KARACHI: The State Bank of Pakistan (SBP) and the ministry of finance have done a lot to promote Islamic Banking in the country but must make more efforts to promote this prudent financial industry in the country, insists the CEO of Burj Bank, Pervez Said.
Referring to the industry-wide, adjusted minimum capital requirement (MCR) of Rs6 billion, Said argued that Islamic banks should not be measured by the same yardstick as conventional banks because by virtue of their asset holdings, "Islamic banks have much better liquidity and so do not need this minimum capital requirement".
Said added that "they should judge us based on the capital adequacy ratio instead".
COMPETING WITH CONVENTIONAL BANKS
He believes that setting the same standard for MCR by SBP for Islamic Banks as those for conventional banks has created "a mismatch between the pace of the business growth and the growth of capital" for the Islamic Banks.
While talking exclusively to BR Research, Said said that Islamic banks should be required to maintain a capital adequacy ratio of at least 8 percent as he believes that such a benchmark would ensure the financial viability of these institutions without stifling their growth prospects.
He also pointed out that at present, only longer term Sukuks are available for investment. He believes that once the Islamic banks have a market share of 20 percent or more, they would be able to break away from following trends set by conventional banks.
The chief executive pointed out that this industry's market share has grown at a relatively rapid pace of close to 7 percent in seven years, when compared to other countries such as Bahrain where the market share stands at around 8 percent in 30 years and Malaysia where the market share is around 12 percent after 25 years of existence of Islamic banks there.
FUTURE GROWTH & INDUSTRY TRENDS
Pervez Said that all Islamic Banks including Dubai Islamic Bank and Bank Islami may consider mergers, unless their existing shareholders are willing to inject additional capital to meet the MCR.
Referring to Burj Bank's expansion plans, Said highlighted that over the past two years Burj Bank established 50 new branches and revamped its core banking system.
Existing stakeholders have pumped in about Rs2 billion into the entity to help it meet its MCR.
Said highlighted the basic tenets of Islamic banking - all contracts must be completely transparent, do not book fictitious assets, do not take undue risk, do not finance any activity that may be harmful to society.
He said that recent economic crises have increased the general public's trust in Islamic banks. Said also asserted that the edge enjoyed by bigger banks due to their numerous branches will soon blunt as internet banking is "a great equaliser".
PUBLIC ACCEPTANCE & POPULARITY
Pervez Said conceded that a significant proportion of the general public are either unaware or unconvinced about the differences between conventional and Islamic banks.
"When I joined Islamic banking a decade back, 95 percent of the transactions were Murabaha transactions, which are the weakest (from a religious perspective)" says Said. He explained that with the introduction of more Islamic offerings, the proportion of Murabaha transactions has thinned to around 60 percent.
He added that religious experts such as Mufti Muneeb-ur-Rehman have also started disallowing some of the transactions that were previously allowed as now, better alternatives are available.
The Islamic Financial Services Board which constitutes fourteen central banks has made significant headway in forming the regulatory infrastructure for the industry. The Institute of Chartered Accountants of Pakistan (ICAP) is also working to strengthen accounting standards for the industry.
"Our own prophet took twenty three years to fully establish Islam," cited Pervez Said, and argued that the Islamic banking industry may not be perfect but it is on the right path.
Copyright Business Recorder, 2011
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