In the heart of Karachi’s business district, known as I.I. Chundrigar Road, Mr Raza’s corporate head office stands across the road from the location of his bank’s first-ever fully Islamic branch, which is due to open in December.
Although Pakistan has faced frequent demands from clients for fully Islamic banks for almost two decades, executives such as Mr Raza preferred instead to concentrate on the development of what was known as ‘Islamic windows’ in mainstream banks and financial institutions.
But continuing interest, the experience of a small group of Islamic banks established in recent years and Pakistan’s ongoing economic recovery, have given an impetus to the creation of more Islamic banking services.
“All that’s going on around us prompts us to see if we have in fact underestimated the Islamic banking market,” Mr Raza says in an interview with The Banker. “This new venture is therefore important and the response here could very well set the pace for the future.”
Growing impetus
Up the road from Mr Raza’s office, officials at Pakistan’s central bank, the State Bank of Pakistan, recognise that the opportunities for Islamic banking may be set to grow. “From credit cards to loans for cars, home loans to business investments, there is demand from consumers in each of these areas,” says an official. “Unlike in the past, when it was simply a matter of pious depositors putting their money with the comfort that they were not reaping a fixed interest rate that many considered haram [illegitimate], borrowers are becoming more savvy.”
A recent in-house study by a large Pakistani bank concluded that the prospects for Islamic banking will be more promising as time goes by. Deposits with Islamic banks are projected to rise to the equivalent of $13bn in 10 years’ time, up from roughly $500m this year, the study concluded. Part of the growing emphasis on Islamic banking comes from investors who are flush with liquidity from high oil prices from the Gulf and the Middle East seeking to invest in countries such as Pakistan.
New trends
In July, management rights along with a 26% stock of Pakistan’s giant telecom monopoly, the Pakistan Telecommunications Corporation Ltd (PTCL), was sold by the government to Etisalaat, a UAE-based telecom company, for $2.6bn – an investment that many analysts say would be financed in part by loans from Islamic banks. “This deal alone could be an important trendsetter for the future,” said a senior official at the government’s privatisation commission in Islamabad. “The use of Islamic borrowings in such a large deal must underline the ample opportunities around for other similar deals.”
With an eye to future prospects, Pakistan’s central bank governor, Ishrat Hussain, announced in August that foreign banks with the intention of setting up fully-fledged Islamic banking branches would be given licences for new branches in Pakistan. Officials at the central bank say that Mr Hussain’s remarks were probably motivated in part by early signs of foreign banks entering the market in Malaysia, which has granted licences to three Middle Eastern banks.
“Pakistan is a large Islamic country with a population of 150 million. There are opportunities here for both local and foreign banks,” says the official.
Sultan Allana, chairman of Habib Bank, one of Pakistan’s three largest banks, believes that the country’s economic recovery in the past year has improved prospects for all types of banking, including Islamic. “There has been a complete turnaround in consumer banking. Today, there are Pakistanis who want everything from cars to homes and even the education of their kids, paid through a bank loan,” he says. “It is therefore likely that people who want to abide by Islamic principles have as much demand for such products as other borrowers.”
Habib Bank has joined the trend by opening a fully fledged Islamic banking branch in the heart of the business district this year.
Reins on progress
Bankers warn that the future growth of the Islamic banking industry is dependent on conceptual issues confronting banks all over the Islamic world as well as issues specific to Pakistan, such as a shortage of managers trained in running Islamic bank branches and of scholars trained in sharia law to serve on their boards. The central bank has made it mandatory for managers and senior staff members of Islamic banking branches to demonstrate a knowledge of the subject, for example through certificates in Islamic banking.
Top executives like Mr Allana agree that finding adequately trained personnel would continue to be a challenge for Islamic banking operations for the foreseeable future, especially as some diversify operations from just lending to consumers to benefit from the much larger business opportunities of financing infrastructure projects.
Across banks, many human resources managers complain of a shortage of personnel trained in banking with the knowledge of Islamic principles in relation to economic and financial issues.
“It is a struggle to find bankers with an Islamic mindset,” says the president of a Pakistani bank. “People are mostly just bankers in terms of their training. There are many who are now looking at Islamic banking as an area of opportunity but there isn’t anything such as an MBA in Islamic banking which serves our purposes. If you don’t have trained people, how do you expand rapidly?”
Finding an adequate number of Islamic scholars trained in sharia who are able to serve on the boards of a larger number of Islamic banks has become a mounting concern in the past four years since 9/11. Pakistan and other Islamic countries have been under pressure to tighten regulatory controls in anticipation of concerns from countries such as the US over terrorist financing.
Bankers lament that finding such scholars, who are well-versed in globally-recognised banking principles as well as the workings of the financial markets, remains a difficult obstacle. “If there was indeed a faster paced expansion from what we have seen in Pakistan thus far, I would like to know if there are indeed that many scholars who would be available to perform the task,” says the bank president.
Skill assimilation
There is also disagreement over the extent to which bankers with experience of mainstream banking could quickly make a transition to Islamic banking. Many aspiring Islamic bankers believe that assimilation of the two vital skills – sharia and the workings of the financial markets – would give them the necessary qualifications to enter the world of Islamic banking successfully, perhaps even leading to higher salary packages and other benefits as banks try to attract a relatively smaller community of professionals. But bankers warn that some of the best-performing Islamic bankers are driven more by personal commitment to what they consider an important cause rather than the promise of improved career prospects.
Economic drivers
Bankers believe that the long-term prospects for business will be driven primarily by Pakistan’s overall economic trends. Prospects for the new financial year, which began in July, have so far been clouded by concerns over exorbitant global oil prices.
In the last financial year, Pakistan’s economic growth edged up to more than 8%, driven by a robust industrial recovery as well as higher growth in the agricultural sector. Pakistani leaders, such as prime minister Shaukat Aziz, often cite statistics such as sales of new motorcycles rising to almost half a million last year from around 150,000 the year before, and new car sales rising by about 130,000, three times higher than the year before as examples of a successful economic turnaround.
Encouraged by such trends, the government is expected to launch yet another Eurobond worth at least $500m by the end of this year or early next year, following the successful launch of a $600m sukkuk bond earlier this year and a $500m Eurobond last year.
Mr Raza says that in spite of the expected demand for Islamic banking products, the pace at which his bank expands depends on business prospects. “If there is demand flowing from Pakistan’s ongoing recovery, then certainly there would be more to come,” he concludes, pointing towards the site of the new branch.
