Brief status of Islamic Banking Industry in Pakistan as of year 2017 and its comparison with the overall Banking industry of Pakistan in terms of Assets, Liabilities, Profitability and branch structure has been provided in the respective document based on statistical data issued by SBP.

1. Fahad Akbar Khan, ACA, CIA, CIFE
Head Shari’ah Audit, Allied Bank Limited
[Pick the date]
STATUS OF ISLAMIC BANKING
INDUSTRY IN PAKISTAN
AS OF YEAR 2017

2. 1
TABLE OF CONTENTS
1. OVERVIEW............................................................................................................................ 2
2. IBI ASSET STRUCTURE .......................................................................................................... 3
3. IBI DEPOSIT STRUCTURE ...................................................................................................... 6
4. IBI PROFITABILITY................................................................................................................. 8
5. IBI BRANCH NETWORK:...................................................................................................... 10
6. THE WAY FORWARD: ......................................................................................................... 12
Abbreviations:............................................................................................................................... 14
References: ................................................................................................................................... 14

3. 2
1. OVERVIEW
Islamic banking is one of the emerging fields in global financial market. It is growing at very fast
pace all around the world. Islamic banking does suit to religious mindset in the Muslim
countries where people generally abstain from involving in conventional interest on religious
grounds. Globally, Islamic finance has expanded rapidly over the past few decades, and is now
emerging as a strategic financial segment to many economies. Having more than 95 percent
Muslim population in Pakistan, an approach was adopted during 1980s, for transforming the
entire financial system to an Interest-Free system. However, the dream of transforming the
entire financial system was not translate into reality despite having introduced landmark
changes in the legal framework of Pakistan. Major reasons attributable to the unsuccessful
attempt were: non-availability of the necessary infrastructure and human resource; lack of
ownership amongst the Banks and the Business Community for abrupt change-over to new
system; weak judicial system and dispute resolution mechanism; and lack of general awareness
among the masses about Islamic banking.
Learning from past experience, the State Bank of Pakistan (SBP) adopted an evolutionary
approach for establishing Islamic finance in Pakistan during the Year 2001, whereby, both
conventional and Islamic banks were allowed to operate in parallel. This enabled the masses to
choose between the two systems that best serves their banking and financial service needs. The
current legal framework allow three types of Islamic Banking Institutes (IBI) in Pakistan, namely;
full-fledged Islamic Banks, Islamic Banking Subsidiaries of Conventional Banks and Islamic
Banking Branches (IBBs) of Conventional Banks. The approach has worked well since then and
the Islamic Banking Industry starting from almost scratch during the Year 2001 has grown on a
gradual basis and by the end of Year 2017 has reached the market share of 12.4 percent in
terms of assets and 14.5 percent in terms of deposits of the overall Banking Industry in
Pakistan.
The purpose of the document is to provide brief statistics of the overall Islamic Banking Industry
(IBI) in Pakistan as of the Year 2017 in terms of total Asset, Liability, Profitability and Branch
Structure. Further, brief review of the progress IBI in Pakistan has made over the years since its
re-launch in Pakistan during the Year 2001 along with its comparison with the overall Banking
industry of Pakistan has also been highlighted. Moreover, in the end, way forward for further
enhancement of IBI in Pakistan along with the challenges it faces that are needed to be
addressed for ensuring the sustainable growth are also covered.

4. 3
2. IBI ASSET STRUCTURE
IBIs Assets witnessed a yearly growth rate of 22.6 percent during the Year 2017 and stood at
PKR 2,272 Billion as compared to the yearly growth rate of the overall Banking Industry of
about 15.9 percent. Due to the mentioned growth rate, the market share of IBI’s assets in
overall Banking Industry’s assets has increased to 12.4 percent during the Year 2017 from 11.7
percent during the last year. The analysis of the progressive increase in the percentage share of
the IBI’s assets in the overall Banking Industry’s assets since its re-launch is provided below:
2.1 Yearly analysis of percentage increase in IBI assets in the overall Banking Industry assets:
The total IBI assets mainly comprise of investments and financing. As of the Year 2017, the
share of net investments and financing in total IBI assets stood at 23.5 percent and 53.1 percent
respectively. The IBI net Investments were recorded at PKR 534 Billion by end of Year 2017 and
the majority of these investments were observed in the Federal Government Securities, such as
Sukuks (Islamic Bonds), due to lack of alternatives available for investment.
The IBI net financing were recorded at PKR 1207 Billion for the Year 2017. In terms of financing
mix, the major modes offered by the IBIs in Pakistan are Diminishing Musharaka, Musharaka,
Murabaha, Ijarah, Salam and Istisna. As of the Year 2017, Diminishing Musharaka (DM)
remained the leading mode with 31 percent share in the overall IBI financing figure followed by
Musharaka and Murabaha with 22 percent and 13 percent share respectively. The graphical
representation of the IBIs financing mix as of the Year 2017 is provided below:
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%

5. 4
2.2 Financing Mix of IBI assets as of the Year 2017:
The percentage wise compositions of Islamic financing modes offered by IBIs have changed
significantly over the years in Pakistan. Initially, the sale based financing mode ‘Murabaha’ was
the most common financing mode offered by IBIs. In this respect, many Islamic Scholars had
reservations and opine that Murabaha is not an ideal mode of financing and should be only
taken as a transitory step in the process of the Islamization of the Pakistan economy. Over the
years, the percentage share of Murabaha financing mode has accordingly declined and focus is
now more on the preferable Partnership/Equity base modes such as DM and Musharaka. The
graphical representation of the changes in the percentage wise composition of major Islamic
financing modes offered by the IBI’s over the years is provided below:
2.3 Changes in the percentage wise composition of Islamic financing modes offered by IBIs:
31%
22%13%
8%
6%
3%
17% DM
Musharaka
Murabaha
Istisna
Ijarah
Salam
Other
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
DM
Musharaka
Ijarah
Murabaha
Salam
Istisna
Other

6. 5
With regard to client wise category of the Islamic Financing, there is a concentration of
financing in the corporate sector. As of the Year 2017, the share of the overall financing of IBI
stood at 70.6 percent in the corporate sector. Further, in comparison to the overall Banking
Industry’s average, the share of small and medium enterprises (SMEs) financing and agriculture
financing has remained minimal over the years. The comparison of the client category wise
breakup of the IBI financing with the overall Banking industry of Pakistan for the Year 2017 is
provided below:
2.4 Client Category wise breakup of financing of IBI and overall Banking Industry for the Year 2017:
Asset quality indicators of IBI assets, including, Non-Performing Finances (NPFs) to financing
(gross) and net NPFs to net-financing shows better view than the overall banking industry’s
average figures. For the Year 2017, Gross NPFs to financing ratio and Net NPFs to net-financing
ratio were recorded at 3.1 percent and 0.5 percent respectively as compared to industry’s
average of 8.4 percent and 1.2 percent respectively. The comparison of the IBI Asset quality
indicators with the overall Banking Industry for the Year 2017 is provided below:
2.5 Asset Quality Indicators of IBI and Overall Banking Industry for the Year 2017:
70.6% 68.7%
3.3%
6.4%
0.5%
4.5%
9.9%
6.4%
13.9%
10.5%
1.8% 3.5%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
IBI Average Banking Industry Average
Corporate Sector
SMEs
Agriculture
Consumer Financing
Commodity Financing
Others
82.5
3.1 0.5
87.2
8.4
1.2
0
10
20
30
40
50
60
70
80
90
100
Provision to NPFs NPFs to Financing Net NPFs to Net
Financing
IBI
Overall Banking Industry

7. 6
3. IBI DEPOSIT STRUCTURE
IBIs Deposits showed a yearly growth rate of 19.8 percent during the Year 2017 and stood at
PKR 1,885 Billion as compared to the yearly growth rate of overall Banking Industry in Pakistan
of 10.3 percent. Due to the mentioned growth rate, the market share of IBI’s deposits in overall
banking industry’s deposits has increased to 14.5 percent during the Year 2017 from 13.3
percent during the last year. The yearly analysis of the progressive increase in the percentage
share of the IBI’s deposits in the overall banking industry’s deposits is provided below:
3.1 Yearly analysis of percentage increase in IBI deposits in the overall Banking Industry deposits:
As common in the Banking industry, the deposit mix of the IBI deposits consists of customer
based and financial institution based classification. The customer based categories consisting of
Fixed Deposits, Saving Deposits, Current Accounts (remunerative and non-remunerative) and
other accounts represents majority 93.5 percent of the overall IBI’s deposits for the Year 2017.
While the Financial Institutions based category (remunerative and non-remunerative) represent
the remaining 6.5 percent of the overall IBI’s deposits. Saving Deposits and Current Accounts
(remunerative and non-remunerative) are the major customer based deposit categories which
represent 38.9 percent and 34 percent respectively of the overall IBI deposit balances for the
Year 2017. In comparison, the overall Banking industry shows slightly better position with the
composition of customer based Saving Deposits and Current Accounts (remunerative and non-
remunerative) being 36.1 percent and 35.2 percent respectively of the overall deposit balances
for the Year 2017. The graphic representation of the category wise breakup of the IBI and
overall Banking industry deposits for the Year 2017 is provided below:
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%

8. 7
3.2 Deposit mix of IBI and Overall Banking Industry for the Year 2017:
The yearly comparison of the IBI deposit mix shows that initially the customer based Fixed
Deposit category had the major composition of the overall IBI deposits mix. However, over the
years, the boom in the stock and real estate markets followed by a somewhat cyclical boom
and bust in these markets, plus unprecedented growth in National Saving Schemes and grey
banking, made Fixed Deposits category the least lucrative option for customers and accordingly
the percentage share in the Fixed Deposit category has accordingly declined over the years in
the IBIs. Due to same reasons, similar picture of decline in the composition of the fixed deposit
category in the deposit mix of overall Banking industry is also visible. The graphical
representation of the changes in the percentage wise IBI deposits category over the years is
provided below:
3.3 Yearly comparison of percentage wise changes in IBI Deposit Mix:
5.7%
1.2%
21.8%
35.2%
36.1%
6.5%
0.8%
19.8%
34.0%
38.9%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0%
Financial Institutions
Others
Fixed Deposits
Current Accounts
Saving Deposits
IBI
Overall Banking Industry
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Fixed Deposits
Saving Deposits
Current Accounts
Others
Financial institutions

9. 8
4. IBI PROFITABILITY
The IBI in Pakistan is new and emerging industry, which has picked up gradually from the Year
2001, when compared with conventional banking sector, which is as old as the country with 29
full-fledge banking companies operating as of the Year 2017. During the recent years, IBI is
persistently showing growth in its Profitability compared with the conventional banking
industry which is facing major fluctuation and negative growth in profitability. During the Year
2017, amidst prevailing low interest rates and with conventional Banking industry witnessing a
double-digit decline in profitability by 15 percent, the IBI recorded improvement in the yearly
growth rate of profit before tax by 31.3 percent with the Profit before tax amounting to PKR 23
Billion. In this respect, the comparison of the fluctuation and changes in Profit before tax
amount of IBI and overall Banking Industry during the recent years is provided below:
4.1 Analysis of Profit before Tax amount of IBI and overall Banking Industry:
The IBI Profitability ratios like ROA and ROE before tax were recorded at 1.1 percent and 17.1
percent respectively for the Year 2017. These rations are comparatively below the average ROA
and ROE before tax of the Overall Banking Industry in Pakistan which were recorded at 1.6
percent and 19.5 percent respectively for the Year 2017. However, over the recent years, the
respective profitability rations of IBI are continuously improving in contrast to the overall
banking industry where there is downward trend in the respective rations. In this respect, the
yearly comparison of the ROA and ROE before tax of IBI and overall Banking Industry is
provided below:
0
50
100
150
200
250
300
350
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Banking Industry Profit Before
Tax
IBI Profit Before Tax

10. 9
4.2 ROA and ROE of IBI and overall Banking Industry:
In addition to ROA and ROE rations, operating expense to gross income ratio of IBI witnessed
some improvement during the Year 2017 and were recorded at 69.8 percent which is still being
higher than the overall banking industry’s average at 57.1 percent. The reasons for the higher
comparative operating expenses are mainly due to being new and emerging industry and due
to increasingly growth in the IBI branch network of IBI which is 18.94 percent of the overall
Banking industry branches as of the Year 2017. However, as with the other ratios, the
respective ratio is also improving and decline in the recent years is also observed in comparison
with the overall banking industry average. The comparison of operating expenses to gross
income percentage of IBI and overall Banking industry during the recent years is provided
below:
4.3 Operating Expenses to Gross Income Ratio of IBI and overall Banking Industry:
0
5
10
15
20
25
30
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
Banking Industry ROE (Before
Tax)
IBI ROE (Before Tax)
Banking Industry ROA (Before
Tax)
IBI ROA (Before Tax)
0
10
20
30
40
50
60
70
80
Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Industry Operating Expenses to
Gross Income
IBI Operating Expenses to Gross
Income

11. 10
5. IBI BRANCH NETWORK:
Since re-launch of Islamic Banking Industry in Pakistan, the IBI branch network is growing
gradually and progressively over the years. As of the Year 2017, there are 21 Islamic banking
institutions operating in Pakistan in which, there are 4 full-fledged Islamic Banks, 1 Islamic
Banking Subsidiary of Conventional Bank and 16 Conventional Banks having standalone Islamic
Banking Branches. As of the Year 2017, the aggregate numbers of Islamic branches have
reached 2,581 which represent 18.9 percent of the overall banking industry branches of 13,629.
In addition, the number of Islamic banking windows operated by conventional banks having
standalone Islamic banking branches have reached 1,277 as of the Year 2017. The Islamic
Branch Network has spread all across Pakistan. Yearly analysis of the increase in the Islamic
Branch network over the years since its re-launch is provided below:
5.1 Number of Islamic Branches in Pakistan over the years:
Among the total Islamic branch network, 54 percent Islamic branches/sub branches (1,395)
belongs to full-fledged Islamic banks & Islamic Banking Subsidiary and remaining 46 percent
Islamic Branches/sub branches (1,186) belongs to Conventional Banks having standalone
Islamic Banking Branches. The major shareholder of the Islamic Branch network is Meezan Bank
Limited having 601 Islamic Branches being 23.3 percent of the total Islamic Branch network of
17 48 70
150
289
515
651
751
886
1097
1304
1574
2075
2322
2581
0
500
1000
1500
2000
2500
3000

12. 11
Pakistan followed by Bank Islamic Pakistan Limited having 330 Islamic Branches/sub branches
being 12.8 percent of the total Islamic Branch network.
The Islamic Branch network has spread across 111 districts of Pakistan. Majority of the Islamic
Branches are in the Punjab and Sindh Province of Pakistan. As of the Year 2017, around 48 % of
the Islamic Branches are in the Punjab Province and 29% are in the Sindh Province. The graphic
representation of Province/Region wise breakup of the Islamic Branches in Pakistan for the Year
2017 is provided below:
5.2 Province/Region wise breakup of IBI Branch Network:
48%
29%
12%
4% 5% 2%
Punjab
Sindh
Khyber Pakhtunkhwa
Baluchistan
Federal Capital
Azad Kashmir, Gilgit Baltistan and
FATA Region

13. 12
6. THE WAY FORWARD:
Although there is major difference between the conventional banking industry and Islamic
Banking in all aspects including their period of operations, but Islamic Banking Industry has
been expanding across Pakistan with regard to its branches network, size of deposits, assets
and financing with considerably good pace. This shows the acceptability of IBI is increasing
among the masses across the Pakistan and showing a sound future of the industry in the years
to come.
Though impressive growth rate of the industry in general is being witnessed as a sign of greater
fortune around the corner, however, there are challenges that still need to be addressed for
ensuring the sustainable growth of IBI for becoming an integral component of overall finance in
Pakistan and to come at par with the Muslim world in growth and development of Islamic
Finance. In this respect, key challenges Islamic finance industry has to overcome to further
accelerate its growth are:
1. Effective liquidity management: It has always been the primary focus of IBI; however, this
has gained more significance in present times owing to factors like dearth of Shari’ah
compliant investment opportunities, limited availability of Shari’ah compliant money
markets & instruments and Shari’ah compliant alternate of standing facilities.
2. Launch of Innovative Products: In a global environment where Islamic banking is operating
parallel to centuries old conventional industry, it is imperative to expand its scope. It would
be difficult for IBIs with their prevalent model, having limited product mix and outreach, to
compete with conventional banks in the future. There is a need for IBIs to move away from
the traditional business model and explore new opportunities/markets by developing more
innovative products and reaching out to non-traditional sectors.
3. Skilled Human Resources: The growing interest in Islamic finance warrants availability of
required level of skilled human resources. However, one of the biggest challenges faced by
the IBI is the shortage of qualified Islamic finance professionals, who can lead the industry
into the next level of growth and development.
4. Research & Development (R&D): R&D is key for any evolving industry; therefore, the culture
of research and development in IBI needs to be encouraged and universities/academic/
training institutes should undertake action oriented research on key areas like efficiency,
innovative business models and participatory based modes which can provide the much
needed boost to the emerging IBI and support its growth.

14. 13
Given the commitment and concerted efforts of all stakeholders, the Islamic banking and
finance is likely to grow on a sustainable basis in the future to a level where it provides a
genuine alternative to a Riba-based system. However, the true potential of Islamic finance in
Pakistan is still to be explored and there is a need of financial intermediation based on real
economic activities. Islamic finance needs to emphasize on value adding and value based
financial intermediation to achieve next level of growth trajectory. It would bring more stability
to the financial systems, improve equitable distribution of economic gains, and support the
overall economic development. There is still need to work for expansion of client base of IBI in
Pakistan where there is more than 95 percent of Muslim population. Moreover, the Islamic
investment banks and Islamic venture capital funds are yet to be launched in Pakistan.

15. 14
Abbreviations:
DM Diminishing Musharaka
IBI Islamic Banking Institute
IBB Islamic Banking Branches
NPF Non-Performing Finances
PKR Pakistan Rupees
R&D Research & Development
ROA Return on Asset
ROE Return on Equity
SBP State Bank of Pakistan
SME Small and Medium Enterprises
References:
The statistical data has been extracted from SBP website:
 Islamic Banking Bulletin issued by State Bank of Pakistan:
http://www.sbp.org.pk/ibd/bulletin/bulletin.asp
 Quarterly performance review of banking sector issued by State Bank of Pakistan:
http://www.sbp.org.pk/publications/q_reviews/qpr.htm