Commercial vs Islamic Banking in Pakistan


silkThe problem is that “not everybody” knows and believes that Islamic banking is religiously right. There is still confusion in general public about conformity of prevailing Islamic banking with the divine principles of Shariah. Jawad Majid Khan, Group Head Emaan Islamic bank gives his view on Islamic and Conventional banking comparison.

What is the major difference between conventional banking and Islamic banking from a customer`s perspective?
We take a consumer banking customer as a case study and see how Islamic banking is different from conventional banking.

In principle, Islamic banking provides a risk sharing model, primarily because Shari’a requires one to bear the risk of one’s invested capital, in order to be entitled to its returns. This means that if the underlying asset financed (home/car) is destroyed the bank shall also share this loss with its customer. On the other hand, the conventional bank shares no loss with the customer if the asset is destroyed, which is mainly because a conventional bank takes no such risk on its investment when lending.
A conventional bank charges late payment fees and take the same to its income. In comparison, Islamic banks do not charge any late payment fees since financial penalties are impermissible in Islam. Even in those cases where some Islamic Banks penalise some of their negligent customers in order to serve as a deterrent to their mal-intentions, they cannot treat these penalties as their income but are obligated to direct the same to a charity fund, from which donations are subsequently made on behalf of the customer for charitable purposes. In no case can this charity amount become a part of the income of the bank.
Islamic banks don’t charge the customer unless the asset is delivered to him/her in usable condition. For example, an Islamic bank will not book income if the car it has financed is booked in advance and has not yet been delivered to the customer. Contrary to this, a conventional bank would start earning income irrespective of the car being delivered or not. Similarly, if the car is damaged in an accident and is taken to an auto workshop for repairing, an Islamic bank cannot charge the rental for the period during which the car remains unusable. The conventional bank, however, shall charge income for this period too, irrespective of the condition of the car.

Are Islamic banking services more expensive than conventional banking? If yes, is there any security in paying more?
The fact of the matter is that different institutions price themselves differently based on various factors such as their operational costs and the structure of the institution, which has nothing to do with the concept and practice of Islamic banking.
Islamic banks, being market players like their conventional counterparts, have to price their products as per the prevailing market rates. Therefore, the assertion that Islamic banking products are more expensive than conventional ones is simply not true. The prices of Islamic and conventional banking products can only be fairly compared once Islamic banks have their own bench mark and an independent market. Therefore, we must promote Islamic banking enabling it to become a major market player and set its own pricing mechanism.

If everyone think Islamic banking is religiously right and safe, then why there is still huge difference between numbers of customers of Islamic vs conventional banking?
The problem is that “not everybody” knows and believes that Islamic banking is religiously right. There is still confusion in the general public about the conformity of prevailing Islamic banking practices with the divine principles of Shariah. We need to remove misconceptions of people about Islamic banking through media campaigns and conducting awareness sessions for the masses.
Secondly, Islamic banking industry of Pakistan has not yet touched the threshold of 15 percent in terms of market share. It is not an easy job to defeat a banking system that has been running the country for more than five decades and has a much larger branch network.
Thirdly, a large number of banking customers are indifferent when it comes to the Shari’a conformity of their banking activities, demanding good returns and cheaper pricing. If a conventional bank offers them a good return on their deposit, they will never consider depositing their money with Islamic banks. This is because the general public are not willing to pay the price for the Shari’a conformity of their financial activities. This perception of the people needs to be changed through a structured program specifically designed to meet their needs.

What can be done to increase the number of customers in Islamic banking on a national level?
In order to increase the number of Islamic banking customers, we first need to remove the misconceptions regarding Islamic banking. A lay man only looks at the building and apparent features of the Islamic banks and promptly concludes that there is no difference between conventional and Islamic banking. People need to be educated that what matters in Islam is the permissibility and Shari’a conformity of the underlying contract in any financial transaction. People need to learn that the activities of Islamic banks are quite different from their conventional counterparts in letter and spirit. In order to achieve this objective, a mass media campaign needs to be launched to create awareness of Islamic banking among the general public, with Shari’a scholars to play their due role in this regard. Unless and until all the stakeholders (government, law makers, regulators, customer, general public, and management of the banks) are on the same page, we cannot bring a big change in Islamic financial inclusion. Similarly, credible degree programs of Islamic banking and finance should be launched in colleges and universities. Recently, three centers of excellence in Islamic finance have been set up in Pakistan with funding from UK to promote Islamic banking and work as research centers in the field of Islamic finance. Product innovation is also necessary to attract the customers. The customers who are working with conventional banks for ages will not come to Islamic banks unless they find solutions to their business needs in an Islamic way.

What is the market share of Islamic banking in Pakistan and globally?
The current figures show that Islamic banking comprises around 12 percent of the banking industry of Pakistan. Concrete efforts are being employed to remove the hurdles, in the growth of Islamic banking by focusing on creating a separate set of laws for Islamic banks, among other such efforts, and analysts are expecting that Islamic banking shall grow to about 20 percent of the whole banking industry of Pakistan by 2020.

Why do we see a shift in Islamic banking globally?
Among other factors, recent global economic recessions and the fact that Islamic financial institutions had been largely unaffected by the economic turndown, have made global leaders look towards the Islamic financial system. This has caused Islamic banking assets to grow at a very fast pace globally. Many non-Muslim countries have launched Islamic banking and have been issuing Sukuk/Islamic bonds for their public debt requirement. The UK prime minister’s recent statements at the World Islamic Economic Forum, where he has vowed to make the UK a global hub for Islamic banking are a testament to this fact.. This is because they have observed and experienced the evils of capitalistic economy and are now inclining towards the Islamic financial system. In addition, the increasing number of religiously sensitive people across the globe has caused to fasten the pace of this growth of and shift towards Islamic banking.

How do you compare the global growth of Islamic banking vs its growth in Pakistan?
As per an Ernst & Young report “On average, Participation banking growth in core markets over 2009–13 has been 1.9 times higher than that for conventional.” As per the State Bank of Pakistan Bulletin, the Islamic banking industry is currently growing at the rate of about 14.8 percent, with the assets of Islamic Banking Institutions having reached PKR 1,495 Billion and the deposits recorded at PKR 1,281 Billion.


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