Pakistan looks to raise public profile of Islamic finance

The State Bank of Pakistan (SBP) is pushing the country's Islamic banking industry to develop products that are more distinct from conventional modes of finance, and will make a renewed push to improve public perception of Islamic finance.

The Islamic banking industry has grown to a 10% share in Pakistan's banking system. The 19 institutions that offer Islamic banking products and services have established roughly 1,200 branches across the country.

Saleem Ullah, director of the SBP's Islamic banking department, said these achievements were "commendable" but that the industry was "still in the evolutionary phase".

The SBP has launched a five-year strategic plan that aims to grow the industry's share of the banking system to 15% – and sets out a range of objectives to make it happen.

In the foreword to the plan, Ullah expresses concern over the existing range of Islamic banking products, which he described as "overwhelmingly debt-based". Although these types of products meet basic Shariah requirements, they fail to honour the broader principle of risk and reward sharing.

The SBP is championing a move towards products based on equity, rather than debt. This distinction is perhaps most evident in ‘diminishing musharaka' products – a form of housing finance that involves the shared ownership of a property between its occupant and the bank.

Instead of taking out a mortgage to purchase the whole property at once, the customer will buy an initial share of the house, say 10%, and the bank will purchase the remainder.

The customer is able to purchase some of the bank's shares on a monthly basis. At each point of purchase the house is revalued and, if it has increased in worth, then the price of the bank's shares will also increase, although only by a fraction of the amount.

The customer also agrees to pay a set amount to the bank as rent for the right to use the bank's share in the property. This amount decreases as the customer buys up the bank's share.

A key feature of this product is the link between the customer's payments and market prices. The SBP is encouraging this practice, and wants to see more products created where both the payments and the rents are linked to prevailing property prices.

"This will not only improve Islamic banking perception but would also have tremendous appeal for the prospective home owners and depositors," the central bank said.

The central bank noted "the lack of public awareness and buy-in from the masses stands out as one of the key concerns surrounding the industry". In particular it singled out the inability of the general public to distinguish Islamic banking from conventional banking.

It launched a 'Mass media campaign for promotion of Islamic banking' in July 2013, and the strategic plan makes provisions to bolster the central bank's efforts to "leverage print, electronic and digital media for [the] promotion of Islamic finance and clearing confusions and misperceptions".

The SBP also highlighted the need to improve the coordination between the industry stakeholders at a domestic and international level.

It envisions the creation of an ‘Islamic Banking and Finance Consultative Group' comprising each of the key Pakistani stakeholders, while also strengthening the links between Islamic finance institutions and business schools/professional accounting bodies.

The SBP further aims to extend "technical and intellectual assistance" to countries that are "new entrants" into Islamic finance, partly by running customised training programmes for other central banks.