* Aims to increase Islamic banking market share
* Emphasis on sharia-based rather than compliant banking
* New deputy governor, scholar appointed
* Banks expand existing operations, new entrants expected
* Awareness campaign to attract previously unbanked clients
By Bernardo Vizcaino
Jan 28 The central bank of Pakistan is stepping
up its push to develop Islamic banking, encouraging lenders to
expand their operations in the world's second most populous
Pakistan was one of the first countries to introduce Islamic
banking at a national level in the 1970s, but the industry's
share of the overall banking system has lagged levels in some
As of September, Islamic banks held 926 billion rupees ($8.8
billion) of assets or 9.5 percent of the total, up from 8.1
percent a year earlier, central bank data showed. That compares
with around 25 percent in the Gulf Arab region.
The central bank aims to double the industry's branch
network and reach a 15 percent share of the banking system in
the next five years, and is taking fresh steps to achieve that.
This month, the central bank named a new deputy governor to
focus on Islamic banking and enlisted renowned scholar Muhammad
Taqi Usmani to its sharia board, part of efforts to improve
consumers' perception of the industry.
"The emphasis on sharia compliance has increased and there
is a demand for more sharia-based Islamic banking rather than
simply sharia-compliant banking," Shakir Ullah, a member of the
central bank's Islamic banking focus group, told Reuters.
"I expect that Pakistan will soon become a key player in
Islamic banking globally and will probably take the role it
played in the 1980s as the pioneer of Islamic banking."
Sharia-compliant banking merely obeys the industry's rules,
while sharia-based business also follows the spirit of Islamic
principles such as an emphasis on transactions based on real
economic activity rather than monetary speculation.
Last year, the central bank launched a media awareness
campaign and said it would revise rules on sharia governance and
liquidity management for Islamic banks.
Pakistani lenders currently include five full-fledged
Islamic banks and 14 which operate Islamic windows, and some
appear to be responding. A number of conventional banks aim to
grow or spin off their existing Islamic windows, while new
entrants are expected.
One of them is Summit Bank, which last year said
it would convert itself into a full-fledged Islamic bank over a
three- to five-year period.
It has 111.9 billion rupees of assets and 187 branches,
which at present would make it Pakistan's second largest Islamic
bank after Meezan Bank, taking second spot away from
the Pakistani unit of Dubai Islamic Bank.
"Summit is actively working on their groundwork, like
finalising manuals, product papers, etc. They will soon convert
one of their conventional branches here in Karachi and will
start operations," said a central bank source. The bank did not
respond to Reuters requests for comment.
Other banks plan to expand their existing branch networks.
This is seen as key because 56 percent of the Islamic industry's
1,161 branches are in the five largest cities, leaving smaller
cities underserved, the central bank said in a report.
National Bank of Pakistan (NBP) added 10 branches
to its Islamic window last year and plans seven more by the end
of this quarter, to reach a total of 25, said Zubair Haider,
NBP's group chief of Islamic banking.
"Our business plan calls for over 100 branches in the next
three years. The environment is quite positive and banks are
quite keen to push into Islamic banking."
Other conventional banks such as Allied Bank will
soon offer Islamic banking, while Bank of Punjab
opened its first Islamic branch last year, said Haider.
"From an awareness point of view this will help the
industry," he added.
This month, MCB Bank was given regulatory approval
to spin off its Islamic window into a separate subsidiary with
10 billion rupees in paid-up capital, using its existing 27
Islamic banking branches to form the new entity.
Competitive pressures are expected to increase, said Suleman
Muhammad Ali, vice president of product development and sharia
compliance at Meezan Bank.
"There has been renewed aggressiveness from existing
participants like Alfalah Islamic and Dubai Islamic
Bank through expansion of branches and revamping of divisions.
"This may result in eroding the conventional share in the
long term and increase competitiveness among Islamic banks in
the near term," said Ali.
Bank Islami Pakistan expects business will more
than double in the next three years, forecasting its assets will
reach 184 billion rupees by 2016 from 81.2 billion rupees last
September, a stock exchange filing showed.
The central bank's media campaign is expected to intensify
in coming months and such educational efforts could attract
previously unbanked clients to the sector, rather than snatch
them away from conventional banks, said NBP's Haider.
Positive market sentiment has prompted some investors in the
sector to cash out: Kuwaiti firm Noor Financial said
last month that it was selling its 49.11 percent stake in Meezan
Bank for $190 million, expecting to post a $24 million profit.
The identity of the buyer has not been officially revealed.
($1 = 105.5750 Pakistani rupees)
(Editing by Andrew Torchia)