducing radical and structural developments made by the
government.
State Bank of Pakistans released figures indicate that branch network of Islamic Bank
s in Pakistan has grown in excess of 1304 branches in Dec 2013, with the growing
number of total assets and deposits.
Despite the impressive growth, the Islamic banking and financial industry in Pakistan
is facing a
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number of challenges that are preventing it from attaining an even higher pace of gro
wth. To succeed as a viable banking and finance option, Islamic banks and financial
institutions not only need passionate supporters but
also a number of supporting institutions or a set of arrangements to perform functions
which are being carried out by various financial institutions in the conventional
framework. Attempts should be made to improve the existing structure to provide
better products and quality service which comply with the Islamic laws.

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REFERENCES
1. Pakistans Islamic Banking Sector Review,(2003-2007). Islamic Banking Department, State Bank of
Pakistan.
2. Strategic Plan-Islamic banking Industry of Pakistan (2014-2018)
3. Islamic Finance for Development Present status & future prospects in Pakistan
4. Pakistans Islamic Banking Sector Review 2003 to 2007
5. Prof. Dr. Khawaja Amjad Saeed Islamic Banking in Pakistan: A Review of Conventional and
Islamic Banking
6. Islamic Banking Bulletin, (Dec, 2012). Islamic Banking Department, State Bank of Pakistan.
7. Islamic Banking Bulletin, (Dec, 2013). Islamic Banking Department, State Bank of Pakistan.
8. Saeed, P. (2011). Islamic Banking in Pakistan: A Review of Conventional and Islamic Banking.
Proceedings of 2nd International Conference on Business Management, 2-7.
9. Handbook of Islamic Banking Products & Services, (2008), Islamic Banking Department, State Bank
of Pakistan.
10. www.burjbankltd.com
11. http://www.albaraka.com.pk/
12. www.meezanbank.com
13. www.bankislami.com.pk
14. www.sbp.org.pk
15. http://www.dibpak.com/

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