SBP unveils plan to make Islamic Banking big in Pakistan

The State Bank of Pakistan on Monday announced the third five-year strategic plan for the Islamic banking industry. The aim of the plan is to expand the share of Islamic banks’ assets and deposits to 30 percent in the overall banking industry.

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The State Bank of Pakistan (SBP) Monday unveiled a third five-year strategic plan for the Islamic Banking Industry (IBI). “The SBP aims at making Islamic banking one-third of the overall banking industry by 2025,” the announcement said.

These targets included some 30 percent share in both assets and deposits of the overall banking industry, 35 percent share in the branch network of the overall banking industry, and 10 percent and 8 percent share of SMEs and Agriculture financing respectively, in private sector financing of the Islamic banking industry.

In order to steer the growth of Islamic banking on sound footings, SBP has been providing proactive guidance through the issuance of Strategic Plans for the Islamic banking industry; so far, two five-year Strategic Plans have been issued.

This third Strategic Plan for the Islamic banking industry (2021-25) aims to set a strategic direction for the industry to strengthen the existing progressive momentum and lead the industry to the next level of growth. The plan has been developed in close coordination and consultation with all key relevant stakeholders.

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The strategic plan envisages achieving the aforementioned specified targets by focusing on six strategic pillars namely: (i) strengthening legal landscape, (ii) enhancing conduciveness of regulatory framework, (iii) reinforcing comprehensive Shariah governance framework, (iv) improving liquidity management framework, (v) expanding outreach & market development, and (vi) bolstering human capital & raising awareness.

“In order to steer the growth of Islamic banking on sound footings, SBP has been providing proactive guidance through issuance of strategic plans for the Islamic banking industry; so far, two five-year strategic plans have been issued,” the announcement added.

The Islamic banking industry has widened its footprint in the banking system of the country. Currently, throughout Pakistan, 22 Islamic banking institutions (5 full-fledged Islamic banks and 17 conventional banks having standalone Islamic banking branches) are offering Shariah-compliant products and services through a network of 3,456 branches and 1,638 Islamic banking windows (dedicated counters at conventional branches) spread across 124 districts of the country.

In terms of share, the Islamic banking industry has acquired a market share of 17 percent and 18.3 percent in assets and deposits of the overall banking industry, respectively by the end of December 2020.

The State Bank aims at making Islamic banking one-third of the overall banking industry by 2025. Keeping in view the potential towards ensuring broad-based economic growth and development, Islamic banking has remained a top priority area for the SBP.

Moody’s believes that the growth in Pakistan’s Islamic banking is going to greatly benefit the banking sector. “Because attracting previously unbanked customers facilitates deposit and loan growth while reducing funding costs because of the banks’ access to a large pool of non-remunerated deposits”, the credit rating agency said

“The growth(in Islamic Banking) is credit positive for Pakistani banks because it attracts customers from the previously unbanked population, which creates new business opportunities and boosts banks’ financial performance,” said Moody’s in a statement.

The new strategic plan provides a consensus-based agenda and strategy to make Islamic banking an efficient and practical solution for consumers.

It also contains an extensive focus on improving the public perception of Islamic banking as a distinct and viable system capable of catering to the varied financial services needs of various segments of the society that would significantly contribute to increasing overall financial inclusion in Pakistan.

Read More: Moody’s terms growth in Pakistan’s Islamic banking as credit positive

The plan also emphasizes that Islamic banking institutions must develop innovative products based on distinctive Shariah characteristics to cater to underserved sectors particularly SMEs and Agriculture, which are critical for the growth of the country’s economy.

According to the central bank, the Islamic banking industry is expected to fully capitalize on the potential of Islamic finance to attain the shared vision of a vibrant and sustainable Islamic banking sector in Pakistan.

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