62pc respondents willing to pay more for Islamic banking products; 36pc will not withdraw money if Islamic bank announces loss; religious satisfaction ‘most important reason’ to opt for Islamic banking

ISLAMABAD: Almost three-fourth of Pakistanis using bank accounts prefer switching to Islamic banking and are even willing to share the losses if any incurred upon thereof, State Bank of Pakistan (SBP)’s report on Islamic banking reveal.

The banking regulator has predicted that there is overwhelming potential demand for Islamic banking in the country and if proper awareness is created significant number of new entrants can be attracted to the industry.

The report has highlighted the growth of Islamic banks from 2003 to 2013 according to which during the period 2003-2013, net financing and investments have seen impressive growth from Rs10 billion to Rs709 billion. By end of December 2013, total size of net financing and investment reached by 8.5 percent. Since 2008 the growth of investments in federal government securities has increased from Rs 9.62 billion to Rs 267 billion by the end of December 2013. Out of the total Islamic banks investments, government securities approximately account for 70 percent.

The report regarding knowledge, attitude and practices of Islamic banks in Pakistan predicts bright future of the Islamic banking in Pakistan and suggested few recommendation for the Islamic banking system to leave the conventional banking system behind.

The special report which has been prepared with the support of Department for International Development (DFID) also included survey questions about the Islamic banking system.

The report reveals that overall 74 percent respondents who have bank accounts either in conventional banks or Islamic banks are willing to switch to Islamic banking system thus showing there is a strong willingness to switch whereas 26 percent stated that they would not switch or unsure of switching to Islamic banking.

Another interesting aspect which this report reveals is that irrespective of whether conventional products are cheaper than the Islamic products 62 percent of banked respondents were willing to pay more for Islamic banking products because these are Sharia compliant. A significant number of respondents are willing to use purely profit loss sharing accounts as compared to those that provide capital guarantee and certainty of returns. More than 6 in 10 respondents using both Islamic or conventional banking were willing to accept the risk of loss. 36 percent have even stated that they would not remove their money if the bank announces loss.

As much as 51 percent of banked respondents prefer to be customers of only full fledged Islamic bank while remaining 49 percent expressed that they would accept the option to bank with Islamic branch/window model. However among the later mentioned group, 14 percent stated that they were comfortable in dealing with the conventional bank offering Islamic services whereas 22 percent expressed better customer services to be necessary condition for choosing an Islamic bank while remaining 14 percent said that they would use an Islamic window only if it was guided by Sharia scholars that they trust.

“For those that are interested in Islamic banking , religious satisfaction derived from Islamic banking products and the absence of interest were the most important reason for switching to Islamic banking. Interestingly profit and loss sharing was the third most important reason for both banked and non banked. While the reputation of the bank and the availability of a range of Sharia compliant product were relatively less important,” the report says.

The report has pointed out a major reason of slow pace of Islamic banking penetration in the country and predicted that the presence of Islamic banking branch would bring a significant increase in switching from conventional banking to Islamic banking as 69 percent of those who are willing to switch reported there is no Islamic bank branch in their locality. 65 percent of non banked explained that there is no Islamic bank in their locality but 79 per cent felt that they are not banking Islamically because Islamic bank have not approached them.

Another important result coming from the survey is the willingness of majority of the corporate (more than 50 percent) to access PLS based financing. This is contrary to the perception that there is no demand for such financing among corporate, the report points out.

There is significant demand for Islamic banking amongst retail and business in Pakistan. It follows from the analysis that while overall demand for Islamic banking amongst the retail is higher than the businesses (nearly 95 percent for household and about 73 percent for businesses). The effective demand for Islamic banking amongst business and individuals also remain consistant (26 for business as opposed to 65 percent individuals).

While highlighting the Islamic financing portfolio, the report says, more than 70 percent of total Islamic financing portfolio is represented by the corporate sector, followed by consumer finance(11.6 percent). Most of the corporate financing is extended textile 19.1 percent, energy 8.9 percent and chemicals and pharmaceuticle 6.3 percent. The SME sector represents only 5 percent of the total financing along with the agriculture and these two sectors are the most neglected sectors.

Interestingly the ratio of Non Performing Financing which has increased significantly from 2008 to 2013 but in the Islamic banking it is much low than the conventional banking which is 5.7 percent in December 2013 but encouragingly it is still below the overall banking industry average of 12.7 percent.

According to this report, the complete switch from the conventional to Islamic banking will take some time as banking relationship tends to be sticky. 68 percent of the users of Islamic banking have been with the present system for less than three years indicating that there has been a significant rise in the numbers of customers over the last few years. 44 percent have been using the Islamic banking services for 1-3 years slightly under 24 percent of the respondent have been using services for less than a year.

The study shows that there is not much difference between the users of conventional and Islamic banking in terms of educational background, although Islamic banking users tend to be more educated that the conventional banking users. Majority of Islamic banking users are from urban areas.

There are proportionally less government employees who deal with Islamic banking institutions with a relatively small number of respondents using Islamic banking  services associated with this profession.

It is recommended in the report that a favourable decision of government to use Islamic bank for disbursement of salaries would not only provide a stimulus to growth of the industry but also create awareness among this segment of the society. The remaining other sectors have less representation.

The report has also highlighted the fact that majority of the Islamic banking users are satisfied with the services of the banks. 89 percent of the Islamic banked were satisfied with their banking services. Three most important factors contributing to satisfaction were i) Islamic products are not based on interest, ii) they provide religious satisfaction and comfort, iii) Islamic bank employees are helpful.

Overall 84 percent of Islamic banked respondents stated that they would recommend others to utilise Islamic banking services. This is five percent less than the number of respondents who were satisfied with the Islamic banking services, but the high percentage of those who would recommend nevertheless bodes well in terms of spreading knowledge and information about Islamic banking.

“From among the businesses surveyed 86 percent chose Islamic banking because the owners were religiously motivated. Similarly the report suggests that services quality of Islamic banking is better than the conventional banking which suggests that the Islamic banks are going beyond their religious proposition and attempting to compete with the conventional banks,” the report says.

The report has suggested some recommendation for the growth of Islamic banking net. As per report these three areas are, rural areas, SME and agricultural financing and micro-finance services and they must develop some innovative products. For this purpose they need to invest more into research and development by themselves of seeking external support.

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