Making Islamic finance a reality

Irfan Siddique talks to Amber Arshad about the growth of Meezan Bank, the current state of Islamic banking, and the challenges and opportunities the industry faces.

AMBER ARSHAD: In 2016, Meezan Bank was honoured with the Best Islamic Bank Award at the Pakistan Banking Awards as well as Pakistani Islamic Bank of the Year by FT’s The Banker. What has been Meezan Bank’s trajectory and what role has it played in developing Islamic banking in the country?
IRFAN SIDDIQUI: Meezan Bank was launched in 1997 as an investment bank with an initial paid-up capital of Rs 721 million. For the first five years we functioned with a workforce of 30 people; then in 2002, the State Bank of Pakistan (SBP) issued Meezan Pakistan’s first Islamic commercial banking license, and concurrently we took over the operations of Societe Generale (SG) in Pakistan. Converting SG’s four-branch conventional banking operations into a Shariah compliant one was an achievement and we operated as Pakistan’s only Islamic commercial bank for the next two years. Since then, we have seen an average of 40-50% growth in the size of our branch network every year and today we have a nationwide network of 551 commercial banking branches. In 14 years of operations, we are not only the largest Islamic bank in Pakistan; we rank among the largest commercial banks in the country.

AA: What is Meezan Bank’s market share in the Islamic banking sector?
IS: Meezan Bank holds about 55% share of the dedicated Islamic banking industry in Pakistan.Our market share of deposits (across the entire banking industry in Pakistan) is five percent. Our branch network and superior services have enabled our deposit base to grow by 24% – from Rs 380 billion (in 2014) to Rs 472 billion in 2015. Our total assets grew by 22% from Rs 437 billion (in 2014) to Rs 532 billion as of December 2015.

AA: There are five dedicated Islamic banks in Pakistan. What is Meezan’s brand differentiation factor?
IS: Our vision is to establish ‘Islamic banking as banking of first choice’ and in keeping with this vision, we have never consciously differentiated ourselves from the Islamic banking industry. We believe in giving our best regardless of how others are performing. Instead of seeing other Islamic banks or windows as competition, we work with them, and support them. The differentiating factor is up to the consumer. For some it is the pricing, for others it is the accessibility or environment.

AA: As a dedicated Islamic bank, what advantages do you have over conventional banks with an Islamic banking division?
IS: Conventional banks with an Islamic banking division offer a vast range of Shariah-compliant products, but they are only a part of their product portfolio. We offer Islamic banking products only and hence we are very focused. Conventional banks have a ‘priority-driven’ approach towards Islamic banking products – they push them only when it suits them or they detect customer interest in them. This is not the case with dedicated Islamic banks. Also, customers are more comfortable with dedicated Islamic banks; they know there will not be any mingling of assets with non-Shariah compliant sources.

“Customers feel more comfortable with dedicated Islamic banks; they know there won’t be any mingling of assets with non-Shariah compliant sources”

AA: Most of the mid to senior management in Islamic banks is drawn from conventional banks. What measures do you take to train them in Islamic banking?
IS: This is a challenge and there is a significant learning curve for people coming from conventional banks. Meezan runs rigorous training initiatives to enhance our staff’s knowledge and skills about Islamic banking and its products and processes. These include a comprehensive orientation programme for new staff (senior and junior), certificate programmes on Islamic banking and refresher programmes on Islamic banking products and their underlying concepts. We have four dedicated learning centres and we support institutions such as the Centre for Islamic Economics (CIE), SBP and National Institute of Banking and Finance (NIBAF) in conducting Islamic banking training sessions.

AA: As an Islamic bank, what are your policies towards hiring non-Muslims?
IS: We are an equal opportunity employer and there is no gender, ethnic or religious bias. If a non Muslim applies, is capable and fulfils our criteria, we hire him/her.

AA: Islamic banking accounts for about 13% of the overall banking industry in Pakistan. Five years ago the share was 7.8%. Has this growth been satisfactory?
IS: Growth is relative. Islamic banking is about 13%, and conventional banking almost 87%. Obviously growth in the latter will be far more than in the former. The good news is that banks that offer dedicated Islamic banking or window operations are increasing, and now there are a total of 22 Islamic banks. Summit Bank and Faysal Bank are in the process of converting into 100% Islamic banks and others will follow. The sentiment is that Islamic banking is viable and has real growth potential. With more banks coming into Islamic banking, the annual growth of one to two percent will increase to at least three or four percent.

AA: Has the government of Pakistan taken sufficient steps to support Islamic banking?
IS: The government has shown keen interest in developing Islamic banking through its strategic five-year plan. As a member of the Government’s Steering Committee of Islamic Banking, I have strongly advocated that the government should place the excess liquidity of the entire Islamic finance sector at the same rate offered to conventional banks. There still exists an asset/liability gap management problem for this industry and this does not merely pertain to Islamic banks, but to Islamic mutual funds, Islamic Takaful and Islamic investors.The government and the regulators have made great strides in expanding Islamic finance, but much work remains to be done.

AA: How is Shariah compliance assured? And is there a supreme Shariah Board that ensures uniformity among Shariah advisors and boards in different institutions?
IS: The provisions of laws, rules, regulations and procedures have to be in accordance with Shariah. All activities have to be monitored and reviewed. All Islamic banks are required to have a Shariah advisor to ensure compliance. At Meezan we have a Shariah Supervisory Board headed by Justice (Retd) Muhammad Taqi Usmani and a product development and Shariah compliance department, operating under the guidance of resident Shariah board member. Both work on developing Shariah-compliant banking products and ensuring that our operations are Shariah-compliant. Furthermore, the Shariah Board of SBP provides feedback and overlooks the activities of individual Shariah Boards of different banks as and when necessary.

AA: What challenges does the Islamic financial sector face?
IS: There are three main ones. One, raising awareness about Islamic banking; two, creating and adopting a set of international best practices; three, taking pragmatic steps to translate the government’s support for Islamic finance into a reality.

AA: Apart from Shariah compliance and appealing to religious sentiments, what advantages does Islamic banking offer over conventional banking?
IS: Islamic banking has been proven to be able to drive economic growth faster. Malaysia is one example of such economic growth; Islamic banks there played a main role as financial intermediaries in facilitating the transmission of savings from surplus households to deficit households. One of the core principles of Islamic banking is linking finance to productivity; according to Shariah, wealth can only be generated through legitimate trade and investment in assets. Furthermore, Islamic banking emphasises equitable contracts and this implies that investors have the right to equal power in the negotiations leading to a transaction. Conventional banking involves paying interest on deposits at a predetermined rate. Since we don’t do this, it helps to promote a large pool of savings, hence improving the economy.

AA: Where do you see growth coming from next?
IS: We are moving towards providing Islamic branchless banking services and this will prove transformational for the Islamic banking sector across the globe. SMEs are the backbone of Pakistan’s economy and a key contributor to achieving sustainable economic growth. Branchless banking, microfinance, house finance and SME are the main growth areas.

AA: What other opportunities do you see for Meezan and Islamic banking in general?
IS: The China Pakistan Economic Corridor (CPEC)is a tremendous opportunity for Pakistan and for Islamic banking. We are identifying the routes the CPEC will take in order to establish branches there. With $45 billion worth of infrastructure projects under CPEC, the opportunities to offer Islamic bonds (sukuk) for infrastructure will grow.

AA: Why don’t Islamic banks advertise as aggressively as conventional banks?
IS: It’s a 90-10 rule. Conventional banks are 90%. If those banks run one ad each, it will seem a lot. And if the 10% advertise – even throughout the year, it will seem much less in comparison. Also, marketing budgets have a direct correlation with a company’s overall profitability – we are not huge so our marketing budgets are not huge. However, in the last couple of years a forum was created by the SBP in which all 22 banks pooled and collected funds to raise awareness about Islamic banking. The SBP also initiated a mass media campaign last year to raise awareness about the value proposition of Islamic finance.

AA: What future do you see for Meezan in particular and Islamic banking in general?
IS: The Islamic banking industry is growing annually by approximately 1.1% and this may increase to 2-2.5% when the smaller Islamic banks start growing. At present, Islamic banking assets and deposits account for approximately 11.2% and 13.1% respectively of Pakistan’s total banking industry, and given the number of Islamic banks, this could grow to 15% over the next few years. Overall, the banking industry is growing at a rate of six percent, yet the financing portfolio of Meezan grew by 18% in 2015. However, this year will be a challenging one for Meezan when it comes to profitability. We opened 123 new branches in 2015 and it takes an average of 18 to 24 months to break even. Having said this, we plan to stay focused and give our best for the betterment and success of Meezan Bank in all areas in 2016.

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