Another day, another bank wants to transition to Islamic Banking

KARACHI: Zarai Taraqiati Bank Limited (ZTBL), a Pakistani agricultural lender providing financing services to farmers, plans to convert its banking system from conventional to Islamic banking. After the Federal Government’s directive last year to end the Riba-based banking and financial system within the next five years, the conversation has been rife in the banking sector. Faysal Bank has successfully transitioned to Islamic banking while other banks like Summit Bank and Bank of Punjab have also expressed their intent to transition to Islamic banking.

ZTBL’s Senior Executive Vice President Zahid Hussain told The News that the bank is already in the process of conversion of branches from conventional to Islamic. Branches will be converted every year to transform the bank into an Islamic one over the years. By the end of this year, 25 branches would be converted from conventional to Islamic. Currently, ZTBL has a network of 501 branches, 9 of which are Islamic.

Federal government’s support for Islamic Banking

Last year in April, the Shariah Court made a historic verdict that declared the prevailing interest-based banking system as against the principles of Shariah, directing the government to facilitate all loans under an interest-free system. The court further instructed the government to enact and amend laws to implement Islamic banking within the country and issued directives that the banking system of the country should be free of interest by December 2027.

This decision came after years of petitions against Riba (interest), with the Supreme Court referring the case back to the court in 2002 following appeals against the decision of the Federal Shariat Court (FSC).

In February of this year, Finance Minister Ishaq Dar reiterated the government’s commitment to implementing the Islamic financial system in Pakistan. He also revealed that a high-level three-member committee comprising key stakeholders such as the Ministry of Finance, State Bank of Pakistan (SBP), Securities and Exchange Commission of Pakistan (SECP), and Shariah scholars and chaired by the Governor State Bank, has been formed to plan the financial system of Pakistan to operate on an Islamic basis. This committee would be directly monitored by him.

As part of its strategy to increase the share of Islamic banking from 20% to 35% in the next two years, the State Bank of Pakistan (SBP) has announced that it will facilitate banks that have plans to convert their business into a Shariah-compliant mode.

Growing demand for Shariah-compliant banking

The growing demand for Shariah-compliant financing and its remarkable growth across the country further highlights the attractiveness of Islamic banking. Islamic banking in Pakistan has experienced remarkable growth, with assets totalling over Rs 6 trillion and deposits reaching Rs 5 trillion in 2022.

As evidenced by the State Bank of Pakistan’s survey, which polled 10,000 households, a staggering 74% expressed willingness to switch to Islamic banking, indicating not just receptiveness but also support for the Riba-free banking system. This overwhelming demand for Islamic banking in the country is evident from the survey results, reinforcing the promising prospects of the industry.

Apart from the growing demand, banks are aware of how Islamic banking has the capacity to increase market share significantly while also providing high returns due to its low deposit costs. And ZTBL is no different. In its pursuit to expand its branch network, ZTBL in 2022 approved a policy to open Islamic Banking Windows, allowing for a more comprehensive outreach to customers. It also established a mechanism to connect its conventional windows with Islamic windows. It introduced Islamic products which include Shariah-compliant investment product and Islamic tractor financing.

About Zarai Taraqiati Bank Limited (ZTBL)

ZTBL provides farmers, particularly small ones in rural areas, sustainable financial services, including the implementation of new schemes and the development of innovative products.

According to the bank’s annual report for the 2022 fiscal year, the bank’s asset base increased 93% last year to reach Rs 491 billion. Total deposits of the bank increased by 9% to Rs 47.3 billion in 2022. The bank reported a profit after tax of Rs 5.1 billion last year, compared with a loss of Rs1.7 billion in the preceding year. 

ZTBL diversified its investment portfolio in 2022. It increased its investment in government securities by around 4 times which resulted in an increased markup income of Rs. 23,608 million, compared to Rs. 6,965 million the previous year. 

The bank’s asset quality indicators showed improvement as the gross infection ratio decreased to 31% in 2022 from 35% in 2021. The non-performing loans fell to Rs 33.68 billion from Rs 40.74 billion a year earlier.