Shabbir H. Kazmi
newspapers and magazines are full of praises for the Government of Pakistan
(GoP) and State Bank of Pakistan (SBP) for ushering double digit growth of
Islamic banking in the country.
the performance over slightly less than two decades looks miniscule keeping the
facts in mind that overwhelming majority of the population of the country is
Muslim and the name of the country is Islamic Republic of Pakistan. The
Constitution promises that all the laws and rules of the country will be
promulgated in the light of Shariah, but the government itself remains the
biggest borrower under Riba-based regime.
analysts as well as banking professionals to arrive at the inference, the GoP
is not serious in the elimination of Riba from the economy and it keeps taking
refuge behind all sorts of arguments.
It is right
that the apex regulator of banking system in the country, SBP has stopped
issuing permissions for the creation of new conventional banks, but it is still
granting permissions for opening up of new branches by the conventional banks.
The other fact establishing ‘lack of government interest’ is outstanding
colossal volume of Treasury Bills and Pakistan Investment Bonds, as against the
size of outstanding Sovereign Sukuks is dismal.
to a banking sector expert, “The recent flotation of Energy Sukuk can be termed
‘marriage of convenience’. As the government has already utilized the liquidity
available with the conventional banks, it got an opportunity to mop up
liquidity available with Islamic banks, who are suffering from surplus
liquidity crisis. In other words, ‘it was in no way any love for Islamic
banking but lust to swallow the liquidity available with them. Some experts go
to the extent of saying, “Islamic banks have fallen in a deadly trap because
there seems to be no end to circular debt issue. The Government has been
failing miserably in containing blatant theft of electricity and theft that has
been going on with the connivance of electricity and gas distribution
the total deposits held by commercial bank at end June 2019 were reported at
Rs14.4 trillion, up 10.7%YoY as compared to earlier year. Analysts believe that
the surge in deposits by Rs961 billion during the last few days of June 2019
could be attributed to asset declaration scheme as well as year-end phenomenon.
They expect relatively slower or single digit growth over the next few years
owing to: 1) higher interest rates impacting money supply and 2) government
restricting its borrowings from the central bank.
to be noted is that Islamic banks (including designated Islamic banking
branches of conventional banks) hold up to 15% of the total deposits, which
comes to slightly more than Rs2 trillion. Out of these Rs400 billion have been
plunged into Energy Sukuk. A worrying point is that the GoP plans to issue
further Energy Sukuk of Rs200 billion, which is alarming and can be termed
‘putting too many eggs in one basket.
under Agriculture Package, plans to extend Rs309 billion to farmers for
improving crop yields, livestock development and import substitution. Out of
the allocated funds, 7%will be utilized for increasing the average yield of
wheat and sugarcane. The agriculture package entails higher financing target
for agriculture sector. Likely beneficiary of higher disbursement of funds
could be Islamic banks considering potentially slower financing demand
elsewhere. Lending by Islamic banks to farmers has increased in 11MFY19 at a
faster rate as compared to the growth recorded by conventional banks.
necessary to mention that bulk of the lending to farmers by conventional banks
is based on Stone Age ‘Pass Book System’. Since most of the farmers don’t have
land ownership documents, they are deprived of and forced to borrow from
non-banking channels. It is worth noting that under Shariah compliant lending
system farmers can get loans even without landholding documents because
upcoming crop itself is the collateral.
It is also
important to bring it to the notice of new Governor of SBP that ‘Warehouse
Receipt Financing’ (WRF) has not become a norm in more than five years. The
prerequisite of WRF is presence of modern warehouses and warehousing system.
The Securities & Exchange Commission of Pakistan (SECP) has lately issued
draft of Collateral Management Companies and seeking comments from general
public. It may be recalled a similar exercise was done in 2016 which yielded no
to informed sources the SECP has based its draft on the system prevailing in
India. However, the commission has failed in offering the right impetus. For
those who may not be fully conversant with the Indian model it is sufficient to
say that the first collateral management company commenced its operations in
2006 with an initial paid-up capital of 0.5 million Indian rupees, which was
raised to 5 million rupees in 2008. As against this the SECP has proposed
capital of PKR200 million and suggested public flotation. Experts are afraid
that SECP is trying to create another supra authority rather than offering a
It may not
be out of context to mention the shrinking size of Modaraba Companies. Pakistan
had created a history in mid eighties when permissions were granted for the
creation of Modarabas as corporate entities. The number spiked to more than 50,
but has been reduced to around two dozen lately. These entities are effectively
‘closed-end mutual funds’. They, on one hand mobilize small savings and on the
other hand offer medium term financing and the added advantage in Riba free
Shabbir H. Kazmi is an economic analyst from
Pakistan. He has been writing for local and foreign publications for about
quarter of a century. He maintains the blog ‘Geo Politics in South Asia and
Source: Eurasia Review