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Government incentives boost Pakistan's Islamic banks

Sharia-compliant banks in the country, the world's second most populous Muslim nation, held 11.4 percent of total banking assets in June, barely changed from a year ago. That is well below levels of around 25 percent seen in Gulf Arab states.
To help change this, the government introduced a 2 percent tax rebate for sharia-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 he detected signs of an increase in demand for both short- and long-term Islamic financing.
The bank has launched sharia-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.
Last month, 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, sharia 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 sharia-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 percent year-on-year in June, a slowdown from 37.3 percent 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.
Source; Salaamgateway


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