Govt in­cen­tives boost Pak­istan Is­lamic banks

Kuwait Times - - BUSINESS -

Pak­istan’s Is­lamic banks are in­tro­duc­ing new prod­ucts and ad­just­ing poli­cies to take ad­van­tage of govern­ment in­cen­tives de­signed to boost growth in the in­dus­try.

Sharia-com­pli­ant banks in the coun­try, the world’s sec­ond most pop­u­lous Mus­lim na­tion, held 11.4 per­cent of to­tal bank­ing as­sets in June, barely changed from a year ago. That is well be­low lev­els of around 25 per­cent seen in Gulf Arab states. To help change this, the govern­ment in­tro­duced a 2 per­cent tax re­bate for sharia-com­pli­ant man­u­fac­tur­ing firms in July to en­cour­age them to elim­i­nate in­ter­est-bear­ing debt from their bal­ance sheets. The cen­tral bank has ex­empted Is­lamic banks from us­ing in­ter­est-based bench­marks for some fi­nanc­ing prod­ucts.

Ab­dul­lah Ghaf­far, head of in­vest­ment bank­ing at Al Baraka Bank Pak­istan, a unit of Bahrain’s Al Baraka Bank­ing Group , said he de­tected signs of an in­crease in de­mand for both short- and long-term Is­lamic fi­nanc­ing. The bank has launched sharia-com­pli­ant prod­ucts to fi­nance pur­chases of trac­tors by cus­tomers and struc­tured short-term sukuk for a white-la­bel elec­tronic equip­ment man­u­fac­turer in La­hore.

“The cus­tomer opted for sukuk - slightly more ex­pen­sive to float - over quick-to-mar­ket com­mer­cial pa­per,” Ghaf­far said. Last month, Is­lamic lender Meezan Bank ap­proved a new fi­nanc­ing struc­ture for use in the air­line in­dus­try; it uses plane tick­ets as an as­set to back Is­lamic deals in cases where fixed as­sets are not avail­able.

Is­lamic banks are also ad­just­ing in­ter­nal poli­cies which limit fi­nanc­ing to man­u­fac­tur­ing com­pa­nies and the use of long-term ma­tu­ri­ties, said Syed Abubakr, sharia board mem­ber of Emaan Is­lamic Bank­ing, a unit of Silk Bank.

There is some de­mand for new prod­ucts from con­ven­tional banks plan­ning to con­vert their op­er­a­tions into ful­lyfledged Is­lamic banks, in­clud­ing Faysal Bank and Sum­mit Bank , Abubakr added.

These banks have large port­fo­lios of con­ven­tional credit card and per­sonal loan fa­cil­i­ties, but sharia-com­pli­ant equiv­a­lents are needed to re­tain cus­tomers, he said.

Such moves could help Is­lamic banks con­tinue to grow at dou­ble-digit rates; the sec­tor’s as­sets grew 16.8 per­cent year-on-year in June, a slow­down from 37.3 per­cent growth recorded in the year to June 2015. Pak­istan’s govern­ment be­lieves it can pull more peo­ple into the for­mal bank­ing sec­tor-es­pe­cially in ru­ral ar­eas — by ex­pand­ing the Is­lamic fi­nance sec­tor, and this could boost eco­nomic growth.


How­ever, cap­i­tal­i­sa­tion lev­els could emerge as a con­straint on growth, said Ghaf­far. In June, Is­lamic banks had a com­bined, av­er­age risk-weighted cap­i­tal ra­tio of 13.4 per­cent of as­sets, down 1.2 per­cent­age point from a year ago, cen­tral bank data shows, com­pared to a bank­ing in­dus­try av­er­age of 16.1 per­cent. This has prompted some Is­lamic banks to issue cap­i­tal-boost­ing sukuk; in Septem­ber Meezan raised 7 bil­lion ru­pees ($66.9 mil­lion) via a pri­vate place­ment of sub­or­di­nated sukuk.

Oth­ers have opted for consolidation: Al Baraka Bank Pak­istan com­pleted a merger with Is­lamic lender Burj Bank last month. The cen­tral bank helped ear­lier this month by low­er­ing Is­lamic banks’ statu­tory liq­uid­ity re­quire­ment to 14 per­cent of to­tal de­mand li­a­bil­i­ties from 19 per­cent, reducing the amount of liq­uid as­sets which banks must main­tain as re­serves.

The ra­tio com­pares to 15 per­cent for con­ven­tional banks. Is­lamic banks face an acute short­age of sharia-com­pli­ant liq­uid as­sets, ag­gra­vated by lim­ited sup­ply of lo­cal cur­rency sov­er­eign sukuk. — Reuters

KARACHI: In this pho­to­graph taken on Novem­ber 16, 2016, Pak­istani stock­bro­kers mon­i­tor in­dex board dur­ing a trad­ing ses­sion at the Pak­istan Stock Ex­change (PSE) in Karachi. — AFP

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