SBP allows Islamic banks to offer long-term financing facility

KARACHI: The central bank on Wednesday allowed Islamic banks to offer long-term financing for plants and machinery to help improve their market share in the banking sector and give borrowers shariah-compliant alternatives.

The State Bank of Pakistan (SBP) issued Islamic long-term financing facility (ILTFF) based on Mudarabah to provide shariah-compliant alternative of conventional financing facility to meet long-awaited demand of exporters.

“ILTFF will allow exporters an opportunity to avail long-term refinance facility of the SBP for purchase of imported and locally manufactured new plant and machinery from the eligible Islamic banking institutions,” the SBP said in a statement. “The facility shall be available to the export oriented projects if their annual export is at least equivalent to $5 million or fifty percent of their sales constitute exports, whichever is lower.”

The central bank has been offering long-term refinance facility through commercial banks and development finance institutions since 2008 to allow exporters an opportunity to avail concessional financing for imported and locally manufactured plant and machinery. However, such facility could not be availed through Islamic banking institutions in absence of a shariah-compliant alternative.

“This (latest decision) is another manifestation of commitment of State Bank of Pakistan, which has been playing an instrumental role for promotion and development of Islamic banking in the country on sound foundations,” the SBP said. “Due to continuous efforts of State Bank of Pakistan and relevant stakeholders, the market share of Islamic banking industry’s assets and deposits in the overall banking industry has increased to 12.4 percent and 14.5 percent, respectively by end December 2017.”

Assets and deposits of Islamic banking industry have been consistently growing with a compound annual growth rate of over 25 percent for the last 10 years.

At present, five full-fledged Islamic banks and 16 conventional banks having standalone Islamic banking branches are providing shariah-compliant products and services with a network of more than 2,581 branches spread across the country.

The central bank said the period of financing under the ILTFF will not exceed more than 10 years, including a grace period of maximum two years while maximum limit for obtaining financing under the facility by a prospective customer will be Rs1.5 billion.

SBP said the participating Islamic banking institutions need to undertake due diligence process in accordance with their respective financing policies before sanctioning the facility subject to the respective prudential regulations prescribed by SBP for each type of customer.

“Islamic banking institutions may participate in the scheme by submitting an application to the concerned department of State Bank of Pakistan,” the SBP said. “Under the scheme, Islamic banking branches of conventional banks may also apply to State Bank of Pakistan for allocation of limit subject to a maximum of 20 percent of the limit under LTFF for utilisation under ILTFF.”