Global Financial Crisis & It’s Impact on Islamic Banking in Pakistan

By: Munawwar Ali Kartio
Under Supervision of
Prof Dr. Iqbal Ahmed Panhawar

Journal of Islamic Banking & Finance April-June 2009

Abstract

This research investigates the Global financial crisis and its impact on the Islamic Banking sector in Pakistan. The data was collected from annual reports of banks and SBP quarterly bulletin. The results showed that from last six months, growth of banking sector is pretty slow due to global financial crisis as compared to previous years’ like 2006-07, in 2006-07 Islamic banking sector in Pakistan witnessed inclining growth and also in 2008 increased its share in both assets and deposits from 4 to 4.9 & 3.8 to 4.8 per cent respectively. No of branches increased from 289 to 514 which is very remarkable growth.

Most of the Islamic banking branches have stopped hiring new graduates while some privatized banks like HBL and MCB have fired some notable no of employees. Investigation revealed that Global financial crisis has hit banking sector in Pakistan due to inappropriate policy made by the State Bank. Interest rates were raised to cope up with Global financial crisis but put poor impact on the growth of banking sector. Collapse of some global giants financial Institutions notably Lehman Brothers created the liquidity problem for banks in Pakistan , the situation was further aggravated by the intensive rumor mongering, which caused heavy withdrawal of deposit from the banking system and few privatized banks were very much affected. Shocks were absorbed by banks due to their sound long term policies and effective measures taken by SBP to avoid financial crisis.

Keeping in view the intensity of financial crisis it is rightly presumed that the most of the banks will hardly survive in this pace of economic recession if it continues for one more year. Paper highlights the impact of financial crisis on banking industry of Pakistan in general and Islamic Banking in particular.

The analysis concludes that the financial performance and efficiency of banks has been negatively affected in last quarter of 2008 due to panic withdrawal of deposits from banking system, particularly from privatized banks. Hence to analyze the economic recession and its relation with efficiency of private banking, it is urgent need of the hour to redefine, parameterize and analyze the performance of various private banks either conventional or Islamic in Pakistan in general and the efficiency in particular.