Since the re-launching of Islamic banking in Pakistan nearly a quarter of a century ago, the apex regulator — the State Bank of Pakistan (SBP), has been saying that the industry has made significant strides. However, many of the critics say the growth is far from satisfactory.
The largest number of listed banks falls in the category of conventional banks. Excluding a couple of Islamic banks, most are too small, suffer from a dearth of asset and liability products and mostly suffer from complacency. Their biggest complaint is that the mindset of the people managing the finances of the Government of Pakistan (GoP) has not changed, they still prefer to borrow against Treasury Bills and Pakistan Investment Bonds. This complaint needs to be explored to come up with alternative channels.
The other complaint of the Islamic bankers is that the cost of their funds is ‘too high’ as compared to conventional banks. This dilemma could only be attributed to the ‘morbid’ thinking of those who place their funds with conventional banks and also refuse to receive ‘return’ on their deposits, terming it Riba.
This mindset has to be changed because forgoing the return causes the biggest damage to Islamic banks. If these people don’t wish to be part of Riba-based banking, they should immediately stop banking with conventional banks.
Till lately, Islamic banks used to complain about a limited number of branches. However, time has proved that ‘brick and mortar’ branches have lost their significance.
The analysts invite people to visit the business model of the Pakistan Mercantile Exchange (PMEX). Most of the traders transfer their funds online and also complete withdrawals electronically. At an average, the daily trading volume exceeds PKR20 billion. The Exchange now offers an ‘online’ account opening facility and most of the traders transfer funds electronically.
Gold is considered the most secure investment around the world and its prices always remain on an upward trajectory. Reportedly more than two dozen asset management companies are operating in the country, but the number of ‘gold-backed’ funds is disappointing.
According to banking sector experts, commodity financing in Pakistan runs into trillions of rupees. Those who may find this number mindboggling must find out the value of major crops produced in Pakistan, top of the list items are wheat, cotton, rice, maize, sugar and edible oil.
The biggest problem is that Pakistan doesn’t have modern warehouses for safekeeping of these produce. At an average 20% of the produce goes stale before reaching the market. If these postharvest losses are reduced, the availability of these crops will be increased; farmers’ income will be boosted and above all country will attain ‘self-sufficiency’ in food.
All the Islamic banks are advised to focus on lending to farmers. This is usually split into two portions – lending for the purchase of inputs and loans for the construction of warehouses and purchase of implements.
The SBP has introduced an Electronic Warehouse Receipt (EWR) financing regime. Under this system, farmers keep their produce in the ‘accredited warehouse’ and use the receipt as collateral for obtaining funds from financial institutions.
Some people play the mantra that the safekeeping of commodities is tantamount to promoting ‘hoarding’, which is a wrong perception. Under the safekeeping system, critical information like the name of the owner, quantity held, quality standard and location of the warehouse are declared.
The fraternity of Islamic bakers will have to come out of their ‘comfort zones’ to communicate with farmers, traders, owners of small and medium enterprises (SMEs) and micro-enterprises.
In the end, a statement of an Islamic banker must be read carefully, he said, “Lately, the Government of Pakistan (GoP) has borrowed a huge amount through flotation of ‘Sovereign Sukuks’. However, this option will not be available after a while because the GoP is not left with assets, which it could offer as ‘underlined’ assets”.
There is a word of caution also to the GoP, which is also the biggest borrower from the commercial banks, that as long as you continue to borrow through T-Bills and PIBs eliminating Riba from the economy will not be possible.
GoP Borrowing
The government successfully exceeded its auction target for treasury bills (T-bills) in the latest auction, securing over double the anticipated amount.
The treasury bills auction concluded with the government raising PKR526.9 billion, surpassing the set target of PKR225 billion, highlighting a strong market appetite for domestic bonds.
The auction saw a notable reduction in the cut-off yields for the three-month and 12-month T-bills by 27 and three basis points, respectively, while the yield for the six-month T-bills remained constant.
The finalised yields for the three, six, and twelve-month tenures stood at 21.4%, 20.4%, and 20.3% respectively.
This auction outcome demonstrates the banking sector’s increasing interest in government bonds, a trend that has significantly contributed to the sector’s profitability.
Banks reported a 70 to 90% increase in profits in 2023, largely due to their investments in these government securities. The total bids for the T-bills exceeded PKR1,354 billion, indicating robust demand.
Over the fiscal year 2024, the government has managed to amass more than PKR4 trillion from banks through such auctions.
While this strategy has led to substantial earnings for banks, it has also sparked concerns regarding the allocation of resources, with the private sector facing neglect or high borrowing costs that deter participation in the money market.
The government’s borrowing strategy has led to an escalation in debt servicing challenges, simultaneously impacting economic growth due to reduced private-sector borrowing.