Islamic banking deposits to grow by Rs300bn in 2015

KARACHI: Deposits base of Islamic banking system will be added by Rs300 billion during this year as conventional banks are aggressively promoting shariah-compliant products, said industry officials on Tuesday.
“A certain degree of conversion of conventional banks into Islamic led to higher growth in deposits in 2014,” said a banker.
A State Bank of Pakistan’s report recorded 23.3 percent year-on-year growth in deposits of Islamic banking industry to Rs1.070 trillion in 2014. The industry’s deposits stood at Rs868 billion in 2013.
Bankers said two big conventional banks are mulling expansion in Islamic banking window operation due to growing demand from the customers.
“The growing deposits will spur robust growth in the banking industry over the next few years,” said Hasan Aziz Bilgrami, chief executive officer at BankIslami Pakistan.
Presently, there are 22 Islamic banking institutions operating in the country. Of which, five are full-fledged Islamic banks and 17 conventional banks with 1,574 Islamic banking branches. Conventional banks manage 929 Islamic windows nationwide.
The central bank report said the market shares of Islamic banking assets and deposits were recorded at 10.4 percent and 11.6 percent, respectively as of December 31, 2014.
Giving an example of paradigm shift, an analyst at KASB Research said the renewed focus of Habib Bank Limited led to 135 percent surge in its shariah-compliant deposits to Rs113 billion in 2014.
Meezan Bank had merged HSBC into its Islamic banking portfolio last year. Faysal Bank and Summit Bank announced transformation to full-fledged Islamic banking in near future.
Faysal Bank, in its annual report, said a business transformation plan was being formulated to be shortly presented before the board for consideration. Summit Bank is targeting the changeover in three years.
Ahmed Ali Siddiqui, Head of Product Development and Shariah Compliance at Meezan Bank said shariah-compliant model offers considerable growth opportunities as it attracts savers.
Siddiqui said deposits are the major source of funding for banks, which are making efforts to mobilise Islamic deposits.
“Returns on Islamic financial products [deposits] are derived by profits earned on assets not influenced with the fluctuation in the discount rate,” he added.
Conventional banks, however, have an edge over their Islamic counterparts as they pay a minimum six percent profit on savings, while returns on Islamic deposits are still below six percent.
Government is encouraging Islamic finance in the country. The central bank has revised down the paid-up capital requirement for Islamic banking subsidiaries to six billion rupees from Rs10 billion.
However, Islamic banks get less return on investments in sukuks as compared to conventional banks in market treasury bills.
Bankers believe that shariah-compliant lenders could accumulate more deposits if they obtain better returns on investments.
“The Islamic banking industry is significantly improving the process of financial inclusion,” said Bilgrami.