1. 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

2. P RESENTATION F RAME 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

3. 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

4. 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

5. 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

6. 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

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

8. 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

9. 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. YearTotal AssetsDepositsNet financing investment (December)Total Rs.bShare of IBIs %Total Rs.bShare of IBIs %Total Rs.bShare of IBIs % 200313181101 2004442301 1 2005712502482 20061193843732 2007206414741384 2008276520251864 2009366628362265 2010 (Sept)424633872335

10. B-2: GROWTH OF ISLAMIC BANKS BRANCHES December 2003 to September 2010 10 Year (December)NumberBase IndexNumber of Times 2003171001 2004483003 2005704124 20061508829 20072891,70017 20085153,02930 20096513,82938 2010 (Sept)6844,02340 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, P.4.

11. 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 Particulars Number of Branches% A: Full Fledged Islamic Banks43764 B: Islamic Branches of Conventional Banks19729 C: Sub-Branches5007 Total684100

12. 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.ProvinceNumber% 1.Punjab30644 2.Sindh23134 3.Khyber Pakhtoonkhwa7311 4.Baluchistan3305 5.Federal Capital3305 6.Azad Kashmir07*01 7.Northern Area1*- 684100 *As on December 31, 2009

13. B-5: FULL FLEDGED ISLAMIC BANKS As on December 31, 2009 13 S. No.BanksNumber of Branches% 1.Meezan Bank Ltd16641 2.Bankislami Pakistan7018 3.Emirates Global Islamic Bank Ltd5815 4.Dawood Islamic Bank Ltd4210 5.Dubai Islamic Bank Pakistan Ltd359 6.Al Barka Islamic Bank297 400100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P.16.

14. B-6: ISLAMIC BRANCHES OF CONVENTIONAL BANKS As on D ecember 31, 2009 14 S. No.BanksNumber of Branches% 1.Bank Alfalah Ltd6036 2.Askari Bank Ltd2917 3.The Bank of Khyber1810 4.MCB Bank Ltd116 5.Standard Chartered Bank116 12975 6.National Bank of Pakistan85 7.Bank Al-Habib Ltd64 8.Faysal Bank Ltd64 9.Soneri Bank Ltd64 10.United Bank Ltd53 11.Habib Metropoltian Ltd42 12.The Royal Bank of Scotland32 13.Habib Bank Ltd11 3925 168100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P.16.

15. 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.ProvinceNumber% 1.Punjab3847 2.Khyber Pakhtoonkhwa1721 3.Sindh1215 4.Baluchistan1013 5.Azad Kashmir22 6.Federal Capital11 7.Northern Area11 81100

16. B-8: ISLAMIC BANKS SUB BRANCHES As on December 31, 2009 16 S. No.BanksNumber of Branches% 1.Bank Alfalah Ltd3544 2.Bankislami Pakistan Ltd3240 6784 3.Dawood Islamic810 4.Askari Bank Ltd22 5.Emirates Global Bank Ltd22 6.Dubai Islamic Bank Ltd11 7.The Bank of Khyber11 1416 81100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, December 2009, P.16.

17. 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.Province Number MaximumMinimum 1.Sindh/Karachi (Five Cities)1801 2.Punjab/Lahore (Twelve Cities)1091 3.Federal Capital/Islamabad31- 4.Khyber/Pakhtoonkhwa (Eight Cities)281 5.Baluchistan/Quetta (Eight Cities211 6.Azad Kashmir/Mirpur AK Muzafarabad43 7.Northern Area/Gilgit1-

18. B-10: CITY WISE ISLAMIC BANKING BRANCHES NETOWRK As on September 30, 2010 18 S. No.CityNumber% 1.Karachi19328 2.Lahore11717 3.Rawalpindi335 4.Peshawar295 5.Faisalabad284 6.Multan243 7.Quetta223 44665 8.Others23835 684100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 9, P. 8.

19. 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

20. C-1: IBIs Deposits As on September 30, 2010 20 S. No.ParticularRs. Billion% A: CUSTOMERS Fined Deposits12839 Saving Deposits11333 Currents Accounts-non-Remunerative7421 Others0301 31894 B: FINANCIAL INSTITUTIONS Remunerative2006 338100 C: CURRENCY WISE BREAKING Local Currency Deposits32095 Foreign Currency Deposits1805 338100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 7, P. 7.

21. C-2: IBIs FINANCING: SECTORAL COMPOSITION September 30, 2010 21 S. No.SectorsIBIs%Industry % 1.Individuals18.8312.5 2.Textile17.9116.8 3.Chemical & Pharmaceuticals9.914.3 4.Energy: Production & Transmission6.409.6 5.Cement3.632.7 6.Sugar2.301.6 58.9846.5 7.Other Sectors (Including 34.41% and 41.7% for industry others) 41.0253.5 100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 5, P. 6.

22. C-3: IBIs FINANCING PRODUCTS (Total Rs. 162b) September 30, 2010 22 S. No.Products% 1.Murabaha43.3 2.Diminishing Musharaka32.1 3.Ijarah13.6 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.

23. C-4: IBIs NPFs TIME SERIES 23 PeriodNPFNet NPFs Rs. b September 20098.954.03 July 201010.654.39 September 201013.516.21 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 2, P. 5.

24. 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 24 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

25. D: IBIs INVESTMENTS 1.Composition 2.Types 25

26. D-1: IBIs INVESTMENTS: COMPOSITION As on September 30, 2010 26 ParticularsRs. b% 1. Federal Govt Securities27.0333 2. TFCs, Debentures, Bonds & PTCs28.5135 3. Fully Paid up Ordinary Shares1.8102 57.3570 4. Others24.1430 Total81.49100 Shown in the table81.62100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September 2010, Table 6, P. 7.

27. D-2: IBIs INVESTMENTS TYPES As on September 2010 27 ParticularsRs. b% 1. Available for Sale6683 2. Held to Maturity12.9317 3. Surplus deficit on revaluation0.29- Total79.22100 Shown in the table80.69100 Source: Extracted from: Islamic Banking Bulletin, Karachi: State Bank of Pakistan, September, 2010, Table 7, P. 6.

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

29. E-1: SELECTED PERFORMANCE INDICATORS: IBIs & BANKING INDUSTRY (Continued) 29 S. No.ParticularsSeptember, 2010 1.CAPITALIBIsIndustry (Capital to Total Assts)12.49.9 2.ASSETS QUALITY NPLs to Financing6.514.0 Net NPLs to Net Financing3.04.5 Provisions to NPEs55.071.1 Net NPFs to total Capital13.421.6 Real Estate Financing to total Financing8.62.1 3.EARNINGS & PROFITABILITY Net Income to total Assets0.71.0 ROE, after tax5.49.9 Net Income Financing to Gross Income21.024.4

30. 30 S. No.ParticularsMarch, 2010 Trading & Exchange Gains/Losses to Gross Income8.97.4 Operating Expenses to Gross Income67.253.6 Personnel Expenses to Operating Expenses29.135.5 Spread between Financing and Deposit Rates6.96.8 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)

31. F: FUTURE PROSPECTS 31 1.Forecasts 2.Challenges

32. F-1: FORECASTS 32 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

33. F-2: CHALLENGES 33 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.

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