The State Bank of Pakistan (SBP) has an extensive database on Islamic Banks (IBs) operations, but inconsistencies in the data methodologies in IBs audited accounts could affect data quality for policy formulation, said International Monetary Fund (IMF).
IMF staff report "multi-country report ensuring financial stability in countries with Islamic banking" states that rather than forcing a transition toward a fully-fledged IB industry, policy makers should focus on putting in place an enabling environment that levels the playing field with the conventional industry, and let market forces play their role.
The report further contends that Pakistan has made considerable progress in adapting the institutional, legal and regulatory framework to the specifics of IB, but scope remains for further strengthening. Additional reforms are needed to address gaps with respect to consolidated supervision, consumer protection, the resolution framework, and the absence of liquid secondary markets.
The ongoing reforms with respect to Capital Adequacy Ratio (CAR), liquidity framework and Deposit Insurance Scheme (DIS) need to be expedited. Concentrations in bank financing, maturity mismatches and development of interbank markets warrant attention and further efforts are needed to develop deep Sukuk markets.
The IB industry has experienced rapid growth and the IBs in Pakistan have also increased the share of risk-sharing financing (Musharakah and Mudarabah). IB in Pakistan has been growing very fast since its re-launch in 2001. Though still in an evolutionary phase, Pakistan's IB industry expanded at a Compound Annual Growth Rate (CAGR) of nearly 50 percent between 2002 and 2015, and reached a market share of 11.4 percent by end 2015. Facilitative regulatory support has been propelling the growth of Pakistan's IB sector. The large Muslim population and low market penetration also suggest that there is a substantial upside potential for further growth. About 96 percent of Pakistan's population of 193 million is reported to be Muslim and the World Bank Findex data show that only 13 percent of the adult population has a bank account. The central bank has also devised a strategic plan for the IB Industry to reach 15 percent of banking system assets by end 2018.
The IBs have a healthy domestic funding base. Close to 85.3 percent of the assets are funded by customer deposits, and about 63 percent are PLS deposits accounts based on Mudarabah contracts while current accounts are mostly based on Qard. Funds due to OFIs account for a very small share. The funding is mostly in local currency, thus exchange rate risk is low.
Sukuk issuance by banks and other long term funding appear limited, thereby potentially creating maturity mismatches with financing structure. IBs in Pakistan exhibit strong financial fundamentals. For full-fledged IBs, the CAR was 14 percent at end 2015, significantly above the prescribed minimum of 10 percent but below conventional banks. The NPF ratio of 2 percent is significantly below the average for conventional banks of 12 percent. IBs are also profitable and liquid but the profit margins and liquidity levels are, however, lower than their conventional counterparts.
The SBP, however, does not yet supervise IBs on a consolidated basis, but is in the process of amending the law. The presentation of audited accounts differs considerably across banks and the different classifications make consolidation and comparative analysis challenging.
The SBP has played a major role in the issuance of government of Pakistan Ijarah Sukuk which has paved the way for effective liquidity management of IBs. In addition, despite witnessing growth over the years, the domestic Sukuk market is still confronted with issues such as lack of short term and long term Sukuk of high quality, absence of a secondary market for trading, and identification of assets for sovereign Sukuk.
The liquidity management framework is still to be operationalized. A number of instruments have been developed for liquidity management by the SBP and banks, including Bai Muajjal of Sukuk, interbank Mudarabah, Islamic placements, Wakala and others. A liquidity management framework has also been developed that includes development of a Shari'ah portfolio at SBP, Mudarabah-based facility for IBs at the SBP, development of an Islamic inter-bank money market, and availability of Shari'ah compliant discount window for IBs. However, this framework has not yet been operationalized. Pakistan is in the process of developing a deposit insurance framework. The Deposit Insurance Corporation Act, presently with the Parliament for enactment provides coverage for IB depositors.
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