The surge in popularity for Islamic banking products has led to the development of a flourishing Islamic banking sector in Pakistan. President & CEO of Burk Bank Ahmed Khizer Khan shares his views with Blue Chip on the success of Burj Bank in Pakistan and the future of Islamic banking.
Burj Bank has been described as the fastest growing Islamic bank. How was this rapid expansion achieved?
Ahmed Khizer Khan: “Expansion was important for us because we were a late entrant into the market. We are probably one of the youngest banks around. The Burj brand was launched in July 2011 and even when you look at the history prior to the re-branding; it is still a very young organization. Being a late entrant in the market, we have performed exceptionally well with the support of a lead investor like ICD, and now we have brought the bank into a position where we can target market dominance within the next three years.
We focus on an aggressive awareness drive promoting the Bank & the category, making sure that every branding effort is out there and visible to the customer. We are sending out a strong message of superior service quality which has considerably improved as compared to what it used to be under the old brand. We are the only AA rated Islamic Bank in Pakistan for Shari’ah quality (rating assigned by the Islamic International Rating Agency, Bahrain). If you look at it from deposits alone, there was a 63% increase in deposits from the previous year which is the fastest growth rate in the industry. We have managed aggressive growth while maintaining a clean balance sheet as our non performing financing is amongst the lowest in the industry.
Our growth plans ahead are aggressive whereby we are opening 25 new branches this year and targeting a network of 300 plus branches in the next 5 years. So there is a lot of work that is happening and our customer growth is very rapid. We are for sure the fastest growing Islamic bank in Pakistan and we have different thresholds to measure & ensure that we are not only keeping pace with the market but exceeding it.”
What are your views on the demand for Islamic banking services in a country like Pakistan?
Khizer: “If you look at Islamic banking penetration right now it’s about 7.5%. You are talking about the 6th most populous nation in the world, a country with over 180 million people which continues to grow rapidly. Till date the banking sector has only been able to tap roughly 20 million customers. According to our analysis an untapped banking market of over 40 million customers still exists within Pakistan.
Islam is the predominant religion in Pakistan and Shari’ah compliant Banking as of today stands at a very small market share thus reflecting huge potential for growth in this sector. Given the growth trends of Islamic Banking in Pakistan till date as well as the huge growth of IBs globally we can forecast double digit growth for Islamic Banks in the years to come. I always give this example: if you have two burger shops in the same lane out of which only one is Shari’ah compliant in the sense that it is halal and it also has all the necessary ingredients, the ambience is good and the taste is the same as the non halal burger shop next door, people would always opt for the Halal option. Why wouldn’t people go for what is Shari’ah compliant banking as long as you can deliver the same services and standards as conventional banks?
So not only compete within the Islamic Banking space but we actually try to exceed what conventional banks do in order to capture their share thus working under a blue ocean strategy of market development. If we can develop and deliver Shari’ah compliant products, features and functionalities to customers that exceed the conventional banking standards then there is no stopping the growth of the Islamic Banking sector. The strategy is to target customers from the conventional banking segment as well as the unbanked segment to bring them towards Islamic Banking. In the next 5 years in my view, the Islamic Banking market may be expected to double its market share from 7.5% to roughly 15%.”
Have you seen a lot of people leave conventional banking to Islamic banking?
Khizer: “Yes, we see a lot of conversion taking place. There are thousands of people coming into Islamic banking. The fastest growth, even in conventional banks, is happening through their increased focus on Islamic banking windows. The question that is raised is: why are most conventional banks coming up with Islamic banking branches instead of opening conventional banking branches? There is obviously significant conversion taking place. So we not only have a natural conversion within the existing banks from conventional to Islamic windows, but people are also leaving for full fledged Islamic banks. In a market of over 180 million people, there is a huge potential to grow both in terms of conversion & untapped customers.”
How have the challenges in a country like Pakistan affected the Islamic banking sector in particular?
Khizer: “Challenges are existent in every venture and industry. The success of any individual, organization or industry lies in the way we confront those challenges & convert them into opportunities.
If you look at the law and order situation, it affects Islamic banking like it would affect any other business sector. When businesses close down and you can’t get to work, that’s bad for the economy. Pakistan probably has been no different from the other emerging economies which have suffered the ‘knock-on-effect’ of the larger economies, whether it is the financial crisis in the US or the eurozone, the impact felt by the emerging market has also been felt by Pakistan.
However if we look at the recession period, the Islamic banking sector has prospered in Pakistan, because a large population has a growing need for Shari’ah compliant Banking. This sector has been quite resilient as the affects have been minimal compared to its conventional counterparts or the industrial sector. This has happened purely because the fundamentals of Islamic banking are sound & balanced. If you look back and see what caused the global recession or the financial debacle, it was debt on debt. There is no such thing in Islamic banking because of the prohibition of Riba. You have an asset-backed debt so there is always something concrete backing the debt. Under the conventional system, it was lending money on money with a pyramid being created which eventually came down and brought the economy down.
Pakistan has time & again proved itself as the resilient economy by outperforming every time which is heartening to see. Luckily for the Islamic Banking sector, the recessionary economy has diverted many advocates of the conventional banking system to shift their focus towards Islamic Banking.”
What are your views in the recent contraction in lending to the private sector by banks?
Khizer: “If you look at our market and our economy, a lot of banks are playing safe game by avoiding lending to the private sector. By doing this most banks are being unfair to the economy because if we stop lending to the private sector how are they going to do business and generate employment for the citizens? There is obviously a ripple effect of the contraction in lending and its subsequent economic impacts will eventually harm the financial sector. Burj Bank is extremely balanced in the sense that while investing in Sukuks and the Government of Pakistan we ensure significant lending to the private sector. If you look at our ADR it is over 65% because we are lending into the private sector in order to fuel the economy. In my view, it is very important for banks that are rich in deposit base & that have prudent lending practices to keep driving the economy.”
What are your views on the regulatory framework governing the Islamic banking sector?
Khizer: “As far as the State Bank of Pakistan is concerned, I have found them to be very supportive in many ways because I have worked with them representing three different institutions: Citibank, Barclays and now Burj Bank. The State Bank has always been very supportive in making sure that the banking sector develops and grows. Our regulator has done an excellent job in bringing the Banking industry to its current level. Particularly in terms of Islamic Banking, I would give special credit to SBP who learned from the experience of Islamic Banking during the 1980s and based on those experiences re-launched Islamic Banking in 2001.
Measures taken by SBP have resulted in a country wide roll out of Islamic Banking. Islamic Banks in Pakistan are presently in their evolution phase and there is enormous potential to grow this market. With the commitment of our regulators, I have no doubt that historic growth will be made possible in the time to come.”
What is the motivation behind Burj Bank’s foray into the Small & Medium Enterprise (SME) sector?
Khizer: “SME is a huge sector. If you look at our customer base pyramid, you have the blue chip corporates and then you have the commercial business with a lot of trade and cash management opportunities; and then you have this huge middle market that is not being catered to. As a socially responsible corporate entity, it is important for Burj Bank to invest in the future of the country which we operate in. The future in many ways would depend on the growth of small medium enterprises and we are committed to contribute to this cause by extending Islamic Banking facilities to this sector.
Besides becoming an independent profitable business, SME will also offer numerous cross selling opportunities to the Bank. We have the right risk mechanisms and experienced people with specific SME experience so I am confident that we can capture this market successfully.”
What are your views on the perception of Islamic banking in the wake of the banking crisis in the US and Europe?
Khizer: “Islamic banking has come out shining in the global recession. The principles of Islamic banking curtailed the impact of the global recession because the Shari’ah principles enable lending to be backed by assets. According to a recent IMF study, Islamic banks performed better than conventional ones in terms of profitability, credit and asset growth. The profitability crunch of Islamic banks worldwide was less than 10 percent, whereas the profitability of conventional banks slumped by more than 35 percent.
The report depicted stronger credit growth compared to conventional banks in almost all countries, suggesting that the system has great potential for further market share expansion and a possible contribution to market stability, given the available credit. Because the global recession is an on-going phenomenon, these results are conditional; however, the conclusion is supported by the characteristics of the Islamic finance system.
I sincerely believe that the Shari’ah-compliant banking sector will soon prove its superiority and the world will embrace its dominance.”
You have extensive international banking experience, what drew you to a career in Islamic banking?
Khizer: “I had always believed in the power of the Islamic financial and social system. Being a Muslim I always had a strong inclination towards Islamic Finance which has strengthened over the years.
During my previous roles with organizations such as Citibank & Barclays I was always interested in Islamic Banking. Both these organizations had a window operation in Islamic banking. My interest was always in the fundamentals and the good principles of Islamic banking. The prudent lending practices and the way business was conducted made very clear sense which pulled me towards it so I started learning more and more about Islamic Banking while I was with these institutions.
My last international role was as the COO of ICD which is the private sector arm of Islamic Development Bank (IDB) and is also the largest shareholder at Burj Bank. Since all OIC countries are members of IDB, we invested in Islamic Finance institutions throughout these countries and saw how Shari’ah principles of Banking were playing driving roles within the growth of these developing economies. Alhamdulillah at Burj Bank, I am thoroughly enjoying working for the Islamic financial system and on a personal level it is a great feeling to be involved in responsible Banking practices.”