Government incentives boost Pakistan's Islamic banks

Summit Bank (Oregon)

23/11/2016 11:50

* Pakistan adopted tax rebate for sharia-compliant 
manufacturers 
    * Banker sees signs of higher demand for Islamic financing 
 
    By Bernardo Vizcaino 
    Nov 23 (Reuters) - 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 
 BARKA.BH , 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  AMZN.KA  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  SILK.KA . 
    There is some demand for new products from conventional 
banks planning to convert their operations into fully-fledged 
Islamic banks, including Faysal Bank  FYBL.KA  and Summit Bank 
 SBKO.PK , 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. 
 
    HURDLES 
    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. 
    The sector is poised to see further official support; the 
central bank is at an advanced stage of introducing long-term 
financing facilities for Islamic banks. Meanwhile, the capital 
market regulator is introducing a companies bill that includes 
concepts covering sharia-compliant companies and securities. 
 
 (Editing by Andrew Torchia and Adrian Croft) 
 ((Bernardo.Vizcaino@thomsonreuters.com; Telf: +61293218168; 
Reuters Messaging: 
bernardo.vizcaino.thomsonreuters.com@reuters.net)) 
 
Keywords: ISLAMIC FINANCE/PAKISTAN