Unlock Editor’s Digest for free
FT editor Roula Khalaf has chosen her favorite stories in this weekly newsletter.
Meezan Bank, Pakistan’s leading Islamic financial institution, solidified its position as the country’s most valuable lender as its share price soared and it benefited from consumer demand for Sharia-compliant financing and higher interest rates. Ta.
Meezan earned a record 84.5 billion rupees ($305 million) in after-tax profits last year. This is an 88% increase from the previous year, and is also due to the industry-wide boom in revenue from government debt during the high interest rate era.
After-tax profits at Pakistan’s oldest Islamic bank rose 34% to 78.8 billion rupees in the nine months to the end of September, according to results released in October. The bank’s stock price has risen about 80% over the past 12 months, giving the bank a market capitalization of $1.5 billion.
Pakistan has set a goal of implementing a full Islamic banking system by the end of 2027, in the wake of a 2022 ruling by the Federal Sharia Court to eliminate interest from the economy within five years.
Most bankers and policymakers say the country is unlikely to reach this goal, with only a quarter of the sector’s deposits held in Islamic banks, but Islamic banking is gaining momentum. He said that it is increasing.
Saleem Ullah, deputy governor of the country’s central bank, the State Bank of Pakistan, said: “There is huge untapped demand in Pakistan’s Islamic financial market and conventional banks are starting to realize that.” . “Within the next 10 years, a large part of the banking sector will be converted to Islamic finance.”
Some content could not be loaded. Please check your internet connection or browser settings.
Islamic banks prohibit charging riba, or receiving interest on loans. To generate revenue, banks use various equity participation systems to help borrowers repay loans, such as profit sharing and lease payments.
Meezan CEO and founder Irfan Siddiqui said the bank tapped into the unmet needs of Pakistan’s 250 million majority Muslim population.
“Pakistani Muslims, in general, would prefer something Islamic to something non-Islamic,” he told the Financial Times in an interview at the bank’s Karachi headquarters.
Mr. Siddiqui said the bank’s strategy has always been to target a large group of customers with “religious leanings” but who want “services that are on par with or better than traditional banks.”
Meezan’s windfall came after investing in Islamic-compliant government sukuk, which replaces Treasury bills. Sukuk bonds are based on underlying assets such as land or companies, but they are actually tied to an interbank interest rate benchmark of around 13%.
Meezan and other Islamic banks have an interest-free rule, which means they don’t have to set a minimum rate of return on their savings deposits and can keep much of the profits they earn from sukuk bond payments.
Sana Tawfik, an analyst at brokerage Arif Habib, said this advantage created the “extremely high spreads” that pushed Meezan to the top.
Pakistan’s banking sector has soared in profits from interest earned on rising government debt after the central bank raised interest rates up to 22% over the past two years to curb inflation. Government-issued paper remains liquid and a risk-free path to net interest income for banks.
However, the extraordinary growth of Meezan, which has held the title of Pakistan’s most profitable bank since 2022, has brought scrutiny to the Islamic banking sector.
Saleem Mandviwala, chairman of Pakistan’s Senate Finance Committee, said: “They (Islamic banks) are taking people on board with Islamic intentions.”
Meezan’s net interest margin in 2023 was 8.8%, compared with an average of 4.8% for non-Islamic banks, according to an analysis released by the Pakistan Senate Secretariat in September.
Mandviwala promised to introduce regulations that would reduce the profit margins enjoyed by Islamic banks and “keep them on par” with conventional banks.
Mr. Siddiqui rejected Mr. Mandviwala’s criticism of profiteering and cited Mr. Meezan’s cost-oriented management style and “divine help” as reasons for the company’s rapid success.
Recommended
Meezan’s cost-to-income ratio for the first nine months of this year was 29%, much lower than its peers, including other Islamic banks. Karachi-based brokerage firm Topline Securities says its non-performing loan ratio is around 1%, lower than the industry as a whole, even though it lends out more deposits to the private sector than any other major bank in Karachi. lowest. country.
Decisions by the company’s management are taken in consultation with the company’s Sharia Monitoring Committee, headed by Muhammad Taqi Usmani, one of Pakistan’s most prominent religious scholars.
Siddiqui said he is not worried about competitors. The bank’s share of the country’s Islamic finance market has remained stable at around one-third over the past decade, despite an increasing number of competitors entering the space.
The CEO added that it is his duty to convert Sharia-compliant finance. “We got into this business for a cause, and I think that’s why we’ve been blessed with this performance.”
