After a cautious return to public attention at the start of 2022, one entire year later Summit Bank has decided to convert itself into a full-fledged Islamic Bank and gain an Islamic Banking License from the State Bank of Pakistan (SBP).
Just a few days ago, Faysal Bank announced that it had completed its conversion to a full-fledged Islamic Bank, indicating the increasing significance of Islamic Banking in Pakistan’s financial services industry.
It is interesting to note that Faysal Bank had initially made the plan to convert to a full-fledged Islamic Bank back in 2015, and has finally achieved the feat nearly eight years later. Around the same time, in 2016, Summit Bank had also taken a conversion plan under consideration but the board ended up deciding on merging Sumit with Sindh Bank instead. Had they gone with the plan, Summit along with Faysal may have completed its journey by now.
Summit’s recent reemergence
The bank’s misfortunes began a few years ago. In 2018, following a highly publicised and politically entangled money laundering scandal, the bank failed to release its financials prompting raised eyebrows. In 2019, the bank once again failed to release its financials and as a result of this non-compliance shifted to the defaulters segment of the Pakistan Stock Exchange (PSX).
Following the demotion at the stock exchange, the bank made a feeble attempt to correct course by releasing their 2018 financials in 2020, but for a third consecutive year failed to call an Annual General Meeting (AGM).
And a full-blown money laundering investigation initiated by the FIA and NAB following a scandal involving political bigwigs such as Asif Ali Zardari and his sister Faryal Talpur was not the extent of their troubles. The bank was also facing constantly rising pressure from the State Bank of Pakistan (SBP) over its inability to fulfil regulatory requirements due to a deteriorating financial condition. In response, it very much appeared that Summit Bank had wilfully buried their head in the sand and were trying to ride the tide of the scandal out.
Then, at the end of 2021, the bank released three years worth of financial statements and the picture was not pretty.
Not a pretty picture
Summit is not a very profitable bank. In fact, it has posted a net profit after taxation only twice, in 2014 and 2015, in the past 10 years, that too a small one, Rs217 and Rs 230 million respectively. In the 2019 results that were released in October 2021, the bank recorded its greatest loss yet, at Rs9.4 billion. But it wasn’t that far off from the preceding year’s loss of Rs8.7 billion.
The information released during this time was also rich in details about the corruption scandal that had rocked the bank’s boat so badly. In a notification from the same period, the bank informed that Abdullah Hussein Lootah had sent an offer letter to Summit Bank asking for 51% voting shares, and new ordinary shares through fresh equity injection. The board agreed to handing over 5,976,000,000 ordinary shares without right to Lootah, and also increased the authorised capital from Rs 28 billion to Rs 90 billion.
This is the same Abullah Lootah who was mentioned in the ongoing fake accounts case of 2018, involving former president Asif Ali Zardari and his sister Faryal Talpur. The fake accounts case involves alleged money laundering worth billions of rupees through 32 bank accounts, which were opened in five banks. Of those accounts, 15 were opened in Summit Bank.
The IMF gives a warning
After three years in the wilderness, it seemed Summit Bank was trying to edge its way back into the mainstream and make something of itself. While the financial statements were late, following all of these mandatory disclosures, the PSX has also moved them up from the defaulters segment to its “normal counter” – meaning the bank’s stocks are up for trading once again.
However, in May 2022, Profit’s then editor and senior journalist Khurram Husain reported in an exclusive scoop that the government has committed to the IMF that Summit Bank and Silkbank will be sent into “resolution” by May 2023 if they don’t complete the first stage of their recapitalization plan by March of the same year. If this happens, these banks could be the next to be forcibly restructured or even sold off altogether like KASB Bank was in 2015.
“We remain closely engaged with two undercapitalized private banks and are committed to ensuring compliance with the minimum capital requirements” the government says in the Memorandum of Economic and Financial Policies released late on Thursday night. While the two banks were not named, it was clear that it was Silkbank and Summit Bank being referred to.
Rise of Islamic Banking
Summit Bank currently has 195 branches, out of which 50 are already part of their Islamic Banking window. Its assets and deposits stood at Rs. 23 billion and Rs. 20 billion, respectively. The bank is not opening new branches of its conventional bank but converting its established branches into Islamic banking branches. The Islamic banking division of the bank made a profit of Rs. 551 million by the end of September 2022 — an impressive feat considering the bank’s otherwise dismal financial results.
The decision to convert comes in the wake of a recent trend of growing Islamic Banking in Pakistan. On April 28, the Shariat Court announced a verdict in a long-pending, declaring the prevailing interest-based banking system as against the Shariah and directed the government to facilitate all loans under an interest-free system. The court had instructed the government to make laws within five years with regard to the implementation of Islamic banking within the country.
The court had ruled that the federal government and provincial governments must amend relevant laws and issued directives that the country’s banking system should be free of interest by December 2027. Faysal Bank’s conversion from a conventional bank to a full fledged Islamic bank adds pressure on other conventional banks in the country that have appealed the court’s decision.
Even before the Shariat Court verdict, a sizable shift had been observed towards Islamic Banking in Pakistan. According to data from the State Bank of Pakistan and Profit’s analysis of the financial statements of every single bank in the country, it accounts for about 20% of net new deposits between 2002 and 2019. Crucially for the industry, net new Islamic banking deposits hit approximately 30-35% of total industry net new deposits.
And the rise has only grown since then. Islamic banking assets reached around 19.5% of total assets as of end June 2022, while share of deposits reached 20.5%. On a year on year basis, assets and deposits of Islamic Banking institutions were up by 41.4% and 27.0%, respectively by end June, 2022. The country currently has 22 Islamic Banking Institutions (IBIs) with a branch network of 4,086 branches, including 1,463 windows spread across 129 districts that provide Shariah compliant banking services. IBIs include 5 full-fledged Islamic banking and 17 Islamic banking windows of conventional banks.
The country currently has 22 Islamic Banking Institutions (IBIs) with a branch network of 4,086 branches, including 1,463 windows spread across 129 districts that provide Shariah compliant banking services. IBIs include 6 full-fledged Islamic banking and 16 Islamic banking windows of conventional banks. Islamic banking assets reached around 19.5% of total assets as of end June 2022, while share of deposits reached 20.5%. On a year on year basis, assets and deposits of Islamic Banking institutions were up by 41.4% and 27.0%, respectively by end June, 2022.
SBP’s role
The encouraging part for a bank like Summit will be that the SBP is keen on promoting Islamic Banking. The recent granting of a licence to Faysal aside, the central bank’s governor in his fir annual report made special mention of the rise of Islamic Banking.
“The Islamic banking industry has made significant contributions to the overall growth of the banking sector during the review period. Islamic Banking Institutions (IBIs) have shown more accelerated growth and better performance in recent years as compared to conventional banking segment, which reflects the acceptability of Islamic banking and its potential to promote financial inclusion”, reads the report.
