ISLAMABAD: The State Bank of Pakistan (SBP) on Monday unveiled its third five-year strategic plan for the Islamic banking industry, setting targets to be achieved by 2025, including reaching 30 percent share in both assets and deposits of the overall banking industry, 35 percent share in the branch network and 10 percent and eight percent share in private sector financing for small and medium sized industries and agriculture respectively.

The Islamic banking industry of Pakistan has posted 30% and 27.8% growth in overall assets and deposits respectively during 2020, the highest such increase since 2012, central bank data shows, driven by increasing access to shariah-compliant financial instruments and growing faith-based demand.

Twenty-two Islamic banking institutions currently operate in Pakistan: five Islamic banks and 17 conventional banks with standalone Islamic banking branches. The State Bank aims to make Islamic banking one third of the overall banking industry in Pakistan by 2025. 

The overall assets of the industry increased to Rs4.3 trillion while deposits reached Rs3.4 trillion by the end of December 2020, accounting for 17% of all assets and 18.3% of all deposits of the country’s entire banking industry, according to the State Bank.

“In order to steer the growth of Islamic banking on sound footings, SBP has been providing proactive guidance through issuance of Strategic Plans for the Islamic banking industry; so far, two five-year Strategic Plans have been issued,” the central bank said in a statement. “This third Strategic Plan for Islamic banking industry (2021-25) aims to set a strategic direction for the industry to strengthen the existing progressive momentum and lead the industry to the next level of growth. The plan has been developed in close coordination and consultation with all key relevant stakeholders.”

The statement added: 

“The strategic plan envisages achieving the aforementioned specified targets by focusing on six strategic pillars namely: (i) strengthening legal landscape, (ii) enhancing conduciveness of regulatory framework, (iii) reinforcing comprehensive Shariah governance framework, (iv) improving liquidity management framework, (v) expanding outreach & market development, and (vi) bolstering human capital & raising awareness.”

Financing for the Islamic banking industry also grew by 16% during 2020, and the non-performing finances (NPFs) to financing (gross) ratio declined from 4.3 %, as of the end of December 2019, to 3.2%, as of the end of December 2020, central bank data shows.

Bankers say the growth in Islamic banking, where under shariah the payment and receipt of interest is strictly prohibited, is driven main due to increasing access.

Sana Tawfik, banking sector analyst at Arif Habib Limited, told Arab News the central bank had been promoting the sector’s development through the introduction of legal, regulatory and shariah-compliant frameworks for instruments such as Naya Pakistan Certificates (NPCs) under the Roshan Digital Account (RDA) initiative, which are available to overseas Pakistanis and those who had declared assets abroad.

“Steps taken by SBP to promote Islamic banking, inflows through RDA in NPCs, Islamic sukuks and the increasing frequency of sukuk auctions are the other couple of reasons driving it,” Tawfik said.

Ahmed Ali Siddiqui, senior executive vice president of Meezan Bank — Pakistan’s first full-fledged Islamic bank — told Arab News there was “stronger public demand” for shariah based or interest free banking.

“It is continuously fueling growth,” he said. “The development of Islamic capital market and availability of financial instruments like Sukuk expedited the growth.”

He added that the COVID-19 pandemic had proven the stability of Islamic banking.

“Surprisingly Islamic banking has shown strongest growth during COVID-19 crisis,” Siddiqui said. “This shows the stability factors of the Islamic economic system based on real economic conditions.”