Pakistan: Islamic Banking No Room for Complacency

SBP Analysts have two contrary views regarding growth of Islamic banking in Pakistan. While some say that the growth has been substantial others still believe the progress has been far below the potential. The third point of view is that that the government, regulators and players have been striving hard and the outcome depends on how the public at large responds. Yet another point of view is that whatever Pakistan has achieved in a decade others took much longer time in achieving these milestones.

Some critics say the decision of the government to allow operation of conventional and Islamic banking run in parallel in a country where Muslims are in majority was imprudent. However, they tend to ignore the harsh reality that Pakistan can’t live in isolation and the country has to align itself to the global financial system, which is predominantly not compliant to Shariah covenants. Therefore, allowing the two systems run in parallel was need of the time but sooner than later the entire domestic system has to be made fully Shariah compliant, simply because Riba is not permissible in Islam. However, Pakistan will have to remain part of conventional banking, even if it don’t desire.

While it may be true that the growth of Islamic banking in Pakistan has been substantial because the country has benefited from other countries, it is also a fact that the Shariah Scholars from Pakistan are playing a leading role in developing Shariah compliant asset and liability products around the globe. In fact Pakistan has been helping some of the central banks of other Muslim countries as well as the entrepreneurs in making their banking Shariah compliant. Not only the contribution of State Bank of Pakistan (SBP) has been enormous, Meezan Bank has also become a role model for those who wish to make their banking system Shariah compliant.

However, it is necessary to remind all that the debate regarding definition of Riba still going on in Pakistan seems an effort to create doubts about the system. The concept of Riba was fully defined and its elimination from business is obligatory for each Muslim.  The debate that some of the products are still not fully Shariah compliant seems irrelevant because it is the collective responsibility of all the segment of the society to work for the common objective of elimination of Riba from the economy of Pakistan. However, it is necessary to point out that Shariah Scholars and practitioners must also change their mindset and accept the criticism as an endeavor to eliminate short comings which are being highlighted.

According to Shariah ‘debt is not tradable’ but Sukuk, especially Sovereign Ijarah Sukuk issued by the Government of Pakistan (GoP) have been structured in such a way that it allows the government to mobilize fund, subscribers to earn Shariah compliant income and above all facilitate Islamic banks to manage their liquidity as well as meet statutory liquidity requirement stipulated by the central bank of Pakistan. However, an area that needs special focus is recovery of funds when an issuer commits default. This has happened in Pakistan in the past and effective solutions or arrangements have to be made to ensure that no issuer commits default.

Though, some of the practitioners and even the regulars may be shy in admitting that the Sukuk issued by Maple Leaf Cement suffered from some structural shortcomings, but it is a fact that Shariah scholars never doubted the intention of issuer. It was strongly believed that issuer will not commit a default deliberately but situation turned real odd for Shariah Scholars, banks and even the investors. It is believed that all the stakeholders have learnt a lesson from this default and adequate precautionary measures are being taken in the Sukuks issued subsequently.

Pakistan needs billions of dollars to revamp its energy sector, especially for the construction of hydroelectricity units to overcome its electricity shortfall. The added advantage will be substantial reduction in cost of generation that can pave way for reduction in tariff. While some of the stakeholders are ready to go ahead the only concern is billions of rupees accounts receivables, massive corruption in state owned distribution companies. K-Electric (formally Karachi Electric Supply Company) has taken advantage of available liquidity by floating Sukuk and all eyes are set on it. It has to be monitored microscopically to avoid default, else Pakistan will never be able to float dollar denominated Sukuk. The GoP must also realize that investors are fully cognizant of investment opportunities in energy sector but are abstaining only because they don’t have faith in the system.

It is also necessary to pinpoint that focus of Islamic banks has remained in urban areas and corporate sector. Islamic banks will  have to go extra miles to create supporting infrastructure for lending to SMEs and farmers. Growers need billions of rupees to improve production and productivity. Lending to farmers is also part of GoP’s key objective of achieving food security. It is also necessary to bring it to the notice of Islamic banks that nearly 40 percent of agriculture produce goes stale before reaching the market. It on one hand deprives the farmers from legitimate return and on the other hand deprives the country from earning extra foreign exchange by exporting surplus produce.

Islamic banks should especially focus on construction of modern warehousing and logistic facilities. In fact banks can construct their own warehouses and facilitate in storage and selling of the produce particularly food grains and oil seeds. Enhancing production of edible oil in Pakistan can save US$ 2 billion currently being spent on import. Islamic banks must develop the skill to ‘thinks out of book’ and reap healthy return.















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