THE GROWTH OF ISLAMIC BANKING & FINANCE IN PAKISTAN

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A pre-publication copy of the Global Islamic Finance Report 2014, which is expected to be released on April 13 in Washington DC on the occasion of the Global Donors Forum, reveals that Pakistan ranks number nine in the world in terms of its development of the Islamic financial services industry in the country. A London-based Islamic financial advisory company, Edbiz Consulting has formulated the Islamic Finance Country Index (IFCI), which ranks about 50 countries of the world in terms of their role in developing, promoting and advocating Islamic banking and finance. Pakistan comes after eight other countries, namely Iran, Malaysia, Saudi Arabia, Bahrain, Kuwait, United Arab Emirates (UAE), Indonesia, and Sudan. Other countries included in the ranking are given in the table below, which lists the top 20 countries with reference to their performance in the Islamic banking and finance industry.

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The Global Islamic Finance Report 2014 estimates the size of the global Islamic financial services industry to be US$1.813 trillion at the end of 2013. This represents 12.3% annual growth over 2012 – an increase of US$182 billion in absolute terms.

Many Islamic financial institutions appear in the top five largest banks in their respective countries. In Pakistan, the largest Islamic bank is Meezan Bank, which is fast assuming mainstream prominence. Growth of Islamic banking in the country has been over 30% in the last few years, which is certainly above the average global growth rate of Islamic banking and finance. If this trend continues then one should expect that in the next 3 years Islamic banking assets will at least double from its current size of Rs926 billion. The newly unveiled Islamic banking strategy by State Bank of Pakistan attempts to double the number of Islamic branches from 1200, in the next four years, and to increase its market share from 10% to 15%.

Given the huge potential the country has in terms of Islamic banking, increasing the share of Islamic banking to 15% is a modest aim Indeed, if Islamic banking fails to achieve 20% share in the market by 2018, by all indicators, it has failed to reach its potential. Given that a number of banks are showing renewed in interest in Islamic banking, the industry should target an increase of market share by 2% every year through Brownfield growth, i.e., cannibalization of conventional banking and through conversion of conventional into Islamic banks. Once Summit Bank is converted into a fully-fledged Islamic bank, it will become the second largest Islamic bank in the country, taking the number two position from Bank Islami (assuming that Bank Islami does not grow further). Only this will give 8% additional market share to Islamic banking over the next four years. If Islamic banks exhibit Greenfield growth, more than the growth in conventional banking, it should be able to double its market share. Greenfield growth is not only possible but is in fact needed in Pakistan where there is widespread financial exclusion. If Islamic banking is used as a tool for promoting financial inclusion, there is no reason that Islamic banking should not be able to achieve the important milestone of 20% market share.

If that happens, the country will stand next to a number of Gulf countries and Malaysia where Islamic banking represents between 20 to 30% of the market share. Pakistan, however, will become the most important player in Islamic banking and finance, if it attains 20% market share. This is so because Pakistan is the second largest Islamic **market (population wise) after Indonesia.

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