PAKISTAN:
Pakistan’s five-year strategic plan for Islamic finance, launched by
the country’s central bank in February 2014, will drive strong asset
growth in the Islamic finance sector, strong growth in low-cost Shariah
compliant deposits and consolidation within the sector. This
assessment, provided by Moody’s Investors Service in a sector comment
issued on the 6th August, is based on factors including the
high demand from the domestic population for Islamic banking and the
competitive edge held by Islamic banks in terms of the rate of return
on banking deposits.
Pakistan’s
strategy for Islamic banking targets an increase in the sector’s share
of banking system assets from around 10% as of December 2013 to 15% by
2018. The expansion of Islamic banking in Pakistan has in the main been
generated by the country’s dedicated Islamic banks contributing to
annual growth rates above 30% between 2009 and 2013 and is likely to
increase further, as Moody's notes that the country's largest
conventional banks have announced expansion plans targeting the fast
growing Islamic sector. "We believe that this strategic initiative
will lead to strong growth and consolidation in the sector, given the
relatively small size of market participants and capital bases needed
to support growth," said Khalid Howladar, the global head of
Islamic finance at Moody’s.
So
far this year, banks including Allied Bank, MCB Bank, and National Bank
of Pakistan have announced plans to offer Shariah compliant banking
through branches or the establishment of an Islamic banking subsidiary.
Shariah compliant Meezan Bank has also agreed to acquire HSBC Pakistan and
convert its operations to Shariah compliant banking, a move that is
anticipated by the end of the year, subject to regulatory approvals.
Despite
the drive by Pakistan’s government to promote the growth of Islamic
finance, Moody’s has highlighted that high growth rates are likely to
place pressure on the industry’s underwriting and risk management
infrastructure. Melina Skouridou, an analyst for Pakistani banks at
Moody’s, elaborates: "Although the asset quality of Islamic
banking is currently better than that of conventional banking – with a
non-performing financing ratio of 5.7% as of end-2013 versus 13% for
conventional banking – the high rate of financing growth may eventually
lead to higher delinquency ratios in the absence of a prudent approach
to expansion."
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