A Pakistani worker carrying a cement bag on his back passes in front of the visa card roadside signboard for MCB Bank in Karachi, Pakistan (file). MCB Bank, the country’s second-biggest lender by market value, obtained regulatory approval in September to set up a Shariah-compliant subsidiary, after rules issued in October 2014 reduced paid-up capital requirements.

Bloomberg
Kuala Lumpur/Karachi

Pakistan’s incentives for lenders to embrace Islamic banking are bearing fruit in a boost to the local industry where assets have tripled over five years.
MCB Bank Ltd, the country’s second-biggest lender by market value, obtained regulatory approval in September to set up a Shariah-compliant subsidiary, after rules issued in October 2014 reduced paid-up capital requirements. Allied Bank Ltd, Pakistan’s oldest, plans to follow in the next three years, Islamic operations head Abdul Jabbar Karimi said in an interview. Bank Alfalah Ltd is considering such an option in 2016, chief executive officer Atif Bajwa said in November.
Encouraging conventional lenders into the market is part of a five-year initiative to increase Islamic banking assets to at least 20% of the total by 2020, from about 11% now. The common practice of offering Shariah-compliant services from booths at existing branches often denies the world’s second-most populous Muslim nation access to a broader range of dedicated products.
“Lowering minimum paid-up capital will encourage conventional banks, even smaller ones, to set up Islamic banking subsidiaries,” said Umair Naseer, a Karachi-based senior research analyst at Topline Securities (Pvt) Ltd. “In order to further promote Islamic banking, it is imperative that authorities conduct extensive awareness sessions.”
Few Pakistanis use banking services, Islamic or conventional, with only around 40mn bank accounts among a population of more than 190mn, Naseer said. About 96% of the people are Muslim, according to the CIA World Factbook.
While the South Asian nation’s Shariah-compliant banking assets have increased since 2010 to 1.5tn rupees ($14.3bn) as of the end of June, it only has five lenders offering full-fledged Islamic services, compared with 34 traditional ones.
A shortage of local-currency bonds complying with Islam’s ban on interest doesn’t help the cause as it limits investment options for banks and stunts growth. Pakistan’s government hasn’t issued rupee-denominated sukuk since June 2014, and instead turned to the global market in November 2014 with a $1bn offering.
Back in October, the central bank said in an e-mailed response that the Finance Ministry planned to end the hiatus, and would revive sales of rupee Islamic notes once 233.8bn rupees had matured on November 21.
“The growing nature of Islamic banks requires a lot of investment avenues but investment avenues are not there,” said Faraz Younus Bandukda, chief executive officer at Fortune Islamic Services (Pvt) Ltd, a Shariah-compliant brokerage in Karachi. “The government and the private sector should work on issuing new sukuk.”
Allied Bank’s plan is part of an expansion policy that will raise the total number of branches to 200 in two to three years from the 27 expected by December, Islamic operations head Karimi said in a November 26 phone interview from Lahore. Once Bank Alfalah’s new unit is off the ground, it will combine its 160 outlets offering Islamic products, CEO Bajwa said in a November 18 interview in Karachi.
By having Islamic banking subsidiaries, lenders can market their products directly, giving them “more visibility,” said Raza Jafri, executive director for research at Intermarket Securities Ltd in Karachi.
“There could be an element that customers feel that an Islamic bank is much purer than window operations at conventional banks,” said Jafri. “Being an Islamic window operation dilutes the effect.”