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More products help boost growth of Islamic banking in Pakistan

Islamic banks are introducing new products to take advantage of government incentives designed to boost growth in the industry. Our government believes it can pull more people into the formal banking sector, particularly in rural areas. This would eventually expand the Islamic finance sector, and would boost economic growth.

Shariah-compliant banks in Pakistan held 11.4 percent of total banking assets in June, hardly changed from a year ago. The government introduced a 2 percent tax rebate for Shariah-compliant manufacturing firms in July to encourage them to rid off interest-bearing debt from their balance sheets.

State Bank of Pakistan has exempted Islamic banks from using interest-based benchmarks for some financing products.

Al Baraka Banking Group said that there are 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.

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. This was stated by 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. These banks have large portfolios of conventional credit card and personal loan facilities, but Shariah-compliant equivalents are needed to retain customers.

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.

In June, Islamic banks had a combined, average risk-weighted capital ratio of 13.4 percent of assets, down 1.2 percentage point from a year ago, central bank data shows, compared to a banking industry average of 16.1 percent.

This has prompted some Islamic banks to issue capital-boosting Sukuk; in September Meezan raised 7 billion rupees ($66.9 million) via a private placement of subordinated Sukuk.

Al Baraka Bank Pakistan completed a merger with Islamic lender Burj Bank last month.

State Bank of Pakistan helped lowering Islamic banks’ statutory liquidity requirement to 14 percent of total demand liabilities from 19 percent, reducing the amount of liquid assets which banks must maintain as reserves.

The ratio compares to 15 percent for conventional banks. Islamic banks face an acute shortage of Shariah-compliant liquid assets, aggravated by limited supply of local currency sovereign Sukuk.

State Bank of Pakistan is at an advanced stage of introducing long-term financing facilities for Islamic banks. The capital market regulator is introducing a company’s bill that includes concepts covering Shariah-compliant companies and securities.

Dubai Islamic Bank said that 80 percent Pakistanis liked to prefer Islamic products ‘if all things are equal.” If an Islamic product had the same world standard quality, same return on product and same facility like a competitive conventional banking product has, people would get Islamic product instead of conventional product.

The agriculture sector lacks financial resources, due to which small-scale farmers are facing a lot of problems, consequently affecting the agriculture and livestock sector.

Muslim countries including Pakistan, the primary reason behind the lack of financial inclusion in the agricultural sector is unavailability of such financial products that are in correlation with the religious and social belief of the Muslims.

If we want to promote agriculture and livestock then we would have to introduce such financial products which are in accordance with our religious beliefs.

Finance is necessary for the development of rural economy especially in Muslim majority countries.

Pakistan can retrieve ideal Islamic agricultural finance products from Islamic banking and finance industry, by utilization of those products there can be revolution in the agriculture sectors.

These products will not only boost the rural economy but also can enhance the agricultural business; expand the livestock industry, generate employment, education and health facilities for the farmers.

The people who are financially excluded and do not use conventional financing system because of interest and other religious reasons, will also start using agricultural finances, therefore, it can be said that Islamic agricultural finance can be utilized as tool of financial inclusion for the development of rural economies. In some countries it is seen that people of rural areas are more sensitive to interest related issues, and so the agriculture sector suffers the most.

But in countries where Islamic financial products are available for agriculture industry, there the use of financial instruments is higher as compared to other nations.

If we analyze the Islamic financial products in detail, we can observe that the financial needs of the farmers can be fully catered by utilization of them, one of the best examples is the use of “Salam” product in Islamic banking.

Zubair Mughal, the Chief Executive Officer of Al Huda Center of Islamic Banking and Economics added that Accounting & Auditing Organization of Islamic financial institutions (AAOIFI) also issued three(3) Sukuk structure Sukuk Al Muzara’s , Sukuk Al Musaqa’a, Sukuk Al Mugarasa’s which can be utilized for Sharecropping, Irrigation and Orchid Financing respectively for the corporate farming.

Many other Islamic Financing instrument are available which can be utilized for agricultural purposes, such as, ‘Murabaha’ can be utilized for purchase of seed, fertilizer, harvesting and planting.

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