YH: Knowing what Islamic banking is all about is necessary. We anticipated that this journey would take one or two years when Faysal Bank Limited (FBL) began it. As it turned out, it wasn’t all that easy. There are numerous problems. Understanding Islamic banking is the first step; the fundamentals of its application; how to transform entire businesses in accordance with Islamic banking principles and the dos and don’ts. It’s not just about changing the banking system; it’s also about changing into a new business model and knowing the risks, benefits, and drawbacks. It entails determining the bank and customer’s risk tolerance. One of the biggest problems is mentality. It’s more than just about the business for employees; It’s about their belief that they are doing things correctly and that they are changing the behavior of other businesses in a way that will benefit the community as a whole. Islamic participatory financing is based on making a direct contribution to the growth of various industries and the economy. Faith and belief are the foundation of the entire chain.
A: What is it about Islamic banking that incorporates this crucial belief component?
YH: Interest is forbidden in Islam. Because a bank guarantees a deposit’s return, a traditional banking model removes risk entirely—apart from entity risk; that is to say, if the bank fails. Because you are not taking a risk, whereas Islamic principles require you to assume a business risk, guaranteed return without risk participation is considered Riba/sood, or interest. It is a type of participatory supporting. You are taking a risk when you invest in a pool of assets because you will lose money if the company fails. Naturally, banks exercise extreme caution. They hold assets in a portfolio; To manage that risk, they employ a diversification strategy and a risk mitigation strategy. Banks serve as the link between businesses and depositors or investors in Islamic banking, which encourages investment in businesses. You won’t get anything back if the businesses fail. However, as I mentioned earlier, you are actually investing in a pool of businesses—say, 50,00—and if five of them fail, the remaining 4,795 will make up for the losses. Naturally, FBL ensures that our risk management procedures meet the highest standards as an Islamic bank.
A: Is it reasonable to assume that the majority of customers in Pakistan would prefer an Islamic bank to a conventional one?
YH: Yes, the growth of Islamic banking is much higher than that of conventional banking. This growth is due to both the addition of new customers and the attrition of customers who switch from conventional banking to Islamic banking.
A: Given that they will lose their Islamic advantage, will it not slow the expansion of existing Islamic banks if the entire banking system becomes Islamic?
YH: I don’t believe so. Due to the fact that Islamic banks do not yet have the reach necessary to cover the entire market, a significant portion of our market does not have a banking relationship because they believe that interest is anti-Islamic. Because more Islamic banks are opening branches close to unbanked people, there is a lot of room for growth in this market.
A: What is the Islamic-to-conventional bank percentage ratio?
YH: Islamic banking assets and deposits held market shares of 20 percent and 21 percent, respectively, in the overall banking industry as of September 2022.
A: In an ecosystem of Islamic banking, how will the various banks compete with one another?
YH: the same way they currently compete. in terms of their overall stature, products, and services, as well as the customer’s belief in the security of a particular bank. These distinguishing characteristics will not change. Because the return parameters will change, the investment principles will change. Islamic banks serve as middlemen and are in charge of how a depositor’s money is used in a business. This is where a bank’s knowledge of safe risk management techniques comes in handy. The quality of a bank’s risk management procedures is what sets it apart here.
A: How will Islamic banks use the excess liquidity they have, given that asset-based Islamic financial management is the approach they take?
YH: Overly much liquidity exists. Treasury bills and investment bonds have been the investments made by the banks thus far. The Government of Pakistan (GoP) has increased the number of Islamic Sukuks available. However, the problem lies in the lack of Sukuks. In a typical bank like ours, between 60 and 65 percent of the deposit base is liquid. Despite the fact that the government has now imposed a tax on banks with deposits that are less than a certain amount, some banks do not lend much and instead prefer to invest in the Pakistan Investment Bonds (PIBs) and treasury bills (T-Bills) of the government. A: This is a strategy to get them to lend to businesses rather than the GoP. Is the pool of assets capable of absorbing the liquidity Islamic banks currently dispose of?
YH: At the moment, the pool of assets is insufficient. You will notice that there is always a portion of Islamic financing in every large deal as the banking industry moves toward Islamic banking. This is because lenders are now interested in borrowing from Islamic banks because Islamic banks took the initiative to spread Islamic practices.
A: T-Bills and PIBs, at least in their current form, will not exist in an Islamic system; consequently, will the GOP have sufficient assets to support their Sukuks?
YH: Finding assets without debt has been a challenge for the government. However, as they investigate various structures and methodologies, it is anticipated that the availability of GoP assets will gradually but surely increase.
A: What new structures are these?
YH: Two goals are being pursued by the government. First, encourage banks to lend to the industry so that more capital is available and the industry can grow. In addition, banks take some risk when they lend to the industry. Second, the Government of Pakistan is developing a variety of short-, medium-, and long-term Sukuks for government loans. The Government of Pakistan (GoP) has already published an Asset Light Sukuk Framework that provides guidelines for raising Sharia-compliant funding through a portfolio of underlying structures designed to create a larger portfolio of sovereign Sukuks.
A: How challenging was the change?
YH: The conversion consisted of two stages. It was crucial to instill in our employees the belief that they are doing the right thing for themselves and the community as a whole. They must comprehend the idea and have faith in it. It must be based on faith. Prior to entering the market, the first two to three years were primarily spent with an internal focus on providing the appropriate products and improving our system’s capacity to accommodate these products. In terms of the milestones we set, the systems we needed for implementation, and the kind of people we wanted, planning was very important. The most pressing issue here is changing one’s mindset. You will be seen as shallow and playing with other people’s beliefs by the market if there is no belief at the beginning. The next step is to impart this belief to your clients, which becomes much simpler when you truly believe in the system. We started developing a new vision, mission, and values (set of principles) as part of our conversion in 2022. The FBL team’s faith in Allah, confidence in their abilities, and perseverance in their efforts all played a role in the formulation of the values. They are predicated on the idea that Allah has provided the FBL family with an opportunity for self-cleansing; faith and trust in Allah’s direction, honesty (sadiq and ameen), cooperation, creativity, and concern for both FBL’s staff and customers
A: How does the Noor Card differ from standard credit cards?
YH: One of our innovative Islamic products is the Noor Card. It is funded through Musawamah and is based on the Tawarruq principle. The act of purchasing a good with a deferred payment through Musawamah is called “tawarruq.”
A: Is FBL now entirely Muslim?
YH: Yes, and our massive transformation has been officially recognized as the world’s largest transformation by scale by the Islamic International Rating Agency (IIRA). Today, FBL is well-positioned to provide authentic Islamic goods. When it comes to Islamic banks, our product selection is the most extensive, covering everything from consumer finance to corporate finance to SME financing to everything else we offer under the brand. In fact, we have offered our services to the Government of Pakistan in order to serve as a model for the transformation of Pakistan’s banking system. In the most recent decision that the Federal Shariat Court made regarding Riba, we were also mentioned as a model for other people. Our management and employees, multiple stakeholders, including our sponsors, Board, State Bank of Pakistan, the Shariah Board, and Sharia advisors, particularly Darul Uloom, as well as, most importantly, our customers, have supported this historic conversion.
