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UNCLAS SECTION 01 OF 02 ISLAMABAD 000189 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O.  12958:  N/A 
TAGS: EFIN ETRD ECON PREL EAID EINV PK
SUBJECT: ISLAMIC FINANCE DEVELOPS SLOWLY IN PAKISTAN 
 
¶1. (SBU) SUMMARY:  Pakistan has started to develop well-managed 
financial products for Islamic banking and finance, but their market 
share is still low and will take time to grow. Currently there are 
six full fledged Islamic banks and 13 conventional banks that offer 
Islamic finance products at a total of 170 branches throughout 
Pakistan.  Total assets of Islamic banks are close to USD 2.25 
billion and Islamic banks control only about 2.2 percent of total 
bank assets. In the 1980s, Zia-ul-Haqq mandated Islamic principals 
for all financial institutions in Pakistan; however, the effort 
largely failed and was basically ignored by the financial services 
industry.  Expansion of Islamic finance options is a long-term 
endeavor rather than a sudden boom.  END SUMMARY. 
 
Current State of Pakistan's Islamic Finance Industry 
--------------------------------------------- ------ 
 
¶2. (U) Currently there are six full fledged Islamic banks and 13 
conventional banks that offer Islamic finance products at a total of 
170 branches throughout Pakistan, including Meezan Bank, Albaraka 
Bank, Dubai Islamic Bank, and Bank Islamic Pakistan.  The State Bank 
of Pakistan (SBP) issued licenses to two additional Islamic banks, 
Emirate Global Islamic Bank, and First Dawood Islamic Bank. 
 
¶3. (U) The market size is extremely small in Pakistan where total 
assets of Islamic banks are close to USD 2.25 billion and Islamic 
banks control about 2.2 percent of total bank assets in Pakistan, 
according to the SBP.  Out of about five million borrowers 
countrywide, 23,000 borrowers have loans that conform to Islamic 
finance standards.  Islamic banks offer about 75 percent of the 
financial products normally available at conventional banks such as 
checking accounts and loans, without the interest accumulation. 
These banks operate exclusively in larger cities, with the potential 
to expand to secondary cities, but are largely absent in rural 
areas. 
 
¶4. (SBU) The Islamic banks are public limited companies and are 
listed on the stock exchanges of Pakistan, according to Mr. Kamran 
Shahzad, the Executive Director of SBP.  They are required to offer 
50 percent of shares to general public.  SBP says the GOP does not 
provide incentives for establishing Islamic banks. The SBP has a 
comprehensive strategy to increase market share of Islamic finance 
from the current three percent to 15 percent.  No target date is 
indicated.  To do this, the SBP says that the market would need to 
grow by 40-50 percent per year.  As a part of the strategy, Pakistan 
intends to conform to standards promoted by the Islamic Financial 
Services Board (IFSB), a sixteen member council of governors and 
central banks.  Pakistan assumed chairmanship of the IFSB in January 
¶2008. 
 
Islamic Finance and Banking Overview 
------------------------------------- 
 
¶5. (SBU) Islamic finance did not begin in Pakistan until the 1980s, 
although Pakistanis proudly proclaim that the nation's founder, 
Muhammad Ali Jinnah, emphasized the virtues of its practice as far 
back as 1948.  Developed in the Arab countries during the 1970s as a 
niche industry, modern Islamic finance and banking concepts are 
relatively recent developments.  Today Islamic financial 
institutions are present in almost 60 countries, with Singapore 
widely considered the capital of the industry and London trailing 
second. 
 
¶6. (SBU) In Pakistan, it took five years (from 1980-1985) and eight 
major public policy developments to pave the way for Islamic, 
non-interest based banking transactions.  The Governor of SBP, Dr. 
Shamshad Akhtar, said in a September 2007 speech that the "premature 
 
ISLAMABAD 00000189  002 OF 002 
 
 
and sudden conversion" of the banking system in Pakistan in the 
1980s to Islamic finance made it difficult to implement modern 
Islamic finance products today.  Akhtar claims that due to former 
dictator General Zia-ul-Haqq's policies in the 1980s where he 
declared full Islamization of the financial sector, the banking 
sector reacted by substituting common industry terms such as 
"interest" with words that sounded more Sharia compliant rather than 
making actual institutional changes.  The Pakistani Sharia Appellate 
Court repeatedly issued ultimatum orders to Islamize the system at 
various times, but that proved impossible.  Akhtar said that one of 
the key lessons from experiences in the 1980s is that it is best for 
the industry to adopt Islamic finance in an evolutionary rather than 
a revolutionary process. 
 
¶7. (U) While Islamic finance practices vary among countries and 
regions, there are three main characteristics that make it different 
from conventional finance.  One, Islamic financial products do not 
use interest whether it is assessed or paid.  Instead, the 
investments are "rented" out to a third party trustee who shares the 
profit or loss.  Second, Islamic banking and financial products are 
governed by Sharia law.  Sharia compliance varies among countries, 
but they are often governed by a national Shariat Board and require 
banks to have a Shariat Advisor.  Third, there are limitations on 
the indebtedness of individuals and corporations.  Many Shariat 
boards use a ratio to determine the limit on indebtedness which can 
affect investment decisions. Pakistan has its own Shariat Board that 
determines how practices are compliance with Islam. 
 
¶8. (SBU) The legal and regulatory frameworks still require 
development before Islamic finance can be a globally competitive 
sector in the banking industry, commented Akhtar, as she laid out 
the groundwork in a December 9 speech.  She also said that within 
Islamic banking there are still disagreements about how to carry out 
the practice. Islam's many variants among countries make Islamic 
finance different throughout the Muslim world.  Each Sharia advisory 
board differs on its view of Islamic finance, making a consensus 
difficult and increasing transaction costs.  Akhtar says that, "A 
flexible and simpler interpretation of the basic tenets at the level 
of Scholar would enhance public acceptability." 
 
¶9. (SBU) In practice, many Pakistani banks adopt a loose 
interpretation of Islamic finance and use existing conventional 
finance structures as substitutes for Sharia requirements.  Pervaiz 
Saeed, Head of the Islamic Banking Department at SBP, said that 
Islamic financial institutions follow the same regulatory framework 
applied to conventional banks, for example, with anti-money 
laundering rules.  There are also no differentiated rules on 
financial disclosure requirements and oversight structure for 
Islamic finance. The only difference is that these banks are 
required to show compliance with Islamic principles of banking, 
including no use of interest and indebtedness. 
 
Comment 
------- 
 
¶10. (SBU) Despite growing interest in Islamic finance and banking in 
Pakistan, there is no data to show a sudden surge in increased 
usage.  The best way to develop Islamic finance may be to create 
globally competitive products that are financially compliant 
worldwide. The international expansion of a few large Islamic banks 
may standardize products and practices across countries.  Due to the 
high level of complexity for structuring and monitoring Islamic 
finance, its growth in Pakistan will likely be slow, despite growing 
consumer interest in the concept.  END COMMENT 
 
 
PATTERSON