Government incentives boost Pakistan’s Islamic banks

Pakistan’s Islamic banks are introducing new products and adjusting policies to take advantage of government incentives designed to boost growth in the industry.Shariah-compliant banks in the country, the world’s second most populous Muslim nation, held 11.4% of total banking assets in June, barely changed from a year ago. That is well below levels of around 25% seen in Gulf Arab states.To help change this, the government introduced a 2% tax rebate for Shariah-compliant manufacturing firms in July to encourage them to eliminate interest-bearing debt from their balance sheets. The central bank has exempted Islamic banks from using interest-based benchmarks for some financing products.Abdullah Ghaffar, head of investment banking at Al Baraka Bank Pakistan, a unit of Bahrain’s Al Baraka Banking Group , said last month he detected signs of an increase in demand for both short- and long-term Islamic financing. The bank has launched Shariah-compliant products to finance purchases of tractors by customers and structured short-term sukuk for a white-label electronic equipment manufacturer in Lahore.“The customer opted for sukuk - slightly more expensive to float - over quick-to-market commercial paper,” Ghaffar said.In October, Islamic lender Meezan Bank approved a new financing structure for use in the airline industry; it uses plane tickets as an asset to back Islamic deals in cases where fixed assets are not available.Islamic banks are also adjusting internal policies which limit financing to manufacturing companies and the use of long-term maturities, said Syed Abubakr, Shariah board member of Emaan Islamic Banking, a unit of Silk Bank.There is some demand for new products from conventional banks planning to convert their operations into fully-fledged Islamic banks, including Faysal Bank and Summit Bank, Abubakr added.These banks have large portfolios of conventional credit card and personal loan facilities, but Shariah-compliant equivalents are needed to retain customers, he said. Such moves could help Islamic banks continue to grow at double-digit rates; the sector’s assets grew 16.8% year-on-year in June, a slowdown from 37.3% growth recorded in the year to June 2015.Pakistan’s government believes it can pull more people into the formal banking sector - especially in rural areas - by expanding the Islamic finance sector, and this could boost economic growth. However, capitalisation levels could emerge as a constraint on growth, said Ghaffar. In June, Islamic banks had a combined, average risk-weighted capital ratio of 13.4% of assets, down 1.2 percentage point from a year ago, central bank data shows, compared to a banking industry average of 16.1%.This has prompted some Islamic banks to issue capital-boosting sukuk; in September Meezan raised 7bn rupees ($66.9mn) via a private placement of subordinated sukuk.Others have opted for consolidation: Al Baraka Bank Pakistan completed a merger with Islamic lender Burj Bank last month.The central bank helped earlier last month by lowering Islamic banks’ statutory liquidity requirement to 14% of total demand liabilities from 19%, reducing the amount of liquid assets which banks must maintain as reserves.The ratio compares to 15% for conventional banks. Islamic banks face an acute shortage of Shariah-compliant liquid assets, aggravated by limited supply of local currency sovereign sukuk.The sector is poised to see further official support.