Pakistan’s Islamic Banking Sector Review 2003 to 2007 ISLAMIC BANKING DEPARTMENT STATE BANK OF PAKISTAN Table of Contents 1. Vision & Mission Statements of State Bank of Pakistan (SBP) ................................................ III 2. Vision & Mission Statements of Islamic Banking Department of SBP.................................... III 3. Governor’s Message ...................................................................................................................... IV 4. Foreword ........................................................................................................................................ VI 5. Executive Summary .................................................................................................................... VII 6. Future Outlook .............................................................................................................................. IX 7. Brief Historical Perspective on Islamic Banking Initiatives in Pakistan ................................... 1 7.1 Steps for Islamization of Banking and Financial System in 1980s ............................................ 1 7.2 Brief Evaluation .......................................................................................................................... 2 7.3 Post Judgment Measures ............................................................................................................. 3 7.4 Policy Decision ........................................................................................................................... 4 8. Regulatory, Supervisory & Shariah Compliance Developments ............................................... 6 8.1 Regulatory & Supervisory Framework ....................................................................................... 6 8.1.1 The Three Pronged Strategy ............................................................................................ 7 8.1.2 Guidelines for Conventional Banks having dedicated Islamic Banking Branches for .... 7 Segregation of Funds and System & Control ........................................................................... 7 8.1.3 Schedule of Service Charges: .......................................................................................... 9 8.1.4 Off-Site Surveillance for Shariah Compliance through Introduction of Questionnaires in Institutional Risk Assessment Framework (IRAF) ................................................................. 10 8.1.5 Development of Enforcement Framework..................................................................... 10 8.1.6 Guidelines for Islamic Microfinance Business .............................................................. 10 8.1.7 Rolling Out IFSB Standards / Guidelines ...................................................................... 11 8.1.8 Other Initiatives ............................................................................................................. 14 8.2 Shariah Compliance Framework ............................................................................................... 15 8.2.1 Shariah Board of State Bank of Pakistan ....................................................................... 15 8.2.2 Shariah Advisor ............................................................................................................. 17 Essentials & Model Agreements of Islamic Modes of Financing .......................................... 18 8.2.4 Instructions and Guidelines for Shariah Compliance in Islamic Banking Institutions .. 19 8.2.5 Shariah Advisors Forum (SAF) ..................................................................................... 21 8.2.6 Shariah Compliance Inspection ..................................................................................... 21 8.2.7 Standardization of Shariah Practices- Adoption/Adaptation of AAOIFI Shariah Standards ................................................................................................................................. 22 9. Islamic Banking Industry Review in Terms of: ......................................................................... 23 9.1 Industry Progress and Market Share in Brief ............................................................................ 24 9.2 Year Wise Entry of Players....................................................................................................... 26 9.3 Islamic Banking (Balance Sheet) Market Share-December 2007 ............................................ 27 9.4 Growth in the Branch Network of Islamic Banking Industry ................................................... 28 9.5 Province & City-Wise Breakup of Islamic Banking Branch Network ..................................... 29 9.6 Bank-Wise Position of Islamic Banking Branches ................................................................... 31 9.7 Total Assets & Bank Wise Share .............................................................................................. 32 9.8 Deposits & Bank Wise Share ................................................................................................... 33 9.9 Deposit Structure ...................................................................................................................... 34 9.10 Financing & Bank Wise Share ................................................................................................ 35 9.11 Mode and Sector Wise Break-up of Financing ....................................................................... 36 9.12 Investments & Bank Wise Share ............................................................................................ 37 9.13 Sources and Uses of Funds ..................................................................................................... 38 9.14 Financing to Deposits Ratio .................................................................................................... 39 9.15 Capital Adequacy Ratio .......................................................................................................... 40 9.17 Non Performing Financing ..................................................................................................... 41 9.18 Earning Assets as Percentage of Total Assets ........................................................................ 41 9.19 Income Statement.................................................................................................................... 41 9.20 Product Offering of the Islamic Banking Industry in Pakistan ............................................... 42 10. Issues Faced by the Industry and Efforts of SBP .................................................................... 48 10.1 Taxation Issues........................................................................................................................ 48 10.2 Financial Reporting and Accounting Standards ..................................................................... 48 10.3 Islamic Export Refinance Scheme .......................................................................................... 49 10.4 Capacity Building ................................................................................................................... 50 10.5 Liquidity Management ............................................................................................................ 52 10.6 Limited Outreach of Islamic Banking Institutions .................................................................. 52 10.7 Awareness Creation ................................................................................................................ 53 11. Strengthening Internal & External Linkages........................................................................... 55 11.1 Strengthening Links with International Islamic Infrastructure Institutions (IIIIs) ................. 55 11.1.1 Islamic Financial Services Board (IFSB) .................................................................... 55 11.1.2 International Islamic Financial Market (IIFM) ............................................................ 56 11.1.3 Islamic Research and Training Institute (IRTI) ........................................................... 56 11.1.4 Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) 57 11.1.5 Other Initiatives ........................................................................................................... 57 11.2 Internal Linkages .................................................................................................................... 58 11.2.1 Joint Forum of SBP and Securities & Exchange Commission of Pakistan on Islamic Financial Industry ................................................................................................................... 58 11.2.2 Coordination with ICAP, FBR, MoF etc. .................................................................... 58 12. Chronology of Policy Announcements ...................................................................................... 59 13. List of Tables & Figures ............................................................................................................. 66 14. Glossary of Islamic Finance Terms ........................................................................................... 67 ANNEXURE-A: Brief Background of the Full Fledged Islamic Banks .................................. 70 ANNEXURE-B: Fifteen Principles of Best Practice for Establishing and Implementing Effective Risk