ISLAMIC BANKING AND FINANCE IN THE GULF AND THE FAR EAST: WHERE DOES PAKISTAN STAND?

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Based on the growth and development of Islamic banking in different parts of the world, the Global Islamic Finance Report 2014, to be launched at the Global Donors Forum to be held in Washington DC on Aril 13-16, 2014, predicts that by 2020 there will be at least 6 countries in the world where Islamic banking and finance (IBF) will attain a market share of no less than 50% of the total financial sector in their respective countries. These six countries are in addition to the Islamic Republic of Iran and Sudan, which claim to have fully-fledged Islamic financial systems already in place.

It is almost certain that Brunei Darussalam, Kingdom of Saudi Arabia, Kuwait, Qatar, Malaysia and UAE will have their financial sectors dominated by IBF by 2020.

Brunei Darussalam will be the first country to witness the share of IBF in the domestic financial sector exceeding 50% by 2020. Almost 45% of retail banking in the country already fulfils basic Shari’a requirements. More impetus is needed for the capital markets, which requires a little more guidance and support from the Ministry of Finance. Given its small and overwhelmingly religious population, it will not be surprising to see Brunei Darussalam emerging as a nation where the IBF share is greater than conventional banking and finance.

, Similarly, the Kingdom of Saudi Arabia will have its financial sector predominantly Shari’a compliant by 2020. It currently has over 55% of its retail banking sector already in compliance with Shari’a it will have to streamline Islamic banking and finance, with official recognition of it by Saudi Arabian Monetary Agency (SAMA) and Capital Market Authority (CMA). If Brunei Darussalam has not already achieved the milestone, Saudi Arabia could be the first country to boast of having Islamised the bulk of banking and finance practice in the country.

Since the establishment of Kuwait Finance House (KFH) in 1977, Kuwait has been at the forefront of IBF. It is expected that it will still be ahead of Qatar in achieving the threshold of 50% share. With the current market share at 35%, Kuwait’s IBF industry will have to grow by 7.14% annually for the next six years to achieve the milestone of 50% market share. Furthermore, its existing Islamic financial institutions will have to take over 3.15% market share from the conventional financial institutions during the same time period.

Qatar is another country with huge potential for growth in IBF. Unfortunately, the likelihood of IBF reaching the 50% threshold was adversely affected by the government’s decision to disallow conventional banks offering Islamic banking through window operations; however, it is still likely that IBF will have no less than 50% market share therein by 2020.

Malaysia is another country that has made tremendous progress in IBF. With strong support from the government and the central bank, Malaysia has certainly taught other countries, notably Pakistan and UAE, how government patronage of IBF can actually bring wider economic benefits to the country.

The weakest link, however, in this list of six countries is the UAE. Despite the government of UAE’s strong support for IBF, the country will be able to just make the 50% mark by the end of 2020. This relative less impressive growth of IBF is even more significant, given that there will be a lot of economic activity in Dubai and in the wider UAE in wake of the Expo2020, which the city of Dubai is going to host.

This brings us to the million-dollar question: where does Pakistan stand in this respect? Given the 10% market share of Islamic banking, and far lower market share of IBF in the financial sectors (including insurance and capital markets etc.), it will take a very long time for Pakistan to attain the 50% mark. Focusing on Islamic banking only, it will require an annual growth rate of 66.67% for Islamic banks for the next six years to capture 50% of the market share. To do so, Islamic banks will also have to cannibalise 7.4% of the conventional business on an annual basis during the same period. This is certainly a steep task but the momentum is in the right direction. The mood of newly-appointed deputy governor (for Islamic banking), Mr Saeed Ahmed at the State Bank of Pakistan (SBP), who is widely believed to be the next governor of the central bank after the recent resignation of Mr Yaseen Anwar, is buoyant regarding Islamic banking, and it will be interesting to see if Islamic banking can hold equal market share with conventional banking by 2025. To do so, Islamic banking assets will have to grow by 36.36% annually for the next 11 years, during which time they should also capture 4% of the business of conventional banks. Given that Islamic banking has been growing in Pakistan at a rate of 35% annually for the last few years, this is a realistic target that Mr Saeed Ahmad should aim for

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