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RIPHAH UNIVERSITY, ISLAMABAD Topic for Presentation The Challenges and Prospects of Islamic Banking in Pakistan 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). Date & Venue February 09, 2011, NIBAF, Islamabad Event RIU International Conference: February 8-9, 2011, Islamabad 1

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Event. RIU International Conference: February 8-9, 2011, Islamabad. RIPHAH UNIVERSITY, 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. - PowerPoint PPT Presentation

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Page 1: RIPHAH UNIVERSITY, ISLAMABAD

RIPHAH UNIVERSITY, ISLAMABAD

Topic for Presentation The Challenges and Prospects of Islamic Banking in Pakistan

Presentation byProf. Dr. Khawaja Amjad SaeedProfessor 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).

Date & VenueFebruary 09, 2011, NIBAF, Islamabad

EventRIU International Conference: February 8-9, 2011, Islamabad

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Page 2: RIPHAH UNIVERSITY, ISLAMABAD

PRESENTATION FRAMEA. 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

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Page 3: RIPHAH UNIVERSITY, ISLAMABAD

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

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Page 4: RIPHAH UNIVERSITY, ISLAMABAD

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”.

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Page 5: RIPHAH UNIVERSITY, ISLAMABAD

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.

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Page 6: RIPHAH UNIVERSITY, ISLAMABAD

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 PakistanArticle 38 (f) of the 1973 Constitution of Pakistan is quoted below:“The state shall eliminate riba as early as possible”.

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Page 7: RIPHAH UNIVERSITY, ISLAMABAD

A-3: HISTORICAL RUNDOWN (Concluded)

4. 1970s to 21st Century a. 1970s: efforts, in their initial stages, started to eliminate riba.b. 1980s: 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. c. 1990s: Court battles were on. Instructions were issued by courts for a time framework for implementation of replacing conventional banks into Islamic Banks. However the system did not positively respond for implementation. d. 2000s: In January 2002 Commission for Transformation of Financial System was constituted in SBP. Task Force was set up to suggest ways to eliminate interest from government financial transactions.

However, the end conclusion has been to continue parallel banking ie. Conventional and Islamic Banks. This system is going on in Indonesia

and Malaysia also. 7

Page 8: RIPHAH UNIVERSITY, ISLAMABAD

B: GROWTH OF ISLAMIC BANKS IN PAKISTAN

1. Some Growth of Islamic Banks: Important Indicators2. Growth of Islamic Banks Branches 3. Islamic Banking Branches Network-Three Aspects4. Islamic Banking Branches Network-Seven Aspects5. Full Fledged Islamic Banks 6. Islamic Branches of Conventional Banks7. City wise break-up of Islamic Banking Branches 8. Islamic Banks sub-branches 9. Maximum & minimum braches network of Islamic Banks10. City wise Islamic Banking Branches network as on September

30, 2010.

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Page 9: RIPHAH UNIVERSITY, ISLAMABAD

B-1: GROWTH OF ISLAMIC BANKS:Some Important Indicators

December 2003 to September 2010

99

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, P.4.

Year Total Assets Deposits Net financing investment(December) Total Rs.b Share of IBIs % Total Rs.b Share of IBIs % Total Rs.b Share of IBIs %

2003 13 1 8 1 10 1

2004 44 2 30 1 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

Page 10: RIPHAH UNIVERSITY, ISLAMABAD

B-2: GROWTH OF ISLAMIC BANKS BRANCHES

December 2003 to September 2010

10

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.

Page 11: RIPHAH UNIVERSITY, ISLAMABAD

B-3: ISLAMIC BANKING BRANCHES NETWORK

As on September 30, 2010

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 8, P.8.

11

ParticularsNumber of

Branches %

A: Full Fledged Islamic Banks 437 64

B: Islamic Branches of Conventional Banks 197 29

C: Sub-Branches 50 07

Total 684 100

Page 12: RIPHAH UNIVERSITY, ISLAMABAD

B-4: ISLAMIC BANKING BRANCHES NETWORK

As on September 30, 2010

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 9, P.8.

12

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

Page 13: RIPHAH UNIVERSITY, ISLAMABAD

B-5: FULL FLEDGED ISLAMIC BANKS As on December 31, 2009

13

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.

Page 14: RIPHAH UNIVERSITY, ISLAMABAD

B-6: ISLAMIC BRANCHES OF CONVENTIONAL BANKS

As on December 31, 2009

14

S. No. Banks Number of Branches %

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 100Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P.16.

Page 15: RIPHAH UNIVERSITY, ISLAMABAD

B-7: CITY-WISE BREAK-UP OF ISLAMIC BANKING BRANCHES

As on December 31, 2009

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P.18.

15

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

Page 16: RIPHAH UNIVERSITY, ISLAMABAD

B-8: ISLAMIC BANKS SUB BRANCHES As on December 31, 2009

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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.

Page 17: RIPHAH UNIVERSITY, ISLAMABAD

B-9: MAXIMUM & MINIMUM BRANCHES NET WORK OF ISLAMIC BANKS

AS on December 31, 2009

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P.18.

17

S. No. ProvinceNumber

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 -

Page 18: RIPHAH UNIVERSITY, ISLAMABAD

B-10: CITY WISE ISLAMIC BANKING BRANCHES NETOWRK

As on September 30, 2010

18

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

8. Others 238 35

684 100

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 9, P. 8.

Page 19: RIPHAH UNIVERSITY, ISLAMABAD

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

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Page 20: RIPHAH UNIVERSITY, ISLAMABAD

C-1: IBIs Deposits As on September 30, 2010

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S. No. Particular Rs. Billion %

A: CUSTOMERS

Fined Deposits 128 39

Saving Deposits 113 33

Currents Accounts-non-Remunerative 74 21

Others 03 01

318 94

B: FINANCIAL INSTITUTIONS

Remunerative 20 06

338 100

C: CURRENCY WISE BREAKING

Local Currency Deposits 320 95

Foreign Currency Deposits 18 05

338 100Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of

Pakistan, September 2010, Table 7, P. 7.

Page 21: RIPHAH UNIVERSITY, ISLAMABAD

C-2: IBIs FINANCING: SECTORAL COMPOSITION September 30, 2010

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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

7. Other Sectors (Including 34.41% and 41.7% for industry others)

41.02 53.5

100 100

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 5, P. 6.

Page 22: RIPHAH UNIVERSITY, ISLAMABAD

C-3: IBIs FINANCING PRODUCTS (Total Rs. 162b)

September 30, 2010

22

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.

Page 23: RIPHAH UNIVERSITY, ISLAMABAD

C-4: IBIs NPFs TIME SERIES

23

Period NPF Net NPFs

Rs. b 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.

Page 24: RIPHAH UNIVERSITY, ISLAMABAD

C-5: DEPUTY GOVERNOR OF SBP SUGGESTED INVESTMENT PORTFOLIO

MIX FOR IBIS1. 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

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Source: Extracted from: Deputy Governor of SBP, Mr. Yasin Anwar, Key note Address on “Opportunities for IBIs” delivered in Al-Huda International Conference on Islamic Banking & Takaful, Lahore, Nov. 02, 2010

Page 25: RIPHAH UNIVERSITY, ISLAMABAD

D: IBIs INVESTMENTS

1. Composition

2. Types

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Page 26: RIPHAH UNIVERSITY, ISLAMABAD

D-1: IBIs INVESTMENTS: COMPOSITIONAs on September 30, 2010

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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

4. Others 24.14 30

Total 81.49 100

Shown in the table 81.62 100

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 6, P. 7.

Page 27: RIPHAH UNIVERSITY, ISLAMABAD

D-2: IBIs INVESTMENTS TYPESAs on September 2010

27

Particulars Rs. b %

1. Available for Sale 66 83

2. Held to Maturity 12.93 17

3. Surplus deficit on revaluation 0.29 -

Total 79.22 100

Shown in the table 80.69 100

Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September, 2010, Table 7, P. 6.

Page 28: RIPHAH UNIVERSITY, ISLAMABAD

E: SELECTED PERFORMANCE INDICATORS IBIs & BANKING INDUSTRY

OF PAKISTAN

28

1. Capital

2. Assets Quality

3. Earnings & Profitability

Page 29: RIPHAH UNIVERSITY, ISLAMABAD

E-1: SELECTED PERFORMANCE INDICATORS: IBIs & BANKING INDUSTRY

(Continued)

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S. No. Particulars September, 2010

1. CAPITAL IBIs Industry

(Capital to Total Assts) 12.4 9.9

2. ASSETS QUALITY

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

3. EARNINGS & PROFITABILITY

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

Page 30: RIPHAH UNIVERSITY, ISLAMABAD

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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.

E-1: SELECTED PERFORMANCE INDICATORS: IBIs & BANKING INDUSTRY

(Concluded)

Page 31: RIPHAH UNIVERSITY, ISLAMABAD

F: FUTURE PROSPECTS

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1. Forecasts

2. Challenges

Page 32: RIPHAH UNIVERSITY, ISLAMABAD

F-1: FORECASTS

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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

Page 33: RIPHAH UNIVERSITY, ISLAMABAD

F-2: CHALLENGES

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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.

Page 34: RIPHAH UNIVERSITY, ISLAMABAD

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