JS Bank plans Islamic banking window operations

KARACHI: JS Bank Limited (JSBL) plans to open an Islamic banking window as the lender prepares to transition to Islamic finance in light of the country’s goal to establish a fully Sharia-compliant banking system by January 2028.

“JS Bank currently does not have an Islamic banking window. Recently, we submitted a proposal to the State Bank of Pakistan (SBP) to offer Islamic banking services through the establishment of our own Islamic window,” said Atif Salim Malik, chief operating officer of JS Bank, in an interview with The News.

“We are now awaiting the SBP’s approval and are eager to see the outcome. We have presented a plan for a gradual transition to Islamic banking, marking the beginning of our journey in this direction,” Malik added.

This move coincides with government efforts to convert the financial sector into a Sharia-compliant system. Recently, parliament passed the 26th constitutional amendment, which aims to eliminate all forms of ‘riba’ (interest) by January 2028. The SBP’s Vision 2028 includes transforming existing conventional banks into Islamic banks. Additionally, the SBP has granted in-principle approval for establishing a digital retail Islamic bank and for Sharia-compliant digital banking via Islamic window operations.

In August 2023, JSBL acquired BankIslami, which now operates as an independent Islamic banking subsidiary of the bank. JSBL is a mid-tier bank with a network of 297 branches, including one in Bahrain. However, when combined with BankIslami’s branches, JSBL has over 800 branches, positioning it as a significant player in the market.

Regarding the conversion of all conventional banks to Sharia-compliant banking, Malik said there are some challenges at a broader level. “We need to consider how the country will deal with multilateral creditors and international development finance institutions while seeking funding through Islamic financing options and managing correspondent banking relations,” he said.

“There are challenges with the asset side as well, concerning sukuk. The concept of hybrid sukuk is currently under discussion. As the situation evolves, we anticipate greater clarity,” he added.

“Many laws and regulations will require amendments, and in my personal view, this transition may not be straightforward,” he said.Globally, only a couple of countries, he says, have a full-fledged Islamic banking system. Nonetheless, it is clear that the market for Islamic finance is on the rise and continues to grow.

Financing SMEs a major priority

The COO said that JSBL is actively focused on lending to small and medium businesses, as well as agriculture. Compared to other financial institutions, JSBL is in a better position to serve this market, with 17 per cent of the bank’s total outstand ing exposure in SMEs. Currently, SME financing constitutes less than 4.0 per cent of private sector credit in Pakistan.

According to Malik, the bank has a dedicated SME department with around 150 employees spread across Pakistan. While the bank encounters numerous challenges in terms of SME lending initially, it has learned that these issues cannot be resolved through conventional methods.

Malik mentioned that the Pakistan Banks’ Association (PBA) is working to create an index aimed at targeting small and medium businesses that are currently outside the documented economy. The process will involve a survey of 1,000 SMEs, which will be updated twice a year.

The COO also reported that the banking sector’s total outstanding exposure of SME financing is Rs543 billion. The SBP has set a target to double this financing to Rs1.1 trillion over the next five years.

Lower interest rates likely to slow down deposit mobilisation

He sees chances of interest rates falling to a single digit going forward. If this occurs, it will significantly affect the banking sector’s spread over non-remunerative deposits. Moreover, the banking sector’s deposit mobilization would also slow down owing to falling interest rates. He says that the economy remains significantly undocumented. Out of the total money supply (M2) of Rs35 trillion, roughly 26 per cent is outside the banking system, which points towards purely cash-based transactions. Ultimately, banks, particularly mid-sized ones, will need to pursue funding avenues for their liquidity generation. The SBP’s directives regarding the minimum deposit ratio are expected to increase competition, provide a level playing field and expand the advance-to-deposit ratio (ADR) bracket.

The government abolished a previously proposed additional income tax of 10-15 per cent on banks with low ADR last week. However, banks’ standard income tax rate increased from 39 per cent to 44 per cent for the tax year that ended on December 31, 2024. This rate will drop to 43 per cent in 2025 and further to 42 per cent from 2026 onwards. Meanwhile, the current super tax of 10 per cent remains unchanged.

Malik predicts that the ongoing reduction in interest rates will increase demand for consumer financing, particularly for auto and housing loans. He believes that banks will have opportunities to lend in areas beyond conventional corporate loans. He mentions that the previous government initiated a programme to promote low-cost housing in the country by providing subsidised financing. However, given the current IMF programme, providing subsidies may become challenging.

Focus on renewable energy lending and digitisation

JS Bank has signed on to the Green Climate Fund (GCF), a United Nations initiative that supports developing countries in adapting to and mitigating the impacts of climate change.

“We focus on alternative energy. We have made significant progress with solar loans,” he said. “Pakistan faces a serious energy crisis, as energy produced from fossil fuels is costly. There are issues related to circular debt, independent power producers, their contracts, and capacity charges. Regrettably, many areas in Sindh and Punjab are off the grid, making alternative energy the viable option. The challenge, however, is that these areas lack financial inclusion and access to bank loans.”

Malik sees potential for growth in e-commerce. The shopping landscape is changing, with many people opting for online orders, leading to millions of transactions. However, there is still ample room for growth. “Once you step outside major cities or visit significant wholesale markets like Jodia Bazar and Shah Alam Market, transactions predominantly occur in cash. Until the informal economy transitions into the formal economy, cash transactions will persist,” he noted.

According to him, more than 80 per cent of JSBL account holders use at least one digital channel, whether WhatsApp banking, internet banking or a mobile application. “We launched Zindigi, our digital banking brand, and have invested significantly in its development. In about 2.5 years, Zindigi has registered more than five million accounts,” he said.

Malik believes digitisation can also significantly contribute to green banking, as the JSBL has been able to reduce paper consumption in the branches by three-quarters.“We have partnered with a technology company to create a portal for digital loans. After reviewing the transactional data of our depositors, we issued digital loans under the SME Asaan Finance (SAAF) scheme,” he stated. “Furthermore, we are in the process of introducing credit cards and digitalised vehicle financing for various sectors across SMEs,” he added.