Lack of awareness takes edge off Islamic banking


KARACHI – While conventional banking in Pakistan is faced with innumerable challenges in the wake of global and domestic economic recession, their counterparts in Islamic banks feel troubled by a single daunting challenge; a vast majority of potential customers in the predominant Muslim Pakistan lack awareness of Shariah banking.
“People don’t understand what you are offering,” said Muhammad Raza, Executive Vice President and Head of Consumer Banking at Meezan Bank, working as a pioneer of Islamic banking in Pakistan since it was licensed by the State Bank in May 2002. The executive vice president of Meezan Bank tried to explain the defined parameters of Islamic banking and reiterated that it is distinguished by a ‘thin line’ from normal interest-based conventional banking.
Shrugging off problems emanating from global economic crisis, Raza said the real challenge facing the Islamic banking industry was a lack of awareness among the 170 million predominantly Muslim Pakistanis. “During the recessionary period worldwide; Islamic banking performed much better than its conventional counterparts,” the banker said. He pointed that Pakistani citizens have been thoroughly exposed to conventional banking and in many cases, now deem it indispensable.
“You have to exert extra effort to generate awareness among the people and every one has to play an appropriate role to educate the masses,” Raza said. Dwelling on the difference between Islamic and conventional banking, the banker said the concept of money in Islam stood for a ‘medium of exchange’ with currency having no intrinsic value. “A major distinction between conventional banking and its Islamic counterpart is that the former uses money as a commodity while for the latter, it is a simple medium of exchange,” Raza explained.
He said that “this commodity can be traded either at a higher or lower price” in conventional interest-based banking. “The buying or selling of money allows interest to come into play and that is forbidden in Islam and Islamic banking,” the bank official further elaborated. Therefore, he said, the Islamic banks were not offering packages that were based on cash financing or personal loans.
“Unlike conventional banking the Islamic banks’ transactions are based on assets and not paper,” the banker said adding “We need an instrument behind which there is an asset and not papers like the Treasury Bills.” Raza also brushed aside the deep rooted misconception about the very nature of banking industry in a rigid society like Pakistan where, he said, interest is aptly considered to be a bigger sin than consuming pork.
Illustrating his point, the banker said out of some 80 million eligible consumers, only 15 to 20 million people have opened bank accounts, rendering great capacity and potential untapped. “Islam does not bar economic activity, taking benefits or running businesses. It allows fully fledged economic activity.”
“During the zenith of the Islamic era, trade was prioritised more with certain restrictions like the interest. There is a thin line between trade and interest,” the banker reiterated. Touching upon the overall growth of the Islamic banking in Pakistan, the bank executive stressed that the industry was growing well with each passing year seeing it growing at least by one percent.
“Thanks to the State Bank which provided the Islamic banks with a level playing field to operate in competition with conventional players,” Raza said. According to the banker, the share of Islamic banking in the banking sector was hardly 0.5 percent initially, but was now stands close to 6.5 percent.
Given this rapid growth of the Shariah banking, the regulator, the State Bank, has set a ‘very aggressive’ and to a large extent ‘unrealistic’ growth target of 12 percent by the end of 2012. “But, I believe the Islamic banking would expand by 10 percent against the SBP target and we would be able to achieve over 12 percent growth by 2015,” Raza hoped. He said at the time of launching, tough competition had put the existence of Islamic banking at stake and compelled Islamic bankers to compete hard.
The bank official recalled that it was only by 2005, when other major players had entered Islamic banking emphasising important actors such as Bank Islami, Emirates Global, Dawood Islamic Bank. “The growth in Shariah banking is readily apparent. Today, some 13 conventional banks, including Bank Al-Falah, have Islamic banking operations,” he pointed out.
The banker went on to say that demand for Islamic bonds had also increased greatly. In 2009, Ijara Sukuk worth Rs 14 billion was issued, but in July 2010-11, the issuance of Islamic bonds had skyrocketed to over Rs 170 billion rising thirteen fold. Touching on deposit growth, Raza said “of course we have a great appetite for deposits and the customers are willing to invest in the banks.”
He claimed that total deposits of the banking sector were close to Rs 4.4 trillion of which the Islamic banks’ share constituted five to six percent. He said that in 2009, Meezan Bank had generated deposits of Rs 31 billion while in 2010, its deposits climbed to Rs 61 billion. “A single Islamic bank generated Rs 30 billion, more than doubling in a single year,” the banker emphasised, jubilantly.
On the financing side, the banker said given the higher interest rate and global economic recession, banks are compelled to act cautiously. “We need a risk-free or sovereign risk like Ijara Sukuk,” he added. On consumer banking, the banker underlined that personal loans and credit cards were two major unsecured areas to this effect. “Our regular disbursements are mainly focused on car and house financing; both are secured and demand based,” he said.
The Meezan Bank executive was happy to tell Pakistan Today that gradually more people were coming round to Islamic banking after becoming acquainted with its basic structure. “Islamic banking has its own defined parameters which are in lines with Shariah, although there are still chances for further improvement,” he said.
“Unlike the old, conventional banking, Islamic banking has a history spanning a couple of decades, but with each passing year, Islamic banking grows by at least one percent,” Raza emphasised. “You take a step towards Islamic banking and the situation will improve gradually,” he suggested to the government and is desperate to steer the country’s troubled economy back on track.