Saturday, May 19, 2012

Reflections on One Decade Operations of Islamic Banking in Pakistan

Salman Ahmed Shaikh

Islamic banking in Pakistan roughly started one decade ago and now there are 5 full-fledged Islamic banks in Pakistan and more than 15 conventional banks that have Islamic banking branches.

The industry has grown by more than 10 percent consistently during the last five years and despite the economic slump after 2007 in economy, the growth in Islamic banking had remained consistent and even gained more steam at least in Pakistan and that has been roughly the case elsewhere too.

However, any meaningful assessment and reflection on the performance of Islamic banking must take into account much more than the growth, market share, size of balance sheet and profits.

Islamic financial institutions built their reputation and gained acceptance from masses having promised socio-economic benefits of an egalitarian financial system based on Islamic principles. Hence, this merits a careful analysis of performance on these and similar parameters.

Islamic banks after having spent a decade of Islamic banking operations in Pakistan have to reflect on answers to the following points:

1)How justified are high Islamic banking spreads (difference between average financing and average deposit rates) which have reached 8.40 percent and are one of the highest in the world and more than two percentage points higher than conventional banks in Pakistan?

2)How justified is the argument to seek special privileges from the regulators when Islamic banks use the same benchmark rate, but the difference is that their spreads (margins) are even higher than conventional banks?

3)How do they justify their position and analyze their performance on social and egalitarian grounds when most of their products are priced using the same benchmark of the conventional banking industry, which is KIBOR?

4)Equity financing is regarded as the most ideal mode of financing in an Islamic economy by Islamic scholars. Why it is hardly used in financing the clients with a contribution of less than 2 percent in total financing?

5)Trust and documentation problems did not hinder 700 companies to get registered on Karachi Stock Exchange while thousands of public limited companies are operating in Pakistan as well. Why Islamic financial institutions could not help support more IPOs either through investment banking operations or alternate institutional structure?

6)Lastly and most importantly, they must reflect on what was the real reason for prohibition of Riba? If it was exploitation, then should an alternate system claiming been founded on Islamic principles not differ in any substantial way in terms of cost. Unfortunately, if there is any difference, it shows that Islamic financing schemes are costlier than conventional.

Going forward, it is hoped that after having completed one decade of successful operations of Islamic banking and exhibiting exemplary growth in commercial sense, Islamic banks will look towards increasing their outreach to the poor masses and start using more equity based modes of financing which help improve their image and bring some fruits of Islamic economic principles.

(Salman Ahmed Shaikh is a researcher in Islamic Economics. He is author of "Proposal for a New Economic Framework Based on Islamic Principles". He has also written 20 papers and more than 70 articles on Islamic Economics. He can be contacted at

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