Islamic Banking: An Idea whose time has come

24.02.2012

Victor Hugo once said 'You can stop an invading army but you can't stop the invasion of an idea whose time has come'.

The invasion of the idea named “Islamic Banking” is eminent throughout the world. In the decade prior to the financial crisis, the Shari’ah compliant financial system showed exceptional returns. Assets doubled almost every two years and net income doubled every year. Even during the World Economic Recession, this idea has invaded many hearts and souls in the midst of economic recession & dismal times whereby the crisis clearly favoured the Islamic banking system compared to the conventional system. According to a recent IMF study, Islamic banks performed better than conventional ones in terms of profitability, credit and asset growth. The Islamic banks’ profitability crunch worldwide was less than 10 percent, whereas the conventional banks’ profitability slumped more than 35 percent. The reports depicted stronger credit growth compared to conventional banks in almost all countries throughout the decade, suggesting that the system has great potential for further market share expansion and a possible contribution to market stability given the available credit. Assets also reflected a similar trend, which were less affected and grew on twice the pace of conventional banks during the period of economic crisis. Because the global recession is an on-going phenomenon, these results are conditional; however, the conclusion may be supported by characteristics of the Islamic finance system.

The growth in the market share of Islamic banking in Pakistan has also been impressive. This can be seen by looking at the market share achieved by other countries over time. The Islamic Banking sector in Pakistan has a 7% share of the total banking industry. This share has been achieved in just 7 years of the launch of State Bank of Pakistan’s Islamic banking initiative. When you compare this to larger Muslim economies like Indonesia, Bahrain or Malaysia, our growth rate, on an annualized basis, has been much higher. The industry has grown from just 6 or 7 branches in 2002 to a cumulative branch network of approximately 700 branches, covering all the major cities of the country, in a very short span of time. The growth trends of Islamic Banking in Pakistan clearly show a bright and prosperous future of this banking sector in the country.

However, we are facing challenges like any other new industry, which despite being new is actually a very competitive market. Islamic Banking is based on the principles of Islamic finance and people have very little knowledge about these concepts. This in itself gives rise to a number of challenges, for instance establishing credibility and spreading awareness. Capacity building is another major challenge. Conventional banking is being taught in numerous universities whereas very few institutions are offering formalized education in Islamic Banking thus production of quality human capital is another challenge for our growing sector. The lack of effective marketing remains as one of the key reasons why the sector hasn’t been able to serve its massive potential. The way mass media and social media has evolved in the overall scenario, it has become very important to be able to use these tools effectively in order to market Islamic Banking in general and its products / services in particular.

The government of Pakistan has done a tremendous job with SBP promoting Islamic finance since 2003. Now you see a sufficient number of banks in the market. The market share has really progressed well if we look at it in the context of a global scenario. If we look at the market share it is evident that the public has shown a positive response. It has not been disruptive in any manner, which shows that the current systems are receptive. Consequently there is significant public demand but we have not been able to provide the required accessibility.

Even though Islamic banks are yet to achieve economies of scale that can make them practicable competitors, the solution is to spread mass awareness on processes, to adapt to beleaguered market conditions, to offer the highest levels of customer services and not to imitate conventional banking strategies. The focus, thus, should be on choosing and creating the most adequate products, services and policies, which are truly complaint with Shari’ah and adapted to the current needs of billions of Muslim customers & even beyond them.

The future of Islamic Banking is brilliant as it surely is an idea whose time has come!