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Islamic Banking Growth in Pakistan

Over the years, Islamic Banking Industry (IBI) has shown phenomenal growth, with 20% share in total assets, 25% in advances and 22% in deposits of the overall banking industry as of Dec-22. Today, IBI network comprises 22 Islamic banking institutions, i.e. 5 full-fledged Islamic banks and 17 conventional banks (~80% of total), having Islamic banking branches.

There is considerable potential as acknowledged by many researches including one undertaken by SBP and Department for International Development, UK. This suggests robust demand from diversified customer clusters, with following example insights:

Willing to pay more for Shariah compliant products

67% 62% 45%
sole-proprietors prefer only Islamic Of banked respondents Of un-banked respondents

 

As per decision of Federal Shariah Court, all conventional banks are to be converted to Islamic mode by Dec-27. Following are key areas, where banks may face challenges that can be addressed through holistic Islamic transformation and conversion programs:

  • People & Culture
  • Technology
  • Borrowings & Treasury
  • Marketing & Communication Plan
  • Retained Earnings
  • Accounting Policies & Procedures
  • Corporate & Investment Business
  • Retail Business
  • Non-Performing Loans
  • Policies & Processes
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Financial Literacy And Capacity Building

Pakistan has a population that is in excess of 180 million people. However, penetration in the financial sector is extremely low, with only 2.4% of the population having access to credit from formal financial sources. Out of the total adult population of Pakistan, the financially excluded population make up 53%. One of the major reasons for why large portion of population is unbanked is the lack of awareness of financial products and their usage. A large portion of population also lacks basic money and financial management skill. The concepts of budgeting, investing savings etc. are novel for them.

State Bank of Pakistan launched the Pakistan’s first ever Nationwide Financial Literacy Program (NFLP) on 20th January 2012 to promote financial inclusion through spreading financial education for inclusive economic growth and stability across the country. The Program intends to target middle income households and youth through building partnerships with education institutions in a phased manner. The program envisions educating around 0.5 million low income households in first phase.

The key objectives of the program are:

  • Imparting knowledge and understanding of, financial concepts, banking/financial products and services.
  • Develop skills and attitudes towards budgeting, savings, investment, debt management, financial negotiation, rights and obligations, etc.

Facilitate behavioral changes and practices to improve financial outcomes; including financial well-being through increased savings, improved debt management, perceived financial stress or satisfaction

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Few Global Developments and Evolving Trends

To remain competitive, banks globally are focusing on mobile-first; end-to-end friction-less journeys and hyper-personalized experiences, through an eco-system of third parties, leveraging customer data to offer smart propositions tailored around lifestyle needs. Ambitions to super-apps is particularly trending in Asia, where certain banks intend to plan transitioning from a financial app into an every-day use super-app. Only when well-strategized, these banks may gain from higher rates of customer acquisition, satisfaction, retention and brand loyalty. Global institutions are also increasingly adopting the growing trend of invisible banking. Examples of embedded finance continue to grow, from no click payments on ride hailing apps to point-of-sales loans from BNPL providers built into mobile shopping apps

Meanwhile in Pakistan, industry stakeholders may be operating at varying levels of maturity, warranting a view on state of readiness and consequent digital transformation journeys that enable harnessing the true potential of digital. Depending on their relative positioning, banks may pursue following initiatives:

  • Design data-driven digital banking and payments strategies
  • Revisit digital banking and payments strategies
  • Diversify solution suite, move into adjacent financial products
  • Introduce app features and value-added services
  • Actively pursue digital lending propositions
  • Provide one window solutions addressing e2e financial needs of MSMEs
  • Focus on increasing app user base
  • Effectively integrate into the e-commerce space
  • Become the central contact for daily banking, building the B2B ecosystem –
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What is Fintech?

Combining the words ‘financial’ and ‘technology’, fintech is technology-enabled financial innovation, which is changing the way financial institutions provide – and consumers and businesses use – financial services.
Although ‘fintech’ is a relatively new term, innovation has always been important in the financial sector. The key difference now is the pace and impact of change.
We are actively exploring how developments in fintech might support our mission to promote the good of the people of Pakistan by maintaining monetary and financial stability.
To embrace the potential of fintech we are:

  • Understanding how Fintechs can benefit DFS access: To gauge Fintechs, the SBP aims to establish a Fintech Facilitation Desk, where all interested Fintechs will be invited to gauge the Central Bank and establish a mutual understanding of how DFS access can be extended.
  • Understanding how Fintechs can impact Soundness of the Pakistani Financial Systems: The SBP is in constant evaluation of new business models and their impact on the soundness and stability of the Pakistani Financial Ecosystem.
  • Applying Fintech to enhance our own Capabilities: The use of new technology is imperative to move forward in this digital age. The SBP is in constant evaluation of new technologies and how we as regulators can use them to enhance our vigilance, supervision, and, regulatory roles.