Pakistani newspapers and magazines are full of praises for the Government of Pakistan (GoP) and State Bank of Pakistan (SBP) for ushering double digit growth of Islamic banking in the country. However, the performance over slightly less than two decades looks miniscule keeping the facts in mind that overwhelming majority of the population of the country is Muslim and the name of the country is Islamic Republic of Pakistan. The Constitution promises that all the laws and rules of the country will be promulgated in the light of Shariah, but the government itself remains the biggest borrower under Riba-based regime. This forces analysts as well as banking professionals to arrive at the inference, the GoP is not serious in the elimination of Riba from the economy and it keeps taking refuge behind all sorts of arguments.
It is right that the apex regulator of banking system in the country, SBP has stopped issuing permissions for the creation of new conventional banks, but it is still granting permissions for opening up of new branches by the conventional banks. The other fact establishing ‘lack of government interest’ is outstanding colossal volume of Treasury Bills and Pakistan Investment Bonds, as against the size of outstanding Sovereign Sukuks is dismal. According to a banking sector expert, “The recent flotation of Energy Sukuk can be termed ‘marriage of convenience’. As the government has already utilized the liquidity available with the conventional banks, it got an opportunity to mop up liquidity available with Islamic banks, who are suffering from surplus liquidity crisis. In other words, ‘it was in no way any love for Islamic banking but lust to swallow the liquidity available with them. Some experts go to the extent of saying, “Islamic banks have fallen in a deadly trap because there seems to be no end to circular debt issue. The Government has been failing miserably in containing blatant theft of electricity and theft that has been going on with the connivance of electricity and gas distribution companies.”
Reportedly, the total deposits held by commercial bank at end June 2019 were reported at Rs14.4 trillion, up 10.7%YoY as compared to earlier year. Analysts believe that the surge in deposits by Rs961 billion during the last few days of June 2019 could be attributed to asset declaration scheme as well as year-end phenomenon. They expect relatively slower or single digit growth over the next few years owing to: 1) higher interest rates impacting money supply and 2) government restricting its borrowings from the central bank.
The point to be noted is that Islamic banks (including designated Islamic banking branches of conventional banks) hold up to 15% of the total deposits, which comes to slightly more than Rs2 trillion. Out of these Rs400 billion have been plunged into Energy Sukuk. A worrying point is that the GoP plans to issue further Energy Sukuk of Rs200 billion, which is alarming and can be termed ‘putting too many eggs in one basket.
The GoP, under Agriculture Package, plans to extend Rs309 billion to farmers for improving crop yields, livestock development and import substitution. Out of the allocated funds, 7%will be utilized for increasing the average yield of wheat and sugarcane. The agriculture package entails higher financing target for agriculture sector. Likely beneficiary of higher disbursement of funds could be Islamic banks considering potentially slower financing demand elsewhere. Lending by Islamic banks to farmers has increased in 11MFY19 at a faster rate as compared to the growth recorded by conventional banks.
It is necessary to mention that bulk of the lending to farmers by conventional banks is based on Stone Age ‘Pass Book System’. Since most of the farmers don’t have land ownership documents, they are deprived of and forced to borrow from non-banking channels. It is worth noting that under Shariah compliant lending system farmers can get loans even without landholding documents because upcoming crop itself is the collateral.
It is also important to bring it to the notice of new Governor of SBP that ‘Warehouse Receipt Financing’ (WRF) has not become a norm in more than five years. The prerequisite of WRF is presence of modern warehouses and warehousing system. The Securities & Exchange Commission of Pakistan (SECP) has lately issued draft of Collateral Management Companies and seeking comments from general public. It may be recalled a similar exercise was done in 2016 which yielded no results.
According to informed sources the SECP has based its draft on the system prevailing in India. However, the commission has failed in offering the right impetus. For those who may not be fully conversant with the Indian model it is sufficient to say that the first collateral management company commenced its operations in 2006 with an initial paid-up capital of 0.5 million Indian rupees, which was raised to 5 million rupees in 2008. As against this the SECP has proposed capital of PKR200 million and suggested public flotation. Experts are afraid that SECP is trying to create another supra authority rather than offering a plausible solution.
It may not be out of context to mention the shrinking size of Modaraba Companies. Pakistan had created a history in mid eighties when permissions were granted for the creation of Modarabas as corporate entities. The number spiked to more than 50, but has been reduced to around two dozen lately. These entities are effectively ‘closed-end mutual funds’. They, on one hand mobilize small savings and on the other hand offer medium term financing and the added advantage in Riba free income.