Agri and SME sectors: Islamic banking's real potential still untapped: sources

LAHORE: Islamic banking financing to the agriculture and SME sectors is low in a scenario where the government is focused on growth of both these sectors, said banking industry sources.

They said 68% population of Pakistan is associated with agriculture while Islamic banking is financing just 0.52% to this sector. It is worth noting that a large population of the country is still attached to the agro-economy, but still its real potential is untapped.

The sources said the Islamic banking should come up with microfinance facilities.

In addition, they said, Islamic banking has also ignored the SMEs sector as well by just financing up to 3.42% while the government is following the strategy to promote SMEs for economic development.

Moreover, they said, Islamic banking is also not attentive to the Qarz-e-Hasana financing which is one of prime Islamic financing instrument of social welfare. A large population of 80% is untapped market and excluded from the financial sector, containing a significant percentage of faith sensitive community of volunteer exclusion.

They said Islamic banking must bring policies, which may increase its network, so it may be accessible to all customers.

According to the sources, another challenge of Islamic banking is related to community awareness and exploitation of potential avenues of growth. The key element causing the misperceptions and confusions about the Islamic banking is the lack of understanding and awareness regarding operating model of Islamic banking. The empirical evidence also supports the same fact that customers are less agreed and more neutral about the Shariah-compliant operation at Islamic banking of Pakistan while extent of knowledge plays an important role in selecting Islamic banks as preferred institutions.

They said the community awareness is one of great challenges; the better awareness can sustain the legitimacy and growth of Islamic banking in Pakistan. The community awareness regarding Islamic banking should be among the foremost important policy of government and as well Islamic banking sector.

Also, they said, the Islamic banking has to increase its capabilities in terms of technology, and as well in term of human capital, and has to look into other deficiency areas to compete in the market. In addition to work out on the deficiencies, the Islamic banking has to more capitalize the core advantages, such that risk management practices, the Islamic banks are superior to conventional banks in this domain, as Shari'ah rules restrict speculation in monetary terms.

It may be noted that State Bank of Pakistan envisions growth of Islamic banking up to 20% for 2020. However, the sector experts believe that this target is not up to the mark as it suggests that the government is reluctant in transformation of economic and banking structure according to Shariah compliant.

Copyright Business Recorder, 2020