Pakistan's Islamic banking sector to have 30% market share by 2026: Moody’s

Enjoying support of the government and the State Bank of Pakistan (SBP), the Islamic banking sector is expected to have a market share of around 30% by 2026, said Moody’s Investor Services.

In its latest report titled, 'Pakistan’s Islamic banking industry continues its strong growth trajectory', Moody’s said Islamic banking assets in Pakistan have grown by an average of 24% per annum over the past decade to Rs5,577 billion ($31.2 billion), accounting for around 19% of total banking assets, up from 8% in 2011.

“We expect annual growth of over 25% over the next five years, pushing up the sector’s market share to around 30%,” added Moody’s.

“We estimate average growth over 2021-2026F to range between 25%-28% for total assets and deposits, and over 20% for net financings."

The outperformance of financings is likely driven by more limited availability of Shariah-compliant liquidity products as well as strong demand for financing products, said the report.

Robust growth in Islamic banking assets credit positive: Moody’s

The Islamic banking industry in Pakistan is made up of 22 Islamic banking institutions, consisting of five fully-fledged Islamic banks and 17 conventional banks that have Islamic banking branches.

The report stated that a total of 3,956 branches were in operation as of December 2021, with an additional 1,442 Islamic banking windows (dedicated counters at conventional branches).

In 2021 alone, 500 branches were added, and “we expect at least a similar number of new branches to be added yearly over the next five years”.

Moody’s was of the view that increasing usage of digital and electronic channels will support the industry's growth. “We expect more banks to apply for Islamic banking licenses and for conventional banks to convert to fully Islamic banks,” projected Moody’s.

Shedding light on the financial indicators, the report said that Islamic banking institutions in Pakistan are more profitable than their conventional counterparts and their loan performance is better.

For 2021, Islamic banking reported a return on assets of 1.3% and return on equity of 21.4%, compared to 1.0% and 14.1% for conventional banks. “The difference in profitability was due to lower loan-loss provisioning needs at the Islamic banks, given their better loan quality and to their lower funding costs,” said the report.

“However, Islamic banking institutions do maintain slightly lower capital and liquidity buffers,” it said, which reflects Islamic banks’ higher proportion of financing-to-deposits (at 62%, against 47% for conventional banks), but also the historically more limited availability of Shariah-compliant liquidity products.

SBP raises key interest rate by 150 basis points, takes it to 13.75%

Moody’s further said that the emergence of new technologies allows the Islamic banking sector an opportunity to speed up the digitalisation of its services and processes to reduce intermediation costs and increase its reach to a wider segment of society.