Pakistan central bank sets aggressive but achievable targets for Islamic banking

  • SBP wants to raise Islamic banking's market share to 30% by 2025 from 18% currently, which we think is achievable
  • It also aims to significantly grow SME and agriculture financing in the overall loan mix, but this might be difficult
  • Meezan Bank could be the key beneficiary; conventional banks like MCB, HBL and BAFL could also benefit
Pakistan central bank sets aggressive but achievable targets for Islamic banking

The State Bank of Pakistan (SBP) has unveiled a five-year strategic plan for the Islamic banking sector. The central bank aims to increase the deposit and assets of Islamic banking to 30% of the overall banking industry from c18% currently. It also wants to tilt the loan mix towards small and medium-sized enterprise (SME) and agriculture financing.

In this report, we discuss how achievable these targets are, the planned steps to achieve these goals and, for Tellimer Insights Pro subscribers, what it could all mean for some of Pakistan's listed banks.

Islamic banking targets for next 5 years

The SBP wants to improve the assets and deposits market share of Islamic banks by c12ppts over the next five years. This is an aggressive target given that the sector has gained c5ppts in the past five years (2015-20), but we also think it is achievable:

  1. The Islamic banking sector has huge untapped potential. An SBP survey shows 74% of the banked population is willing to switch to Islamic banking, and 93% of the unbanked population regards interest as prohibited under Islamic law;

  2. The SBP targets require a CAGR of c25%, which is in line with recent trends; and

  3. Conventional banks have been focusing strongly on their Islamic banking operations.

In terms of the financing mix, the SBP wants to increase SME and agriculture financing to 10% and 8% of private sector loans, respectively, compared with a mere 3% and 0.3% currently. We think these targets might be too ambitious, though, as they require increasing SME loans by c60% CAGR and agriculture loans by 140% – moreover, banks will be wary of the high level of risk associated with these sectors.

Islamic banking selected KPIs - historical and targets

The strategic pillars

The SBP has highlighted six strategic pillars to achieve the targets:

  1. Strengthen the legal landscape: The SBP aims to introduce a legal framework for Islamic banking and also resolve tax issues to provide a level playing field for Islamic banks.

  2. Enhance the regulatory framework: The central bank will continuously review and amend the regulatory framework for Islamic banks, taking note of developments taking place locally and globally.

  3. Reinforce the comprehensive Shariah governance framework: There is a comprehensive Shariah compliance framework in place for Islamic banks, which the SBP plans to strengthen further.

  4. Improve the liquidity management framework: Liquidity is one of the key issues for Islamic banks, and the SBP aims to take several steps to improve this, including developing shariah-compliant standing facilities and sukuk structures for regular sukuk offerings.

  5. Expand outreach & market development: Launching innovative Islamic products using alternative delivery channels, expanding Islamic microfinance services, focusing on research and development.

  6. Bolster human capital & raise awareness: Holding awareness-raising sessions, increasing the profile of the Islamic Banking Certification Course, ensuring a regular supply of Islamic banking professionals and Shariah scholars.

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