Pakistan’s targeted Islamic banking market share: hit or miss?

Islamic banking has been growing rapidly over the past four years in Pakistan, but, has it been growing fast enough to meet the 15% target of Islamic banking market share this year that the central bank set in its strategic plan published back in 2014? MARC ROUSSOT discovers that while it appears to be a straightforward yes/no question, it is actually more complicated than expected as Pakistan did not precisely define its target contrary to Malaysia and Turkey for instance.

Pakistan, Malaysia and Turkey are home to thriving Islamic finance sectors. Starting from a low base and boosted by strong political will, the industry has experienced swift growth in these countries where different objectives have been set in terms of Islamic banking market share for 2018, 2020 and 2025 according to the countries themselves. These targets are not the same both in value and in definition. This is where things start to get tricky.

For instance, the Participation Banks Association of Turkey intends to reach a 15% Islamic banking market share in terms of assets by 2025, according to its Turkish Participation Banking Strategy Document 2015-25, while Bank Negara Malaysia expcts to reach a 40% market share in terms of financing by 2020 as indicated in its Financial Sector Blueprint 2011-20.

In turn, Pakistan’s objective is not as well defined as that of Turkey and Malaysia — the State Bank Pakistan (SBP) is targeting a 15% Islamic banking market share in 2018 in its Strategic Plan Islamic Banking Industry of Pakistan 2014-18 without detailing if it is intending to reach this target in terms of assets or financing.

“Considering the average annual growth rate of the Islamic banking industry over the last decade and significant financial exclusion level, achieving a target of 15% share in [the] overall banking industry along with [the] doubling of number of branches in the next five years has been envisaged in the plan as an attainable target for the industry,” the SBP’s strategic plan indicates.

On track?
Nevertheless, Pakistan’s central bank remains confident in its capacity to achieve its goal. “The SBP is hopeful that Pakistan will meet its target of 15% by 2018. The industry has evolved over the years and now the sector has gained about 14.5% share in the overall banking system from nothing in 2002 despite facing numerous challenges,” says Ghulam Muhammad Abbasi, the director of the Islamic Banking Department at the SBP.

The industry’s asset base has reached PKR2.27 billion (US$19.54 million) or 12.4% of overall banking system assets as of the 31st December 2017, whereas deposits of the Islamic banking industry stood at PKR1.89 billion (US$16.27 million), constituting 14.5% of the overall banking industry’s deposits.

There is little doubt that Islamic banking deposits can reach 15% in 2018, but for Islamic banking assets to increase from 12.4% to 15% by the end of the year, the industry’s assets will have to grow by 20.6%, which is a significantly high growth rate. However, it seems to be achievable as between 2014 and 2017, Islamic banking assets grew by 24.2%, 27.9%, 15.1% and 22.6% on a yearly basis.

Moreover, the SBP is keen to take action in order to increase the chances of the Islamic banking industry’s assets reaching its 15% target. “The industry may be pushed to explore and penetrate in the underserved sectors like microfinance, SMEs and agriculture. The industry also needs to further deepen its penetration in the real sector by way of strengthening its linkages with corporates and businessmen through efficient catering to their business needs in a Shariah compliant way. Efforts for promoting better awareness about Islamic banking among the masses especially corporates may immensely serve toward this end. At the same time, we are also working with the Ministry of Finance to find ways of enabling our Islamic banking industry to manage its liquidity position in an efficient manner,” Ghulam shares.

This article first appeared in IFN Volume 15 Issue 18 on the 2nd of May 2018