DESPITE the deceleration of deposit mobilisation, bank deposits have jumped to a record high of Rs25.6tr in FY23. The Deposit Protection Corporation, a State Bank subsidiary, has attributed the growth in deposits to an all-time high interest rate and expansion in the bank branch network. Conventional banks are required to pay 1.5pc less than the State Bank’s policy rate as returns on savings deposits, thanks to the minimum deposit rate condition. The current MDR of 20.5pc is far below the inflation rate but still significantly higher than what any saver could hope to earn from other investments in the present economic conditions. As land prices decline and real estate transactions fall drastically, along with a reduction in volatility in the foreign exchange market following a crackdown on the illegal dollar trade, most savers are tempted to pull their investments from these assets and put their cash in banks to earn a guaranteed high profit.

While the MDR has benefited the deposits immensely, it has, in a way, also resulted in an uneven playing field between conventional and Islamic banks as the latter are not required to share a minimum rate of return with customers. At present, Islamic banks are paying 7pc to 9.5pc less returns to savers as compared to commercial banks. No wonder they have reported hefty profits in recent months. The situation was not lost on the caretaker finance minister, Dr Shamshad Akhtar, who recently stated that the Sharia-compliant banks are shortchanging their customers by paying insufficient returns on deposits. The recent sharp rise in interest rates has widened the spread, which used to range between 300 and 500 basis points previously, she pointed out, calling upon the State Bank to review the issue of minimum deposit rate and withdraw the exemption to Islamic banks. The DPC report says that the deceleration of deposit mobilisation to 12pc during the last financial year from 15pc may be attributed to macroeconomic uncertainty, including inflationary pressures, and a slowdown in the inflow of foreign remittances by overseas Pakistanis. That is correct. But the Islamic banking industry can certainly mobilise more deposits provided they start to pay their customers the returns being offered by commercial banks. It is time that the Sharia-compliant banks stopped exploiting their customers and started competing with their conventional counterparts to grow their market share.

Published in Dawn, December 4th, 2023