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Banking sector: deposits, advances post double-digit growth YoY in June

14 Jul, 2022


Pakistan's banking sector deposits posted a growth of 15.2% on a year-on-year (YoY) basis in June 2022, shared the State Bank of Pakistan (SBP) on Thursday.

Deposits increased to Rs22.8 trillion by June 2022, compared to Rs19.8 trillion in June 2021. Moreover, on a monthly basis, deposits rose by 7.8%, compared to Rs21.15 trillion in May 2022.

According to brokerage house Arif Habib Limited (AHL), advances also grew by a healthy 21% YoY to Rs10.89 trillion during the last month of FY22, as compared to Rs8.99 trillion in the same period last year. On a monthly basis, advances remained stagnant posting a marginal growth of only 0.6% compared to Rs10.82 trillion posted in May 2022.

Meanwhile, investments jumped by 26.8% YoY to Rs17.42 trillion in June 2022, in comparison to Rs13.74 trillion recorded in the same month last year. On a monthly basis, investments posted a double-digit growth of 12%, as compared to Rs15.56 trillion recorded in May 2022.

Advances-to-total deposits (ADR) ratio stood at 47.7% in June 2022, up by 228 basis points (bps) YoY, as compared to 45.4% ADR in same month last year. However, on a monthly basis, ADR posted a drop of 344bps, as compared to 51.2% registered in May 2022.

Moreover, investment-to-deposit ratio (IDR) clocked in at 76.4% in June 2022, up by 695bps YoY and 282bps MoM.

C/A posts over $17bn deficit in FY22

  • Huge deficit driven by massive increase in goods import bill
Recorder Report
28 Jul, 2022

The country’s current account posted over $17 billion deficit during the last fiscal year (FY22) due to massive increase in goods import bill. The State Bank of Pakistan (SBP) on Wednesday reported that the current account deficit rose by 531% during FY22.

Overall, the current account deficit was $17.4 billion in FY22 compared to $2.8 billion in FY21, depicting an increase of $14.6 billion.

The CAD in FY22 is four-year high as previously $18.1 billion deficit was recorded in FY18.

On a month-on-month basis, the current account recorded a deficit of $2.275 billion for the month of June 2022 compared to deficit of $1.637 billion during June 2021.

On a year-on-year basis, the primary reason behind the deficit was 17% year-on-year increase in total imports to $8.4 billion in June 2022.

According to SBP, a surge in oil imports saw current account deficit rise to $2.3 billion in June despite higher exports and remittances.

So far in July, oil imports were much lower and deficit was expected to resume its moderating trajectory, the SBP added.

SBP in a tweet further said that 3.3 million metric tons of oil was imported in June, 33% higher than in May. Together with higher global prices, this more than doubled the oil import bill from $1.4 billion to $2.9 billion. By contrast, non-oil imports ticked down.

An analyst at Arif Habib Limited said the primary reason behind the deficit was 17% increase in total imports to $8.4 billion in June 2022. However, total exports and remittances also increased by 23% and 2% on year-on-year during June 2022, respectively.

Copyright Business Recorder, 2022
Following the announcements of Moody’s Investors Service and Fitch Ratings, S&P Global Ratings on Thursday revised the outlook on Pakistan's long-term ratings to negative from stable. It also affirmed its 'B-' long-term and 'B' short-term sovereign credit ratings on Pakistan, as well as 'B-' long-term issue rating on the country's senior unsecured notes and Sukuk trust certificates.

“The negative outlook reflects growing risks to Pakistan's external liquidity position over the next 12 months amid an increasingly difficult economic landscape,” said the S&P in a statement.

It added that it revised the outlook to negative to reflect Pakistan's weakening external metrics against a backdrop of higher commodity prices, tighter global financial conditions, and a weakening rupee.

“The Pakistan government has considerable external indebtedness and liquidity needs, and an elevated general government fiscal deficit and debt stock.

Outlook could be revised to stable if Pakistan's external position stabilises and improves from current levels. Evidence of improvement could include a sustained rise in usable foreign exchange reserves: S&P
“Although the impact of these more difficult macroeconomic conditions has been partially mitigated by various reform initiatives undertaken by the government over the past few years, the risk of continued deterioration in key metrics, including external liquidity, is rising,” it said.

The agency said that it could lower its ratings if Pakistan's external indicators continue to deteriorate to the extent that the government's commitments appear to be unsustainable in the long term.
According to the NA, the SBP governor draws Rs2.5 million salary with 10% increment per annum, besides the allocation of a fully furnished house, two vehicles with 1,200 liters of petrol and a driver and four domestic servants.

Besides, the house was informed, the bank also paid for electricity, gas, water bills and generator fuel, landline, mobile phone and internet. The central bank also paid 75% of children's school fees, the reply added.

SBP initiates strict monitoring of forex operations

August 4, 2022

In order to control the volatility in the exchange rate, the State Bank of Pakistan (SBP) has initiated strict monitoring of the foreign exchange operations of exchange companies and banks and suspended the operations of four branches of two exchange companies for violation of SBP regulations.

In view of recent volatility in the exchange rate and the difference between the interbank rate and the rate offered by Exchange Companies (ECs) and banks to their customers, the State Bank has increased the monitoring of the foreign exchange operations of ECs and banks.

In this respect, from Monday August 1, 2022, the SBP has started inspections of a number of exchange companies and banks to inspect the currency operation.

During these surprise visits, on Tuesday, SBP suspended the operations of four branches of two ECs namely Galaxy Exchange Co and Al-Hameed International Money Exchange Co, for violation of SBP regulations.

According to SBP, it has also imposed monetary penalties on some ECs in the recent past for violating the rules and regulation issued by SBP for currency operation. Besides, due to violations of SBP instructions, arrangements of 13 franchises have been terminated by six different ECs in the recent past.

The SBP has also started conducting mystery shopping exercises throughout Pakistan to investigate the apprehensions that some ECs are not selling foreign currency to their customers. In this regard, a meeting of the Exchange Companies Association of Pakistan (ECAP) has also been called on August 4, 2022 at the SBP.

If needed, the SBP said, it would augment its enforcement actions on the ECs and the banks in light of findings of the on-going inspections and mystery shopping.

The actions taken by the SBP along with other good news, help to improve the exchange rate in the interbank and open currency market as on Wednesday, the Pak rupee recorded the highest gain in absolute terms against US dollar.

Analysts said that lower than expected imports for July and the IMF Resident Representative’s statement that Pakistan has met all prior conditions helped Pak rupee to gain Rs9.6 or 4 percent to Rs 229 from Tuesday’s closing of Rs 238 in the interbank market.

Pak rupee had fallen by Rs52 or 23 percent in 2022 to date and Rs19 or 8 percent during the last two weeks on fears of delay in the IMF program, falling FX reserves and increased political noise. However, not it has started the recovery and is likely to gain further in the coming days.

The SBP and the Finance Ministry recently in a statement said that the rupee has overshot temporarily but it is expected to appreciate in line with fundamentals over the next few months.

The SBP expects that with controlled import bill and lower trade deficit, the rupee is expected to gradually strengthen.

Pak rupee depreciation has been overdone and driven by sentiment. The rupee has overshot due to concerns about domestic politics and the IMF program. This uncertainty is being resolved, such that the sentiment-driven part of the rupee depreciation will also unwind over the coming period.

Copyright Business Recorder, 2022
The country’s total debt and liabilities increased by Rs11.85 trillion in FY22, according to data released by the State Bank of Pakistan (SBP) on Monday.

The data, related to the domestic and external debts and liabilities, shows that Pakistan’s total debt and liabilities reached Rs59.696tr by June 30, compared to Rs47.844tr in FY21.

According to the SBP, the year-on-year growth in debt and liabilities was 24.8 per cent in FY22, compared to a growth of just 7.3pc in FY21.

The data also reveals that the total debt and liabilities as a percentage of GDP in FY22 was 89.2pc compared to 85.7pc in FY21.

Similarly, the total debt and liability servicing rose to Rs5.548 trillion in FY22 compared to Rs4.567tr in FY21. It increased by 21.6pc in FY22, compared to 2.5pc in FY21.

However, total debt and liability servicing remained unchanged as a percentage of GDP in the last two fiscal years, at 8.2pc in FY21 and FY22.

The central government’s gross domestic debt (without external debt) was Rs31.036tr by June 30, FY22, against Rs26.265tr by the end of June FY21.

Pakistan’s gross external debt reached $130.192 billion in FY22 compared to $122.292bn in FY21; it increased by $7.9bn
In line with market expectations, the central bank on Monday left its key policy rate unchanged at 15% for the next seven weeks with the outlook the ongoing ease in global commodity prices should control inflation and moderate the current account deficit in the country.

Curtailing high inflation and the widening current account deficit have remained the two primary objectives of the State Bank of Pakistan’s (SBP) monetary policy statement for the past several months.

The SBP, in its monetary policy statement, said “to cool the overheating economy (high inflation) and contain the current account deficit, the policy rate has been raised by a cumulative 800 basis points since last September (in the past 11 months), some temporary administrative steps have recently been taken to curtail imports, and strong fiscal consolidation is planned for FY23.”

These actions are expected to work their way through the system over the coming months. With recent inflation developments in line with expectations, domestic demand beginning to moderate, and external position showing some improvement, “the MPC (Monetary Policy Committee) felt that it was prudent to take a pause (in rate hike cycle) at this stage.”

Earlier, the economy had overheated with the second highest current account deficit at $17.4 billion in the previous fiscal year, and inflation at a 14-year high at around 25% in July 2022.

Oil prices have continued to decline in international markets and are hovering below $100 per barrel these days compared to over $130 around March 2022 in the backdrop of the Russia-Ukraine conflict that erupted in February 2022.

The share of energy stood at around 25% in the total import bill of $80 billion in FY22. It, however, fell significantly amid a drop in global prices and corrective measures taken by the government.

Secondly, the spike in inflation had come mainly due to the withdrawal of subsidies on energy products to win back the IMF loan programme. Inflation may further rise in the coming months. “Looking ahead, the MPC intends to remain data dependent, paying close attention to month-on-month inflation, inflation expectations, developments on the fiscal and external fronts, as well as global commodity prices and interest rate decisions by major central banks,” the SBP said.

In contrast to the trend since last summer, more emerging market central banks have started to hold policy rates in their recent meetings. “This suggests that globally, risks may be shifting slightly from inflation toward growth, although this remains highly uncertain at this stage,” it said.

On balance, the MPC noted that some greater slowdown in global growth would not be as harmful to Pakistan as for most other emerging economies, given the relatively small share of exports and foreign private inflows in the economy. “As a result, both inflation and the current account deficit should fall as global commodity prices ease, while growth would not be as badly affected.”

MPC noted the trade balance fell sharply in July and the rupee reversed course against the US dollar during August, appreciating by around 10% on improved fundamentals and sentiment. Moreover, the board meeting on the ongoing review under the IMF programme will take place on August 29 and is expected to release a further tranche of $1.2 billion, as well as catalyse financing from multilateral and bilateral lenders. “In addition, Pakistan has also successfully secured an additional $4 billion from friendly countries over and above its external financing needs in FY23. As a result, FX reserves will be further augmented through the course of the year, helping to reduce external vulnerability,” it said.

Senate approves bill to establish Export Import Bank of Pakistan

  • Institution will promote international trade
BR Web Desk


In a bid to promote international trade, the Senate session approved on Friday a bill to establish the Export Import (EXIM) Bank of Pakistan.

“The government of Pakistan took the decision with a mandate to provide innovative products to support the growth of exports and export-led foreign direct investment by mitigating related risks,” said a statement by the EXIM Bank of Pakistan.

“EXIM Bank of Pakistan will promote, expand and diversify the export base of the country.”

The motion to pass the bill titled 'the Export Import Bank of Pakistan Bill 2022' was moved by Ayesha Ghous, Minister of State for Finance and Revenue. The bill was earlier passed by the National Assembly on June 9, 2022. The enactment of EXIM bank will help improve Pakistan’s balance of payment position which is one of the pressing issues for the national economy, added the statement.

"There are over 60 agencies in the world, providing similar products to their industry, and this is the first time, the government of Pakistan is introducing such products in the country to provide an enabling environment and level-playing field to exporters."

The bank would achieve its objectives by providing export credit insurance facilities and long-term financing facilities for setting up export-oriented and import-substitution projects.

It will also provide guarantees and other supporting services.
EXIM Bank is headquartered in Islamabad and plans to branch out in all provincial headquarters as well as export hubs of the country, it says.

Its business model is based on partnerships with commercial banks/ international banks and multilateral development agencies as well as Export Credit Agencies around the world. Renowned multilateral agencies like the Asian Development Bank and the Islamic Development Bank continue to provide technical support to the EXIM Bank, the statement added.
Pakistan’s foreign exchange reserves dropped to the lowest level in three years as assistance from multilateral lenders and friendly countries are yet to flow.

The stockpile fell by $303 million to $7.59 billion, according to central bank data. The reading is the lowest since July 2019 and covers less than six weeks of imports.

“This decrease was entirely attributed to external debt repayments, which included repayment of a commercial loan and interest payment on Eurobonds,” said the central bank in a statement.

The South Asian nation sought a bailout to avert a default and rebuild reserves but even before the money trickled in, it was hit by devastating floods that submerged nearly a third of the country, exacerbating the already weak finances. Foreign reserves have dwindled to multi-year lows across Asia after a surging dollar spurred asset revaluations.

Pakistan secured a $1.1 billion loan from the International Monetary Fund in late August, while funds from the World Bank and Asian Development Bank are still awaited. Nearly $5 billion worth of investment commitments from Arab countries will also materialize mostly next year.

State Bank raises policy rate by 100bps to 16pc to curb inflation

November 25, 2022

The State Bank of Pakistan announced on Friday that it had increased the interest rate by 100 basis points (bps) to 16 per cent to curb inflation.

The announcement came after a meeting of the bank’s Monetary Policy Committee (MPC).

The central bank said that the decision was aimed at ensuring that “elevated inflation does not become entrenched and that risks to financial stability are contained, thus paving the way for higher growth on a more sustainable basis”.

The SBP identified higher food and core inflation as “key contributors” to elevated inflation.

The bank maintained growth projections for the financial year 2023 and the current account deficit (CAD) the same as the last policy statement at 2pc and 3pc of GDP, respectively.

According to the SBP press release, the decision to raise the policy rate reflected the MPC’s view that “inflationary pressures have proven to be stronger and more persistent than expected”.

The MPC noted that amid the ongoing economic slowdown, inflation was “increasingly being driven” by persistent global and domestic supply shocks that were raising costs.

“In turn, these shocks are spilling over into broader prices and wages, which could de-anchor inflation expectations and undermine medium-term growth. As a result, the rise in cost-push inflation cannot be overlooked and necessitates a monetary policy response.

“The MPC noted that the short-term costs of bringing inflation down are lower than the long-term costs of allowing it to become entrenched. At the same time, curbing food inflation through administrative measures to resolve supply-chain bottlenecks and any necessary imports remains a high priority,” the press release reads.

The press release added that since its last meeting, the MPC had noted three key domestic developments.

Firstly, it said that headline inflation increased “sharply” in October, as the previous month’s administrative cut to electricity prices was unwound, food prices also “accelerated significantly” due to crop damage from the recent floods and core inflation rose further.

Secondly, the MPC pointed out that a sharp decline in imports led to a “significant moderation” in the current account deficit in both September and October.

However, it added that external account challenges persist despite this moderation and fresh funding from the Asian Development Bank.

Thirdly, it said that while growth and CAD projections were reaffirmed at 2pc and 3pc, average inflation for FY23 was projected at 21-23pc due to higher food prices and core inflation.

Regarding the overall inflation outlook, the MPC said that while inflation was likely to be more persistent than previously anticipated, it was “still expected to fall toward the upper range of the 5-7pc medium-term target by the end of FY24” due to support from “prudent macroeconomic policies, orderly rupee movement, normalising global commodity prices and beneficial base effects”.

“The MPC will continue to carefully monitor developments affecting medium-term prospects for inflation, financial stability, and growth,” the press release added.

Unexpected decision​

The central bank’s decision was unexpected as a number of analysts and economists said it was expected to keep the main policy rate unchanged at 15pc in its monetary policy announcement.

All seven experts who spoke to Dawn.com said they expected the central bank to maintain rates, with many pointing out that a slowdown in economic activity had begun and inflation, which has been at a decades-high level in the past few months, would be trending down.

In October, headline inflation clocked in at 26.6pc from a year earlier, reversing the trend witnessed in September when the consumer price index rose 23.2pc, slowing from a four-decade high of 27.3pc in August.

Before today, the central bank raised interest rates by 525 basis points this year, with the last hike of 125 bps coming in July. Since then, the SBP maintained rates in two monetary policy meetings despite no arrest in inflation.

“Inflation is expected to come down going forward as international commodity prices are declining. Current account deficit has been controlled to a large extent,” Fahad Rauf of Ismail Iqbal Securities had said.

“Demand in the economy has eased as evident from high-frequency indicators such as auto sales, cement sales, petroleum sales etc. Thus, we think a further hike at this point is not required,” he added.

More than one analyst had said a fall in international oil prices and an improved current account deficit could also shape the central bank’s decision to halt rates at current levels.

Even though Finance Minister Ishaq Dar, who took over the reins of the economy in September, has indicated that he wants to bring down interest rates, none of the polled experts called for a rate cut at this stage.

“The finance minister has been vocal about his desire for lower rates. Of course, the State Bank is now autonomous and would not be able to follow direct directions from the ministry of finance. But I think that given oil prices have declined, and US inflation has also come down, the government might feel it has room to keep interest rates at the current level,” said Ali Farid Khwaja, Chairman of KTrade Securities.

“The economy is reflecting some results of the increase in rates witnessed so far. Activity has been slowing down. However, we are still in the negative real interest rates zone. So the SBP may opt to continue its wait-and-watch approach,” said Amreen Soorani of JS Global.

Banking sector: deposits, advances post growth YoY in December


Pakistan's banking sector deposits posted a growth of 7.1% on a year-on-year (YoY) basis in December 2022, revealed data released by the State Bank of Pakistan (SBP).

Deposits increased to Rs22.467 trillion by December 2022, compared to Rs20.972 trillion in December 2021. However, on a monthly basis, deposits declined by 1.2%, compared to Rs22.732 trillion in November 2022.

According to brokerage house Arif Habib Limited (AHL), advances also grew by a healthy 17.4% YoY to Rs11.913 trillion during the last month of 2022, as compared to Rs10.149 trillion in the same period last year. On a monthly basis, advances posted a growth of 7.4% compared to Rs11.092 trillion posted in November 2022.

Meanwhile, investments jumped by 26.7% YoY to Rs17.902 trillion in December 2022, compared to Rs14.124 trillion recorded in the same month last year. However, on a monthly basis, investments registered a decline of 3.1%, as compared to Rs18.483 trillion recorded in November 2022.

Advances-to-total deposits (ADR) ratio stood at 53% in December 2022, up by 463 basis points (bps) YoY, as compared to 48.4% ADR in the same month last year. On a monthly basis, ADR posted an increase of 423bps, as compared to 48.8% registered in November 2022.

Moreover, investment-to-deposit ratio (IDR) clocked in at 79.7% in December 2022, up by 1,233bps YoY, as compared to 67.3% recorded in December 2021. On an MoM basis, IDR posted a fall of 163bps, after clocking in at 81.3% in November 2022.

SBP increases policy rate to 17pc to ‘anchor inflation’

January 23, 2023

<p>State Bank of Pakistan Governor Jameel Ahmad addresses a press conference on Wednesday. — DawnNewsTV</p>

State Bank of Pakistan Governor Jameel Ahmad addresses a press conference on Wednesday.

State Bank of Pakistan (SBP) Governor Jameel Ahmad announced on Monday that the Monetary Policy Committee (MPC) had decided to increase the interest rate by one per cent to 17pc.

He made the announcement in a press conference following the MPC’s meeting. The increase was largely in line with market expectations.

Separately, a press release issued by the central bank stated, “The committee noted that inflationary pressures are persisting and continue to be broad-based. If these remain unchecked, they could feed into higher inflation expectations over a longer-than-anticipated period. The MPC stressed that it is critical to anchor inflation expectations and achieve the objective of price stability to support sustainable growth in the future.”

The MPC noted three major economic developments since its last meeting in November — inflation continued to remain elevated, with core inflation showing an upward trend over the last 10 months; near-term challenges for the external sector have increased despite the policy-induced contraction in the current account deficit and there has been a continuous drawdown in foreign exchange reserves; and global economic and financial conditions broadly remain uncertain in the near-to-short term, leading to mixed implications for Pakistan’s economy.

Will Pakistan’s banking system be able to convert to a completely Islamic system by 2027?

Will Pakistan’s banking system be able to effect its conversion to a completely Islamic system within the government's stated timeline?


The former governor of the State Bank of Pakistan (SBP), Dr Ishrat Husain, sounded uncharacteristically upset one morning in November 2021. His mood was in contrast with the upbeat feel of the campus at the Institute of Business Management (IBA), where seasoned bankers in sharp suits and flowing beards had gathered to take part in a conference on Islamic banking, a rather mundane affair the promoters of Islamic banking indulge in every few months to pat themselves on the back for doing banking the halal way.

In his video link address, Dr Husain told the self-satisfied Islamic bankers that they had become “complacent” over the last two decades. The Sharia-compliant banking industry had fallen “short of the expectations” he had when as governor, he issued the country’s first Islamic banking licence at the turn of the century. Something had gone wrong with Islamic banking, despite all the hype its supporters had built up, partly based on cherry-picked data. Exactly a year later, in November 2022, the Government of Pakistan announced it was targeting a complete transition from conventional to Islamic banking by the end of 2027.

Given the timelines involved, let’s take a deep dive and try to understand what Islamic banking is; how it differs from its conventional counterparts, the level of maturity it has achieved over two decades, and why the increased push towards its adoption.

All For Islamic Banking

In the early 90s, the Federal Shariat Court ruled that interest-based banking must cease to exist because it went against the teachings of Islam. Back then, conventional banking was all Pakistan had and banning interest from the economy outright would have thrown the system off the rails. Understandably, the government appealed, through the SBP, to the Supreme Court of Pakistan against the decision and was granted a stay order. Meanwhile, commercial banks requested the Supreme Court not to rock the boat lest it sank everyone aboard. The status quo prevailed for about three decades. Then all of a sudden, something changed last November.

Ishaq Dar, the Minister of Finance, decided to capitalise on the widespread support for interest-free banking amongst the general public and announced that the SBP was withdrawing its legal challenge to the FSC decision and that Pakistan would do away with interest-based banking by 2027. The announcement was bold. Pakistan has a massive banking system with an asset base of Rs 34.5 trillion.

Before the conversion of Faysal Bank into a full-fledged Islamic bank in January 2023, Pakistan had five Islamic banks and 17 conventional banks with Islamic banking branches. The share of Islamic banking assets was worth approximately Rs 6.9 trillion (20% of the total) at the end of September 2022, the latest period for which industry-wide data is available. The share of Sharia-compliant deposits also equals nearly 20% of the total.

The decision to withdraw the legal challenge was hailed by most, if not all, stakeholders. (Those who believed that the decision was premature or wrong expressed their views only in private because explicit resistance to Islamic banking can be construed in more ways than one in our society.) In this context, senior Islamic bank officials speaking to Aurora said the decision was belated rather than premature and that conversion from conventional to Islamic banking in five years was possible given the available pool of expertise, the existence of long-established players and at least one example of a successful transition.

Like their conventional competitors, Islamic banks are financial intermediaries. They collect money from those who have it (savers) and lend it to those who need it (borrowers) – a process that galvanises the economic cycle and produces material progress for society at large. Under the conventional model, banks perform this function against ‘interest’ – a fee the bank pays to the saver and collects from the borrower. However, Islam prohibits interest because of its exploitative nature that makes transactions inequitable. In its place, Muslim scholars have devised an elaborate Sharia-compliant financial system to replace interest with profit and loans with financing. This raises the question of whether the goal of 100% conversion to Islamic banking by the end of 2027 is realistic.

Only one-fifth of Pakistan’s banking assets are currently Sharia-compliant, despite active regulatory backing, indisputable public support and the solid financial strength of the industry players over the last 20 years. The question then is, if left to grow at its organic pace, would it not take the industry many more decades before achieving 100% conversion?

In the opinion of Ahmed Ali Siddiqui, Senior Executive VP, Meezan Bank, the government should turbo-charge the conversion process by opting for Islamic means to meet its own banking needs. Firstly, the government should immediately start converting its own commercial bank into a Sharia-compliant entity. In this respect, he points to National Bank of Pakistan (NBP), which is one of the largest conventional lenders in the country and ranks among the top three banks, including both conventional and Islamic, when it comes to assets as well as profitability. Even though it does run an Islamic window for a small segment of clients, the bank practises conventional banking by and large. Secondly, many state-owned enterprises that carry massive assets on their balance sheets should be the next in line. Here, Siddiqui mentions energy exploration and production companies like the Oil and Gas Development Company and Mari Petroleum Company, which run huge, capital-intensive operations that require constant liquidity management. The same is the case with Pakistan State Oil, one of the largest Pakistani companies in terms of revenue. Thirdly, the relevant departments within the government that act as custodians of public money should be made to deposit their excess cash in Islamic banks.

Notwithstanding the existing stock of government debt, which is mainly interest-based (to the tune of Rs 48 trillion), Siddiqui says the government should raise new funds only through Ijarah Sukuk (Islamic bonds). In other words, the government should stop interest-based borrowing at once, while gradually retiring the existing stock of conventional debt over the coming years.

Syed Majid Ali, Chief Financial Officer, Faysal Bank, says it is possible to switch from conventional to Islamic banking in five years. He speaks from experience given his bank completed its conversion into a 100% Sharia-compliant entity in five years. To this end, Faysal Bank adopted an ‘asset-led’ conversion model that prioritised the conversion of banking assets (investments and financings) over liabilities (deposits). Apart from making all new branches Sharia-compliant from day one, the bank converted its conventional business into Islamic, one branch at a time.

How is Islamic Banking Different from Conventional?

At its core, Islamic banking is interest-free. But this does not mean that Islamic banks lend money and take back an equal amount in the name of an interest-free system. Operating on a no-profit, no-loss basis would make little financial sense. Islamic banks are for-profit entities that generate returns for their shareholders through banking. So how is it done? Let’s understand it through a simple example.

Suppose you want to buy a car. You do not have the full payment capacity, but you have the capacity to make a small down payment and pay the remaining price in equal instalments over three years. You can either go to a conventional bank or an Islamic bank. Both banks will first look at your credit history and income to ascertain whether they should help you buy a car. Let’s suppose you tick all the boxes. If you opt for a conventional bank, the bank will give you the money to buy a car and you will then pay back that money as well as an additional fee (read: interest) as per the mutually agreed loan terms.

The transaction will be a little different if you opt for the Islamic option. As opposed to giving you cash to buy a car, the Islamic bank will buy the car and rent it out to you. In return, it will charge you ‘rent’ – as opposed to ‘interest’ – every month and gradually transfer the car’s ownership rights over the financing period. The bank will act as a ‘lessor’ instead of a lender. The customer will become the ‘lessee’ instead of a borrower.

In all likelihood, the transaction under both types of banking will generate the same return to the respective banks, but the circuitous way of enabling a client to own a car makes the second transaction Islamic. The principle is simple: interest is prohibited by Islam, but trading is not. The conventional transaction is purely monetary: a loan given on interest. The Islamic transaction is asset-based: the bank sold a car to its client and made a profit. The existence of a real asset (a car in this instance) in the transaction made the deal Islamic.

Challenges Abound

There is no doubt that Islamic banking faces multiple challenges at regulatory, institutional and consumer levels. For example, analysts point to the Islamic banks’ overwhelming focus on the corporate sector when it comes to extending financing. This ratio differs little from that of conventional banks, which are equally enthusiastic about lending to blue-chip clients with established credit histories. As a result, small and medium enterprises (SMEs) lose out, despite the fact that these businesses create the highest economic value for the maximum number of people in society.

Less than three percent of Islamic banking portfolios consist of SMEs, which otherwise form the vast majority of businesses operating in Pakistan. Dr Husain believes Islamic banks draw deposits from the relatively less developed provinces of Balochistan and Khyber-Pakhtunkhwa, but extend financing in big cities of Punjab and Sindh – a pattern witnessed in the conventional banking sector as well.

From the perspective of Islamic banks, the biggest challenge appears to be the deployment of assets. Unlike conventional banks that can (and do) park a massive chunk of their trillions of deposits in risk-free treasury bills and Pakistan Investment Bonds (PIBs), Islamic banks cannot earn easy money that way.

Treasury bills and PIBs are interest-bearing instruments the government uses to raise funds to bridge its fiscal deficit. However, they are out of bounds for Islamic banks as they involve no actual asset and the reason why Islamic banks are urging the government to increase issuing Ijarah Sukuk, which allow the government to raise funds against a leased-out fixed asset, such as an airport, motorway, power plant or even a public park.

Here it is pertinent to emphasise that one of the biggest problems for the government is the lack of infrastructure projects, or even land, that are unencumbered and therefore can be used as underlying assets for Islamic bonds.

In a recent article in Dawn, Riaz Riazuddin, a former SBP banker, wrote that only Rs 2.3 trillion (or five percent of the Rs 48 trillion government debt) is currently Sharia-compliant. Clearly, the government is faced with the Herculean task of converting 95% of its debt into Islamic mode in the next five years.

The fact is that the government cannot swiftly issue new Islamic bonds to retire the old conventional stock of debt; it simply does not have enough real assets to provide the basis for Ijarah Sukuk transactions. The most readily available asset is land, but land ownership in Pakistan lies with the respective provincial governments while the sovereign debt exists on the books of the federal government.

According to Riazuddin, the federal government can either amend the Constitution and make land a federal subject or devise “ingenious ways” to use provincial land as an underlying asset for Ijarah Sukuk.

Another challenge is the perceived lack of trained human resources as well as the notion that full conversion may adversely affect Pakistan’s relationship with international financial institutions such as the International Monetary Fund (IMF) and the World Bank, although industry experts say these are basically cited as excuses to slow down the pace of transition.

According to Siddiqui, he has been actively involved in the operations of the Centre for Excellence in Islamic Finance at IBA, Karachi. It’s one of the many training facilities that prepare young men and women for the rapidly expanding Islamic banking industry. As for Pakistan’s relationship with international financial institutions, Siddiqui says the IMF and the World Bank have no issue with Islamic banking because it’s built upon a sounder foundation. “Islamic banking is asset-backed, which effectively eliminates the possibility of economic bubbles seen so frequently in the conventional system,” concludes Siddiqui.

Kazim Alam is a staff member of Dawn. kazim.alam@dawn.com
The foreign exchange reserves held by the central bank registered their second consecutive weekly increase, according to data released by the State Bank of Pakistan (SBP) on Thursday.

On February 17, the foreign currency reserves held by the SBP were recorded at $3.259 billion, up $66 million (or 2.1 percent) compared to 3.193 billion on February 10.

Last week, the central bank reserves went up by $276 million or almost 10 percent after falling to a precariously low level of below $3 billion in the preceding week..

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