RIPHAH UNIVERSITY ISLAMABAD Event RIU International Conference February

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RIPHAH UNIVERSITY, ISLAMABAD Event RIU International Conference: February 8 -9, 2011, Islamabad Topic for

RIPHAH UNIVERSITY, ISLAMABAD Event RIU International Conference: February 8 -9, 2011, Islamabad Topic for Presentation The Challenges and Prospects of Islamic Banking in Pakistan Date & Venue February 09, 2011, NIBAF, Islamabad Presentation by Prof. Dr. Khawaja Amjad Saeed Professor Emeritus & Founder Principal, Hailey College of Banking & Finance, University of the Punjab, Lahore Pakistan (2003 ----), Member Governing Council, International Federation of Accountants (IFAC), New York (1997 -2000), President, South Asian Federation of Accountants (SAFA) (1997), President, Institute of Cost and Management Accountants of Pakistan (1997 -2000), President, Association of Management Development Institutions of South Asia (AMDISA) (1993 -96), Pro Vice-Chancellor University of the Punjab, Lahore (1994 -1996), Founder Director, Institute of Business Administration (IBA), University of the Punjab, Lahore (1973 -1996). 1

PRESENTATION FRAME A. Islamic Banking-Inretrospect in Pakistan B. Growth of Islamic Banks in Pakistan

PRESENTATION FRAME A. Islamic Banking-Inretrospect in Pakistan B. Growth of Islamic Banks in Pakistan C. IBIs Deposits & Financing D. IBIs Investments E. Selected Performance Indicators: IBIs & Banking Industry of Pakistan F. Future Prospects 2

A: ISLAMIC BANKING - INRETROSPECT IN PAKISTAN 1. Vision and Mission of Islamic Banking

A: ISLAMIC BANKING - INRETROSPECT IN PAKISTAN 1. Vision and Mission of Islamic Banking Department of SBP 2. Strategy for Islamic Banking in Pakistan 3. Historical Rundown 3

A-1: Vision & Mission of Islamic Banking Department of SBP State Bank of Pakistan,

A-1: Vision & Mission of Islamic Banking Department of SBP State Bank of Pakistan, in its role as central bank, has developed the following vision and mission: 1. VISION “To make Islamic Banking the banking of first choice for the providers and users of financial services”. 2. MISSION “To promote and develop Islamic Banking industry in line with the best intersectional practices, ensuring Shariah compliance and transparency”. 4

A-2: STRATEGY FOR ISLAMIC BANKING IN PAKISTAN THREE PRONGED STRATEGY In Pakistan, SBP has

A-2: STRATEGY FOR ISLAMIC BANKING IN PAKISTAN THREE PRONGED STRATEGY In Pakistan, SBP has developed the following three point strategies relating to development of Islamic Banks: 1. Full fledged banks can be established in Pakistan. 2. Islamic Banks can set up their subsidiaries. 3. Stand-alone Islamic Banking branches can be opened by conventional banks in Pakistan. Therefore, flexibility exists in respect of starting and expanding Islamic Banks in Pakistan. 5

A-3: HISTORICAL RUNDOWN (Continued) 1. Pakistan was created out of Islamic Ideology. Therefore Islamic

A-3: HISTORICAL RUNDOWN (Continued) 1. Pakistan was created out of Islamic Ideology. Therefore Islamic Banking gets support for its development. 2. Quaid-e-Azam Mohammad Ali Jinnah, father of the Nation, while inaugurating SBP on July 01, 1948 had guided Research Department of SBP to help develop Islamic Economic System which is based on equality and brotherhood. 3. Constitution of Pakistan Article 38 (f) of the 1973 Constitution of Pakistan is quoted below: “The state shall eliminate riba as early as possible”. 6

A-3: HISTORICAL RUNDOWN (Concluded) 4. 1970 s to 21 st Century a. b. 1970

A-3: HISTORICAL RUNDOWN (Concluded) 4. 1970 s to 21 st Century a. b. 1970 s: efforts, in their initial stages, started to eliminate riba. 1980 s: Bold and comprehensive initiatives were under-taken. Pakistan joined the race of three countries in the world for interest free banking. Several existing laws were reviewed. New financial instruments were introduced, Twelve Non-Interest Based (NIB) modes were released to replace riba based practices, Profit & Loss Sharing concept was introduced. 7

B: GROWTH OF ISLAMIC BANKS IN PAKISTAN 1. Some Growth of Islamic Banks: Important

B: GROWTH OF ISLAMIC BANKS IN PAKISTAN 1. Some Growth of Islamic Banks: Important Indicators 2. Growth of Islamic Banks Branches 3. Islamic Banking Branches Network-Three Aspects 4. Islamic Banking Branches Network-Seven Aspects 5. Full Fledged Islamic Banks 6. Islamic Branches of Conventional Banks 7. City wise break-up of Islamic Banking Branches 8. Islamic Banks sub-branches 9. Maximum & minimum braches network of Islamic Banks 10. City wise Islamic Banking Branches network as on September 30, 2010. 8

B-1: GROWTH OF ISLAMIC BANKS: Some Important Indicators December 2003 to September 2010 Year

B-1: GROWTH OF ISLAMIC BANKS: Some Important Indicators December 2003 to September 2010 Year Total Assets Share of IBIs % Deposits Total Rs. b Net financing investment (December) Total Rs. b Share of IBIs % 2003 13 1 8 1 10 1 2004 44 2 30 1 2005 71 2 50 2 48 2 2006 119 3 84 3 73 2 2007 206 4 147 4 138 4 2008 276 5 202 5 186 4 2009 366 6 283 6 226 5 2010 (Sept) 424 6 338 7 233 5 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, P. 4. 9

B-2: GROWTH OF ISLAMIC BANKS BRANCHES December 2003 to September 2010 Year (December) Number

B-2: GROWTH OF ISLAMIC BANKS BRANCHES December 2003 to September 2010 Year (December) Number Base Index Number of Times 2003 17 100 1 2004 48 300 3 2005 70 412 4 2006 150 882 9 2007 289 1, 700 17 2008 515 3, 029 30 2009 651 3, 829 38 2010 (Sept) 684 4, 023 40 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, P. 4. 10

B-3: ISLAMIC BANKING BRANCHES NETWORK As on September 30, 2010 Number of Particulars Branches

B-3: ISLAMIC BANKING BRANCHES NETWORK As on September 30, 2010 Number of Particulars Branches % A: Full Fledged Islamic Banks 437 64 B: Islamic Branches of Conventional Banks 197 29 C: Sub-Branches 50 07 684 100 Total Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 8, P. 8. 11

B-4: ISLAMIC BANKING BRANCHES NETWORK As on September 30, 2010 S. No. Province Number

B-4: ISLAMIC BANKING BRANCHES NETWORK As on September 30, 2010 S. No. Province Number % 1. Punjab 306 44 2. Sindh 231 34 3. Khyber Pakhtoonkhwa 73 11 4. Baluchistan 33 05 5. Federal Capital 33 05 6. Azad Kashmir 07* 01 7. Northern Area 1* - 684 100 *As on December 31, 2009 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 9, P. 8. 12

B-5: FULL FLEDGED ISLAMIC BANKS As on December 31, 2009 S. No. Banks Number

B-5: FULL FLEDGED ISLAMIC BANKS As on December 31, 2009 S. No. Banks Number of Branches % 1. Meezan Bank Ltd 166 41 2. Bankislami Pakistan 70 18 3. Emirates Global Islamic Bank Ltd 58 15 4. Dawood Islamic Bank Ltd 42 10 5. Dubai Islamic Bank Pakistan Ltd 35 9 6. Al Barka Islamic Bank 29 7 400 100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P. 16. 13

B-6: ISLAMIC BRANCHES OF CONVENTIONAL BANKS As on December 31, 2009 Banks Number of

B-6: ISLAMIC BRANCHES OF CONVENTIONAL BANKS As on December 31, 2009 Banks Number of Branches S. No. % 1. Bank Alfalah Ltd 60 36 2. Askari Bank Ltd 29 17 3. The Bank of Khyber 18 10 4. MCB Bank Ltd 11 6 5. Standard Chartered Bank 11 6 129 75 6. National Bank of Pakistan 8 5 7. Bank Al-Habib Ltd 6 4 8. Faysal Bank Ltd 6 4 9. Soneri Bank Ltd 6 4 10. United Bank Ltd 5 3 11. Habib Metropoltian Ltd 4 2 12. The Royal Bank of Scotland 3 2 13. Habib Bank Ltd 1 1 39 25 168 100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P. 16. 14

B-7: CITY-WISE BREAK-UP OF ISLAMIC BANKING BRANCHES As on December 31, 2009 S. No.

B-7: CITY-WISE BREAK-UP OF ISLAMIC BANKING BRANCHES As on December 31, 2009 S. No. Province Number % 1. Punjab 38 47 2. Khyber Pakhtoonkhwa 17 21 3. Sindh 12 15 4. Baluchistan 10 13 5. Azad Kashmir 2 2 6. Federal Capital 1 1 7. Northern Area 1 1 81 100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P. 18. 15

B-8: ISLAMIC BANKS SUB BRANCHES As on December 31, 2009 S. No. Banks Number

B-8: ISLAMIC BANKS SUB BRANCHES As on December 31, 2009 S. No. Banks Number of Branches % 1. Bank Alfalah Ltd 35 44 2. Bankislami Pakistan Ltd 32 40 67 84 3. Dawood Islamic 8 10 4. Askari Bank Ltd 2 2 5. Emirates Global Bank Ltd 2 2 6. Dubai Islamic Bank Ltd 1 1 7. The Bank of Khyber 1 1 14 16 81 100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P. 16

B-9: MAXIMUM & MINIMUM BRANCHES NET WORK OF ISLAMIC BANKS AS on December 31,

B-9: MAXIMUM & MINIMUM BRANCHES NET WORK OF ISLAMIC BANKS AS on December 31, 2009 S. No. Province Number Maximum Minimum 1. Sindh/Karachi (Five Cities) 180 1 2. Punjab/Lahore (Twelve Cities) 109 1 3. Federal Capital/Islamabad 31 - 4. Khyber/Pakhtoonkhwa (Eight Cities) 28 1 5. Baluchistan/Quetta (Eight Cities 21 1 6. Azad Kashmir/Mirpur AK Muzafarabad 4 3 7. Northern Area/Gilgit 1 - Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P. 18. 17

B-10: CITY WISE ISLAMIC BANKING BRANCHES NETOWRK As on September 30, 2010 S. No.

B-10: CITY WISE ISLAMIC BANKING BRANCHES NETOWRK As on September 30, 2010 S. No. City Number % 1. Karachi 193 28 2. Lahore 117 17 3. Rawalpindi 33 5 4. Peshawar 29 5 5. Faisalabad 28 4 6. Multan 24 3 7. Quetta 22 3 446 65 238 35 684 100 8. Others Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 9, P. 8. 18

C: IBIs DEPOSITS & FINANCING 1. Deposits 2. Sectoral Composition 3. Products 4. NPFs

C: IBIs DEPOSITS & FINANCING 1. Deposits 2. Sectoral Composition 3. Products 4. NPFs Time Series 5. Deputy Governor of SBP Suggested Investment Portfolio for IBIs 19

C-1: IBIs Deposits As on September 30, 2010 S. No. Particular Rs. Billion %

C-1: IBIs Deposits As on September 30, 2010 S. No. Particular Rs. Billion % Fined Deposits 128 39 Saving Deposits 113 33 Currents Accounts-non-Remunerative 74 21 Others 03 01 318 94 20 06 338 100 Local Currency Deposits 320 95 Foreign Currency Deposits 18 05 338 100 A: CUSTOMERS B: FINANCIAL INSTITUTIONS Remunerative C: CURRENCY WISE BREAKING Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 7, P. 7. 20

C-2: IBIs FINANCING: SECTORAL COMPOSITION September 30, 2010 S. No. Sectors IBIs% Industry %

C-2: IBIs FINANCING: SECTORAL COMPOSITION September 30, 2010 S. No. Sectors IBIs% Industry % 1. Individuals 18. 83 12. 5 2. Textile 17. 91 16. 8 3. Chemical & Pharmaceuticals 9. 91 4. 3 4. Energy: Production & Transmission 6. 40 9. 6 5. Cement 3. 63 2. 7 6. Sugar 2. 30 1. 6 58. 98 46. 5 41. 02 53. 5 100 7. Other Sectors (Including 34. 41% and 41. 7% for industry others) Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 5, P. 6. 21

C-3: IBIs FINANCING PRODUCTS (Total Rs. 162 b) September 30, 2010 S. No. Products

C-3: IBIs FINANCING PRODUCTS (Total Rs. 162 b) September 30, 2010 S. No. Products % 1. Murabaha 43. 3 2. Diminishing Musharaka 32. 1 3. Ijarah 13. 6 89 4. Others (Istisna: Salam, Musharaka, Mudarba) 11 100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 4, P. 6. 22

C-4: IBIs NPFs TIME SERIES Period NPF Net NPFs Rs. b September 2009 8.

C-4: IBIs NPFs TIME SERIES Period NPF Net NPFs Rs. b September 2009 8. 95 4. 03 July 2010 10. 65 4. 39 September 2010 13. 51 6. 21 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 2, P. 5. 23

C-5: DEPUTY GOVERNOR OF SBP SUGGESTED INVESTMENT PORTFOLIO MIX FOR IBIS 1. Large Unserved

C-5: DEPUTY GOVERNOR OF SBP SUGGESTED INVESTMENT PORTFOLIO MIX FOR IBIS 1. Large Unserved Agriculture Sector: - GDP Share 22% - IBIs have not yet entered in the market 2. SME Sector: - Expand their outreach to smaller towns & rural/semi rural areas - Total SMEs 3. 1 million - Served by IBIs 2, 300 clients - Consequential Deficit: very low coverage 3. Housing Finance: - Six million housing units deficit in the country - untapped markets awaits IBIs to exploit - Focus: low cost housing Source: Extracted from: Deputy Governor of SBP, Mr. Yasin Anwar, Key note Address on “Opportunities for IBIs” delivered in Al-Huda International 24 Conference on Islamic Banking & Takaful, Lahore, Nov. 02, 2010

D: IBIs INVESTMENTS 1. Composition 2. Types 25

D: IBIs INVESTMENTS 1. Composition 2. Types 25

D-1: IBIs INVESTMENTS: COMPOSITION As on September 30, 2010 Particulars Rs. b % 1.

D-1: IBIs INVESTMENTS: COMPOSITION As on September 30, 2010 Particulars Rs. b % 1. Federal Govt Securities 27. 03 33 2. TFCs, Debentures, Bonds & PTCs 28. 51 35 3. Fully Paid up Ordinary Shares 1. 81 02 57. 35 70 24. 14 30 81. 49 100 81. 62 100 4. Others Total Shown in the table Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 6, P. 7. 26

D-2: IBIs INVESTMENTS TYPES As on September 2010 Particulars Rs. b % 1. Available

D-2: IBIs INVESTMENTS TYPES As on September 2010 Particulars Rs. b % 1. Available for Sale 66 83 2. Held to Maturity 12. 93 17 3. Surplus deficit on revaluation 0. 29 - 79. 22 100 80. 69 100 Total Shown in the table Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September, 2010, Table 7, P. 6. 27

E: SELECTED PERFORMANCE INDICATORS IBIs & BANKING INDUSTRY OF PAKISTAN 1. Capital 2. Assets

E: SELECTED PERFORMANCE INDICATORS IBIs & BANKING INDUSTRY OF PAKISTAN 1. Capital 2. Assets Quality 3. Earnings & Profitability 28

E-1: SELECTED PERFORMANCE INDICATORS: IBIs & BANKING INDUSTRY (Continued) S. No. 1. 2. 3.

E-1: SELECTED PERFORMANCE INDICATORS: IBIs & BANKING INDUSTRY (Continued) S. No. 1. 2. 3. Particulars September, 2010 CAPITAL IBIs Industry (Capital to Total Assts) 12. 4 9. 9 NPLs to Financing 6. 5 14. 0 Net NPLs to Net Financing 3. 0 4. 5 Provisions to NPEs 55. 0 71. 1 Net NPFs to total Capital 13. 4 21. 6 Real Estate Financing to total Financing 8. 6 2. 1 Net Income to total Assets 0. 7 1. 0 ROE, after tax 5. 4 9. 9 Net Income Financing to Gross Income 21. 0 24. 4 ASSETS QUALITY EARNINGS & PROFITABILITY 29

E-1: SELECTED PERFORMANCE INDICATORS: IBIs & BANKING INDUSTRY (Concluded) S. No. Particulars March, 2010

E-1: SELECTED PERFORMANCE INDICATORS: IBIs & BANKING INDUSTRY (Concluded) S. No. Particulars March, 2010 Trading & Exchange Gains/Losses to Gross Income 8. 9 7. 4 Operating Expenses to Gross Income 67. 2 53. 6 Personnel Expenses to Operating Expenses 29. 1 35. 5 Spread between Financing and Deposit Rates 6. 9 6. 8 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 2, P. 5. 30

F: FUTURE PROSPECTS 1. Forecasts 2. Challenges 31

F: FUTURE PROSPECTS 1. Forecasts 2. Challenges 31

F-1: FORECASTS 1. By 2012, total of Islamic Banking industry is forecasted as Rs.

F-1: FORECASTS 1. By 2012, total of Islamic Banking industry is forecasted as Rs. 1 trillion. 2. In the next five years, 1200 branches of Islamic Banks are vitalized 3. The hope is that it will be 12% of total banking industry 4. Determined efforts needed by all of us to push forward the process of Islamic Banking in Pakistan 32

F-2: CHALLENGES We visualize the following future challenges: A. 15, 000 people are needed

F-2: CHALLENGES We visualize the following future challenges: A. 15, 000 people are needed in the next five years to equip Islamic Banks. In this respect Universities in Pakistan must respond to this challenge. Curricula must be changed in management education. High Education Commission should provide motivation in this respect for Universities to positively respond. B. Islamic Banks must demonstrate growth with profitability. The top management must evolve the process to translate the above challenges. C. The scope of services for user may be extended to such areas as micro finance, agriculture and small & medium enterprises. This will widen the base of socio-economic development in our country and will address to the two vital issues in our country namely, promotion of employment opportunities and alleviation of poverty. D. Sharia compliant financial services be expanded. Awareness be created in this respect and logistics be developed as cushion to achieve the above objective. E. Differentiated products be developed. Some Islamic Banks have taken correct initiative in this respect. This areas needs to be logistically well cushioned with demonstrated results. 33

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