Aware that they are competing with conventional institutions of enormous size which also enjoy better outreach, SHABBIR H. KAZMI discovers that Islamic financial institutions (IFIs) operating in Pakistan are relying heavily on state of the art technology to build upon their footprint.

Conventional commercial banks have been operating in Pakistan over nearly two centuries, with Standard Chartered Bank being one of the pioneers. A new chapter in commercial banking started in 1974 when banks were nationalized and the Big Five were created — Habib Bank, United Bank, Allied Bank of Pakistan, Muslim Commercial Bank and National Bank of Pakistan.

In the early nineties there was paradigm shift in the government’s policies, with the basis being deregulation, liberalization and privatization. A dozen licenses were issued to the private sector for establishing commercial banks, with four of the Big Five being privatized. Since National Bank performs some of the functions of the treasury, it could not be privatized. Nevertheless, while the government is the majority shareholder, the bank has been listed on the local stock exchanges.

Since the newly listed commercial banks had to compete with giants enjoying enormous outreach, they opted for developing an elaborate technology base for expanding their customer base. Though the Big Five had mainframe computers for decades, their use remained mostly confined to management information system reports. The introduction of personal computers in the eighties provided an opportunity to computerize key branches and now most of the branches operate online.

The commencement of operations by Meezan Bank, the first full-service Islamic bank, in 2000 wrote a new chapter in Pakistan’s banking industry. Now six full-fledged Islamic banks are operating in the country and almost all the conventional banks have established designated Islamic banking branches, with the total nearing 600. Since the Islamic banks and branches are competing with the giants, they have little option but to rely heavily on technology.

Most of the common services, like ATMs, online banking, internet banking and debit cards, cannot be used unless supported by data warehouses and technology highways using firewalls to provide maximum security for account holders. Now all the ATMs, whether those of conventional or Islamic banks, are interconnected. The growing use of ATMs and e-banking has helped in curtailing physical traffic to branches, allowing the banks to operate with fewer staff but still offering superior quality services.Modarabas (closed-end mutual funds) operating as listed companies are based on a unique business model. One of their biggest contributions is that they lease computer hardware under Ijarah, which make up a significant percentage of the assets underwritten by them. They have been doing this since their inception in the early eighties.

These entities have also emerged as one of the major users of computer hardware and software. First Habib Modaraba (FHM) CEO Muhammad Shaoib Ibrahim said: “We are not only underwriting the leases of office equipment but also operating in a totally computerized environment. Starting from preparation of debit/credit vouchers to compilation of periodical accounts, we have a fully automated environment.

“This has allowed us to contain administrative expenses, receive rentals in time and deter accounts from turning delinquent. For last several years FHM has been winning awards for its performance and also paying handsome dividend to its certificate holders.

The advent of asset management companies dates to 1962 when the first open-end mutual fund was established by National Investment Trust. Over the years the private sector also established closed-end as well as open-end funds. At present the quantum of assets under management is nearly PKR225 billion (US$2.65 billion). Of this, Islamic mutual funds have acquired about 7% of the market share within a brief period.

The first Islamic mutual fund launched in Pakistan was UTP-Islamic Fund floated by ABAMCO (now JS Investments). Al Meezan Investment Management, a subsidiary of Meezan Bank, has launched a series of Islamic mutual funds in various categories. Al Meezan not only enjoys the biggest market share of the Islamic mutual funds in terms of asset under management but also because of the largest number of unit holders.

Anas Rehan, Al Meezan’s assistant vice president for marketing, said: “Over the years, staying at the top has not been an easy task. It is true that our funds are fully Shariah compliant but ensuring the availability throughout the country has been made possible through an extensive and intensive delivery channel based on state-of-the-art technology.

“Al Meezan is not only prompt in issuing/redeeming the units but also in paying good return to investors and providing highest security of the investment. In 2008, after the imposition of a floor at the stock markets, many mutual funds faced redemption pressure but they were able to convince the investors not to get jittery and after the removal of the floor, they enjoyed a win-win situation.”

In the Takaful sector, private sector family Takaful operators face competition from a public sector player of enormous size, the State Life Insurance Corporation, which enjoys a long history and an extensive outreach. To cope with the competition, they are on a two-pronged strategy — their own sales force and bancaTakaful.

One of the reasons for their success has been development of state-of-the-art technology. According to Syed Adnan Hasan, marketing manager at Pak-Qatar Family Takaful, “Enjoying the early bird advantage and association with FUW of Germany, we have succeeded in creating an information technology highway as the backbone of our enterprise.

“Though the cost of hardware and software was enormous, the one-time huge investment has given us an edge over our competitors. Not only that, we have also succeeded in reaching a large number of clients as well as in minimizing the cost per transaction.”

As of the 30th June 2009, the total number of electronic cards in circulation was 8.9 million, compared to 7.5 million the previous June, for a growth rate of 20%. The total number of credit cards eased from 1.8 million to 1.7 million, a 6% decrease. Islamic credit cards accounted for 2,468. The total number of debit cards increased from 4.9 million to 6.4 million for a growth rate of 30%. In 2009, there were 881,000 ATM cards in circulation, up 12% over 2008.

The application of technology in banking in Pakistan is growing at a faster pace and creating new job opportunities. However, it may take some time to develop expertise. Some of the financial institutions prefer to place contracts with foreign software houses whose applications are already in the market and have been tried and tested. Pakistan may be relatively new in the field of e-banking but it doesn’t lack talent. There is growing consensus that the country has the potential to become a strong player in the global markets in this respect.