Azhar Aslam 30+ years of multi product experience across Wholesale and Consumer banking including expertise in Islamic and sustainable finance with multinational banks including American Express, Citi, Dubai Islamic and Standard Chartered (SC). He has experience in supervising diversified businesses, Climate Risk, Governance & Risk Management and Product Management.

Azhar is Head the Islamic banking business, second largest market in Islamic banking (Saadiq) network along with double hatting as Governance Head for Centre and North. Prior to re-joining Standard Chartered, Azhar was Group Head, Corporate and Investment Banking with Dubai Islamic Bank, and was instrumental as one of the core members for establishing the franchise in Pakistan.

In his current role, Azhar has structured landmark sharia compliant deals including first foreign currency Sovereign sukuk, first World Bank PCG backed facility and LNG trade finance for the Sovereign by diversifying investor base. Azhar is also currently leading the transformational change at SC Pakistan to convert the entire eco system of Pakistan to Sharia Compliant solutions at the backs of the court judgment.

BR Research sat down with Azhar and discussed Islamic banking landscape in Pakistan, particularly in the light of the Shariah Court ruling and the transformation that the banking sector is due to undergo. Below are edited excerpts from the conversation:

BR Research: How has the Islamic banking industry performed in the recent past and what is your outlook for the near future?

Azhar Aslam: The Islamic banking industry has continued to grow from strength to strength with a few positive developments in last 12 months. There has been a very active dialogue in the industry on the conversion from conventional to Islamic banking on the backs of the Federal Shariah Court ruling of April 2022.

After almost two decades of debate, the Federal Shariah Court passed a historical judgment in April 2022, declaring Riba in Pakistan as unlawful as per the Constitution of Islamic Republic of Pakistan, and since then, a lot of work has been done, especially by the State Bank of Pakistan under the auspices of the Federal Shariah Court Steering Committee, chaired by the Finance Minister of Pakistan.

There are seven working groups under the steering committee, of which Standard Chartered Bank is part of four. We have been having an active dialogue with the central bank and other stakeholders to facilitate this transformation journey.

Another important development of last couple of months is the active dialogue on how to convert the government debt. Of the total Rs45 trillion of central government debt, conventional debt is approximately Rs40 trillion.

In February 2024, we called on the senior management of the State Bank of Pakistan along with our Chairman of Shariah Board and presented some solutions to them. Post that meeting, we have had multiple discussions with SBP, JFAs along withour Saadiq Group Office and are trying our best to structure a Shariah complaint solution for issuance of local currency Sukuk through a well-established commodity exchange out of Malaysia to facilitate conversion of conventional T bills and PIBs. A lot of hard work has gone into it and I am hopeful that this could be a real game changer for this transformation journey by facilitating deployment of PKR liquidity into sharia compliant government paper. This also includes issuance of shorter tenor (1, 3 and 6 month Sukuks), presently shortest tenor local currency sovereign Sukuk is of 12 months tenor.

BRR: You touched upon the Shariah Court ruling. Please tell us about the practicality aspect of that within the specified timeframe. What is the level of readiness of the industry in terms of transformation from conventional to Islamic?

AA: My view is that it is an effort that must be undertaken not only by Islamic bankers and Shariah scholars but should be embarked upon across the industry. When I say across the industry, I mean not only bankers but also clients, academia, regulators, legislators, legal counsels, accountants, opinion makers, in short, all stakeholders. And not only State Bank of Pakistan but other regulators such as the SECP. Professional bodies such as the ICAP will have a very important role to play considering the and accounting standards that need to be adopted. Similarly, legislation must be passed by the parliament to amend relevant laws of the country to comply with Shariah principles.

To answer your questions specifically, it is doable. Two years have passed since the judgment and a lot of work has been done in terms of laying down the building blocks. The central bank teams have been burning midnight oil. Some other key stakeholders including bankers and scholars are very actively involved in this process. I see the intent of government is also there. Proof point is issuance of a very comprehensive circular in June 2024 by the central bank, addressed to banks requiring them to come up with a plan approved by the respective Board of Directors, by October end 2024.

Post the issuance of the said circular, the central bank has had bilateral meetings with banks. We have had senior level meeting with the State Bank of Pakistan, recently. They are very clear that they would like the banks to come back with a robust and workable conversion plans. It is not only the plan that needs to be submitted, but a quarterly monitoring mechanism has also been instituted by the SBP. Each bank must submit a review on a quarterly basis to their respective Boards and the SBP.

The meetings that are being held by the SBP are not only with Islamic banking divisions. They are holding these meetings with the conventional counterparts as well. This is also proof of the fact that the SBP intends to engage all relevant stakeholders to ensure the transformation journey is taken seriously across the board. They are also willing to facilitate in terms of solutions or support required.

Another reason it is doable is because Pakistan’s banking industry has been doing Islamic banking for well over 20 years. Recently, a mid-sized bank converted and has done very well in terms of financial performance. There is proof of the conversion being not only possible but also has a business case. Today, the most profitable bank in Pakistan is an Islamic bank. These are impermeable points of the fact that size, scale, and products and solutions are available.However, as the industry transforms, human capital would have to be built up.

BRR: Is there any resistance to conversion from the conventional side?

AA: Not sure about resistance, but a change of this size and scale will undoubtedly face challenges. It is a transformation of the entire ecosystem and would require focus, intent, and execution by all stakeholders. It will have to be a well-rounded effort from all industry players including insurance companies, capital markets, Takaful, National Saving Centers etc. We have to collectively come up with solutions which are sustainable, albeit if it takes a little longer than December 2027.

We have to ensure that execution is smooth and long-lasting, and that we address the concerns of any group of people who are not convinced of Islamic banking solutions. There are people who ask questions to understand, and rightly so. There obviously be a certain percentage of society that will not be convinced of the idea, and that is fine. This should not be pushed, but rather be embraced, and that is the approach we, at Standard Chartered, are taking.

BRR: Almost 20-22 percent of the banking system is already Islamic. In light of the industry conversion to Islamic, do you think there is a need to do something that is currently not being done?

AA: Most of the things are in place, but a few things such as capacity building and institutional strengthening across the economic system need to be worked upon. Another area of focus, going forward should be standardization of documentation, structures, and solutions so that clients are convinced that these solutions are workable and have the backing of most scholars or schools of thought.

Broadly speaking, there are two areas that should be focused on. One is capacity building and the other is standardization. This is a challenge across the globe and is being addressed through international platforms like the AAOIFI,IFSB. Scholars from Pakistan now also have seat on the table on these platforms, and therefore, there is a two-way communication.

BRR: When you say standardization, are you talking from a global perspective?

AA: The central bank has adopted a very proactive approach in adopting international standards slowly and gradually over the last few years. Pakistan has taken a consultative approach, when rolling out any international standards, before making them a regulation. There could still be certain areas where a local accounting standard is more relevant, and the consultative process ensures smooth implementation of those processes.

BRR: Is there agreement on a broader level in terms of major sects, on how various banking instruments should or should not work? Does the standardization take care of the difference of opinion among Shariah boards of different sects?

AA: In my view, a slight difference of opinion is always healthy, and I do not see that to be an issue now or going forward. The SBP has been pragmatic about it and has included representatives from various sects on their Shariah board. Going forward, scholars will come along to ensure that we can make this transition smooth.

BRR: Do you think that higher tax in case of ADR being lower than a certain threshold, can or will lead banks to incentivize retail and High Net Worth clients towards instruments such as Sukuk in case of Islamic banking?

AA: I think the government needs to proactively encourage savings, because ours is a very low saving rate when compared to similar developing markets. With high inflation, that is a challenge. But even if someone has the means to save, the government does very little to encourage savings.

BRR: Is low savings rate also a cultural issue in our context?

AA: I think it’s a catch-22 situation. People do not have money to make ends meet, which makes savings difficult. People in our culture generally tend to spend more. If we try and link this to Islamic ecosystem, that does encourage distribution of wealth. The Islamic economic system revolves around distribution of wealth, and it is a very effective and time-tested system. The problem is that we do not have that system in Pakistan. When I touched upon sustainable and long-lasting transformation earlier, I meant it to transform the ecosystem with benefits trickling down to the masses. That is a long term goal; once the building blocks are there, I am hopeful we will see a visible change.

BRR: Is there an example out there of a country that has gone through similar transformation from fully conventional to hybrid to a completely Islamic banking model?

AA: Every country would have their own journey. Markets like Malaysia and Saudi Arabia have seen steady and more importantly, organic growth in Islamic banking. Both these markets have a hybrid model, and there is no court ruling on conversion to Sharia complaint banking. We are unique in that sense that there is a court ruling, which is aligned to the constitution of the Islamic Republic of Pakistan.

BRR: Do you think the Islamic window footprints of the conventional banks will now increase at a more rapid pace as the transition deadline nears, or will banks sit bank and transform in a go?

AA: I think it will be a combination of both the pull factor from the consumer side and the push factor from the regulator and courts. In my assessment, it is a bit too early to comment when it will start gathering pace. It could well happen in the next few months, as evidenced from the conversion of a mid-sized bank in the recent past.

BRR: How have things been on the financial side for Standard Chartered Islamic?

AA: We have been growing steadily and organically over the last few years. Our share of the balance sheet on the asset side is north of 30 percent, whereas liabilities’ share is close to 10 percent and revenues 20 percent. Other than Standard Chartered, there is no international bank which has the capacity and capabilities in terms of product suite and credentials. We are number 1 on the global Sukuk league table by a fair margin for years. We have done sovereign Sukuks for multiple countries including the likes of Hong Kong and United Kingdom.

We have recently introduced a revised version of our Shariah compliant credit card. We are also a leading bank in the Shariah market that provides Shariah compliant personal finance to retail customers. There are areas where we believe customers would prefer to have a Shariah compliant solution – for example home finance and personal finance.

BRR: How do your prices compare in the retail segment with the conventional counterparts?

AA: We are very competitive. In fact, one of the product solutions that we offered in a rising interest rate environment was a fixed rate mortgage, where customers could lock in a rate which they would pay over the next few years.

BRR: On the macro front, do you see the private sector and consumer credit demand picking up in the next two quarters?

AA: I think two quarters might be too early. A lot will depend on how the challenge on electricity pricing plays out and is addressed. Revival of private sector credit demand growth will largely depend on the return of local investors’ confidence. It seems the government is trying, but the jury is still out.