Do Islamic Banks Cost More in Pakistan?


Salman Ahmed Shaikh

There are 5 full-fledged Islamic banks operating in Pakistan and more than 15 conventional banks with Islamic banking branches. The growth in Islamic finance industry has been consistently impressive. Moreover, the share of the industry in the banking system has risen to over 10 percent from just 0.5 percent in 2002.

While all these facts are heartening, what is a little disturbing is the fact that Islamic banking could not live up to its initial promise and commitment to contribute towards equitable distribution of resources through distinctive financial products. Much of the financing products currently offered are in effect, debt based financial contracts which are priced using the same interbank interest rate benchmarks, like KIBOR (Karachi Interbank Offered Rate) in Pakistan.

What had been even more disappointing and surprising is the fact Islamic banking spreads – the difference between average financing and deposit rates – have been constantly higher than the overall banking spreads in Pakistan during the last three years. Below is the data from the State Bank of Pakistan which confirms this.

Period

IB Spreads

Overall Banking Spreads

Sep-11

8.40%

6.70%

Jun-11

8.80%

6.90%

Mar-11

8.40%

6.90%

Dec-10

7.10%

6.80%

Sep-10

7.70%

6.80%

Jun-10

7.70%

6.90%

Mar-10

7.70%

6.60%

Dec-09

7.00%

6.60%

Another point of concern is that Islamic banks have extremely low advance to deposit ratio and due to which their spreads are higher than conventional banks. On the other hand, Islamic banks provide much less financing to Small and Medium Enterprises than conventional banks at the moment, as noted by the central bank of the country recently.

Furthermore, Islamic banks have not ventured into micro finance despite having surplus liquidity at their disposal. They also hardly have banking branches in the rural areas. With surplus liquidity at their disposal, Islamic banks could have provided financing using preferable equity modes to facilitate new IPOs in the market and hence encourage equity financing to be used in the economy.

Going forward, it is hoped that after having completed one decade of successful operations of Islamic banking and exhibiting exemplary growth in commercial sense, Islamic banks will look towards increasing their outreach to the poor masses, start using more egalitarian modes of financing and gradually streamline their operations to gain economies of scale and better serve their loyal and growing customer base.

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About Salman Ahmed Shaikh

PhD Economics. Author, Researcher, Teacher and Consultant. He can be contacted at: salman@siswa.ukm.edu.my
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