KARACHI: Pakistan’s Islamic banking industry is growing rapidly with a combination of a predominantly Muslim population, still modest financial inclusion, and the commitment of the government and regulators as the key driving forces, Moody’s has said in a newly released report, adding that it expected the country’s Islamic banking assets to increase by 25 percent in the next five years. 

The State Bank of Pakistan (SBP) last year said the Islamic Banking Industry (IBI) had recorded the “highest ever growth” in Pakistan as its assets surpassed the Rs5 trillion mark to reach Rs5,577 billion, with the highest ever increase of Rs1,308 billion.

A portion of the demand for banking services in Pakistan is faith-sensitive and there is a large market for Shariah-compliant services. Over the years, the Islamic banking industry has established a strong footing and gained a sizable share of the banking industry.

The Islamic banking industry in Pakistan comprises 22 Islamic banking institutions, consisting of five fully-fledged Islamic banks and 17 conventional banks that have Islamic banking branches.

A total of 3,956 branches were in operation as of December 2021, with an additional 1,442 Islamic banking windows (dedicated counters at conventional branches).

“Islamic banking assets in Pakistan have grown by an average of 24 percent per annum over the past decade to PKR5,577 billion (U$31.2 billion), accounting for around 19 percent of total banking assets, up from 8 percent in 2011,” Moody’s said. “We expect annual growth of over 25 percent over the next five years, pushing up the sector’s market share to around 30 percent.”

The investor service said a large Muslim population and still modest financial inclusion were key growth drivers.

According to the State Bank of Pakistan, approximately 62 percent of the country’s adult population have an account with a formal financial institution, against an average of 95 percent in high-income countries. The combination of these factors provides the bedrock for the industry’s development.

Past studies have also identified an overwhelming demand for Islamic banking products, with religious considerations an integral part of the decision process, Moody’s added.

It appreciated that the Pakistan government and central bank were taking “active measures” to support the industry’s growth.
 
 During 2021, 500 new branches were added, with the central bank saying at least a similar number of new branches would be added yearly over the next five years. 

“Increasing use of digital and electronic channels will also support the industry’s growth,” Moody’s said. “Given the industry’s growth potential and strong financial performance, we expect more banks to apply for Islamic banking licenses and for conventional banks to convert to fully Islamic banks.”

Faysal Bank Limited, a mid-sized bank with around 3 percent market share, is already in the process of converting from conventional banking to Islamic.