Increased Islamic banking penetration supports Pakistani banks’ profitability

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Moody’s Investors Service has in its report on Pakistan’s Islamic banking landscape highlighted the increase in banking sector’s profitability due to increased penetration of Islamic banking services in the country. 

On 13 September, the State Bank of Pakistan released its latest Islamic Banking Bulletin showing that Shariah-compliant assets had increased 21% during the fiscal year that ended in June 2019 to reach a market share of 14.4% of total system assets. 

The report states that Islamic deposits have grown 21% on a compound annual basis for the six-year period through June 2019, outpacing the 11% compound annual growth rate of all other deposit types. The return on assets for Islamic banking institutions was 2.3% at the end of June 2019, versus an average of 1.6% for all banks in the system, the report reads.

Moody’s points out that a significant portion of Islamic banking customers come from populations that were previously unbanked, thus creating a new revenue source for banks. “The State Bank of Pakistan set a goal to increase Islamic assets to 20% of the market, with a focus on lifting structural and regulatory barriers and increasing awareness,” said Moody’s in its report.

As part of the national strategy to increase financial inclusion, the Pakistani government is focusing on a series of initiatives targeting the growth of the Islamic finance industry. According to Moody’s, these initiatives include the adoption of global reporting standards and the introduction of a Shariah-compliant regulatory framework, such as easing initial capital requirements for Islamic banking subsidiaries, facilitating conversion into Islamic mode, introducing tax neutrality for Shariah-compliant banking and crafting exceptions for using the Karachi Interbank Offered Rate as a benchmark for pricing financing. 

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