KARACHI: Financial experts have said the push to Islamize Pakistan’s banking system was being made possible due to the backing of Arab investors, as Faysal Bank gears up to convert into the country’s sixth Islamic commercial bank in January 2023.
Since Pakistan started shariah-compliant, or interest free, banking in 2002, the overall market share of Islamic banking assets and deposits has grown by 19.5 percent and 20.5 percent respectively up until June 2022. By the end of the fiscal year 2021-22, the deposits of the sector had surged from Rs8 billion to Rs4.85 trillion, according to the State Bank of Pakistan (SBP).
At present, the five full-fledged Islamic banks operating in Pakistan have investors from Saudi Arabia, Bahrain, Kuwait, and the United Arab Emirates (UAE).
Faysal Bank, another conventional bank owned by Prince Amr bin Muhammad bin Faisal Al Saud, the grandson of late Saudi King Faisal, has completed the conversion of all its branches save one, which has been retained for administrative purposes.
The bank’s top officials said this week they were “optimistic” to start the new year as the country’s sixth and second-largest Islamic bank after Meezan Bank, the country’s first Islamic bank and the fifth-largest bank in terms of deposits, according to financial sector data.
“We have completed the conversion process and we have applied to the central bank for the license,” Muhammad Faisal Shaikh, Head of Islamic Banking at Faysal Bank, told Arab News on Monday.
“Starting from January 2023, we will be a full-fledged Islamic bank licensed by the SBP and it is regarded as one of the largest conversions in the financial world.”
The Islamic International Rating Agency (IIRA) has also called the conversion of Faysal Bank the “first of its scale” in the domain of Islamic banking globally.
Industry insiders acknowledge the substantial contribution of Arab investors to the country’s Islamic banking sector, saying the roots of its riba, or interest, free financial sector were based in the Middle Eastern region.
“The contribution of Arab investors is very important in Pakistan,” Shaikh said. “In fact, Islamic banking was introduced by Arab Investors in Pakistan.”
Without funds and expertise from Arab investors, analysts said, the growth of the Islamic financial sector in Pakistan would have been “difficult to achieve.”
“In the growth of Islamic banking, the role played by Arab investors is very crucial,” Ahmed Ali Siddiqui, a director at the Center for Excellence in Islamic Finance (CEIF) at the Institute of Business Administration (IBA), told Arab News.
“They are the pioneers to set up Islamic banking in Pakistan, without their support the current level of growth was much difficult to achieve.”
Earlier this month, the central bank and other commercial banks withdrew their appeals from the Supreme Court challenging directions by the Federal Shariat Court to the government to make the country’s entire banking system shariah-compliant by December 2027.
Siddiqui said the decision would help in the further advancement of the sector.
“As Pakistan moves to complete Islamization of the banking system, more opportunities will emerge for investment in the financial sector,” Siddiqui said. “The continuous support of Arab investors is crucial for growth of Pakistan’s financial sectors.”
"The conversion of Faysal Bank is extremely important from the perspective that it is the first case where a full-fledged bank has been converted into a full fledge commercial Islamic bank," Shaikh added.