KARACHI: Pakistan’s Islamic finance market may continue to mature and expand in the years ahead given growing investment by the Islamic banking industry in federal government securities through ijara sukuk (Islamic bonds), said bankers.
Recent statistics issued by the State Bank of Pakistan (SBP) suggest Islamic banking institutions (IBIs) invested Rs266 billion in government securities during the third quarter of 2012 against Rs154 billion over the same period in the last fiscal year, showing a year-on-year growth of 73.2 percent.
Of a total of Rs266 billion investments, more than Rs47 billion were provided by the Islamic banks via ijara sukuk to the government for project financing.
Bankers said that if the government of Pakistan ijarah sukuk are to be issued in the usual manner, Islamic banking liquidity will be directed towards sovereign investments to earn risk-free and government-guaranteed profits. This is mainly due to the weak risk management of Islamic banks, as they are not willing to take risk-based exposure with better pricing. By definition, interest should not be charged or collected and profit and loss is equally shared between lender and borrower in Islamic finance.
They further said that despite excess liquidity in the Islamic banking industry, the focus is on taking risk-free exposure in sukuks or with other financial institutions.
Investing in low-yield, risk-free investments may also be considered the reason for less return on assets (ROA) of Islamic banking than the overall banking industry.
The latest SBP report on Islamic banking said that the financing by IBIs remained stagnant at Rs209 billion from July to September 2012.
President and CEO of Bank Islami, Hasan Aziz Bilgrami, said that credit demand by the private sector remained low in the quarter under review due to energy shortages and heightened security concerns that pushed up the cost of doing business.
“Deposits of Islamic banks were higher than the advances during the quarter,” he said.
“The clean up periods of seasonal financing of various industries (such as sugar, cotton and rice) were observed during the third quarter and therefore adjustment in financing in the Islamic banking segment is seen in the same period,” said Vice President, Head of Credit Islamic Banking Group, MCB, Haroon Siddiqui. “Due to fragile economic conditions and less than expected growth, one Islamic bank had to be merged with anther one,” he said.
The prospect of change in the financing trend of Islamic banks appears bleak. Nevertheless, Islamic financing growth will remain better than overall financing growth of the banking industry, he said.
“This pattern stands to improve after the confidence of foreign investors is restored and policies have been formulated to direct financing towards the private sector, with better earning opportunities,” he said.
“The major Islamic financing portion is expected to be continued with the corporate sector, as these are considered less risky propositions while financing, than SME, consumer and agriculture sectors,” said Siddiqui.
He said that further movement to other sectors with large shares like consumer, agriculture and SMEs is not possible in the short term even though the SBP has encouraged banks to finance the agriculture and SME sectors. However, with the decrease in overall discount rate in the last half year, it is expected that the share of consumer financing may be increased in coming years, subject to improvement in economic conditions.
“Limited availability of Islamic banking financing products (especially for short term) to cater to the needs of various trades, SMEs and agriculture-based customers may also be a reason for sluggish growth,” said Mubashar Bashir, a senior banker at a leading commercial bank.
“Availability of Islamic banking branches in major cities is another reason for the lack of financing in the agriculture and SME sectors, as 65 percent of branches of IBIs are operating in only seven large cities – and 43 percent of these branches are concentrated in Karachi and Lahore,” he added.