Agricultural lender ZTBL set to become fully-fledged Islamic bank

KARACHI: Zarai Taraqiati Bank Limited (ZTBL), a Pakistani agricultural lender providing financing services to farmers, is in the process of transitioning into a fully-fledged Islamic bank, a senior official said on Tuesday.

“Currently the bank is in the process of conversion of branches into Islamic and this process will be carried out every year to transform the bank over the years,” Zahid Hussain, senior executive vice president and group head operations ZTBL said in written answers to questions from The News.

By 2023, 25 branches would be converted into Islamic, “the process has already been initiated”, he added. Presently, ZTBL has a network of 501 branches, 9 of which are Islamic.

Hussain said the bank’s Shariah board gives approval for Shariah-compliant transactions and process flows of the transactions. “The conversion decision is the strategic decision not dependent upon the decision given by the Shariah board, however after decision making, the conversion plan for the year needs the approval of the Shariah board,” he explained.

ZTBL provides farmers, particularly small ones in rural areas, sustainable financial services, including the implementation of new schemes and the development of innovative products.

The bank is crucial in providing farm credit at the local level, both for production financing and development financing. However, the main challenge is the recovery of outstanding amounts at due dates, according to Hussain.

Analysts predict that several Pakistani conventional banks may switch to Islamic banking in an effort to capitalise on the growing market for Shariah-compliant products as well as the government's aim to abolish the interest-based financial system by 2027. The State Bank of Pakistan has guaranteed that it will assist banks that have plans to convert their business operations to an Islamic manner as part of its objective to increase the share of Islamic banking from 20 percent to 35 percent in the next two years.

Islamic finance, which has its core markets in the Middle East and Southeast Asia, including Pakistan, adheres to religious principles such as a prohibition on interest and pure monetary speculation.

In a landmark decision issued last year, the Federal Shariat Court ruled that the current Riba-based banking system contradicts the basic principles of Islamic law and ordered the government to facilitate all loans using an interest-free basis. The government was also ordered by the court to enact fresh laws and change existing ones as soon as possible in order to introduce Islamic banking in the whole country.

Finance Minister Ishaq Dar announced in February 2023 the formation of a high-level, three-member committee with representatives from the finance ministry, the SBP, the Securities and Exchange Commission of Pakistan, and Shariah scholars to develop a plan for Pakistan's financial system to run on an Islamic basis.

“In terms of advantages, Islamic banking enjoys better brand value in the context of religious teachings. In Pakistan, Islamic banks also enjoy better spreads and ROE [return on equity] because they are not subject to the minimum savings rate regime,” said Mustafa Mustansir, head of research at Taurus Securities.

“In the past few years, the SBP has had a special focus on the growth of Islamic banking in particular by issuing more Sukuks, etc. so that Islamic banks can deploy liquidity at similar yields as conventional banks get from T-bills and Pakistan Investment Bonds, Mustansir added.

Concerning obstacles, he said they were connected to product differentiation, cost base, etc. because of compliance with Shariah. “In all of their operations, banks must keep Shariah principles in mind. It's difficult to change the bank's overall balance sheet.”

If the bank converts to Islamic, some of its clients might quit as well. A bank cannot expand simultaneously throughout the conversion period and may encounter dividend limits, for example.

At the beginning of 2023, Faysal Bank successfully underwent the conversion to a fully-fledged Islamic bank. It is now Pakistan's second-largest Islamic bank. The Summit Bank announced that it would become an Islamic entity after a new UAE investor purchased a majority share in the bank. The Bank of Punjab is reportedly thinking about becoming an Islamic bank as well.

Banks are aware of how Islamic banking has the capacity to increase market share significantly while also providing high returns due to its low deposit costs. ZTBL is the same. It is the largest public sector agriculture development financial institution in the country.

According to the bank's annual report for the 2022 fiscal year, which was posted on its website, the bank's asset base increased 93 percent last year to reach Rs491 billion. Total deposits of the bank increased 9 percent to Rs47.3 billion in 2022. The bank reported a profit after tax of Rs5.1 billion last year, compared with a loss of Rs1.7 billion in the previous year.

The bank’s asset quality indicators showed improvement as the gross infection ratio decreased to 31 percent in 2022 from 35 percent in 2021. The non-performing loans fell to Rs33.68 billion from Rs40.74 billion a year earlier.

Currently, the country is experiencing an unprecedented crisis in food security. The flood catastrophe that occurred last Summer has a significant effect on the growth of the agricultural sector, thereby harming the bank's primary business.

“The capacity of ZTBL borrowers to repay their obligations would come under added strain as the aftermath and cannot be unexpected may result in an increase in NPLs,” the bank’s annual report said.