What does US$ 62 billion of Chinese investment in China Pakistan Economic Corridor (CPEC) mean for Islamic Financial Institutions (IFIs)? Are there business opportunities beyond CPEC in Pakistan? To shed light on these questions, IBA Centre for Excellence in Islamic Finance, Karachi, Pakistan conducted an International Forum on Unlocking Islamic Finance Potential in CPEC and beyond on the 17th of January 2017, to critically analyse and discuss the possibilities of Islamic Financing opportunities present in the current economic landscape of the project between China and Pakistan.
In his opening statement, Mr. Ahmed Ali Siddiqui, Director IBA CEIF, highlighted the need to act fast and capture these opportunities presented by CPEC, given that it is only a part of the One Belt One Road project. CPEC passes through 27 Muslim counties, including Pakistan. Hence, the significance of Islamic Finance cannot be ignored. Dr. Farrukh Iqbal, Dean and Director IBA, said that Islamic Finance is a vehicle for long term development with enormous potential that has not yet been fully explored in Pakistan.
Mr. Saeed Ahmed, Ex-Deputy Governor of the State Bank of Pakistan, said that the global Islamic Finance industry has reached a size of over US$ 2 trillion. In October 2016, Pakistan already issued US$ 1 billion worth of Sukuk. He mentioned that a critical area where Islamic Banks can use Islamic Financing is in adjusting the risk-sharing structures of these projects. He mentioned Regulation, Taxation, Capital Markets and Awareness as the four main sub-committees of the Implementation Committee for Islamic Finance.
Dr. Muhammad Nadeem Javaid, Chief Economist, Planning Commission of Pakistan mentioned that the CPEC has four covenants. The first and most important is energy – to take the fuel mix away from furnace/oil based to less expensive coal-based. Rs 9.69/- per unit cost of energy is to be reduced to Rs 9.1/- per unit, and power production is to be increased by 8,000 MW. The other three would be Infrastructure Development, the Gwadar Port and Industrial Cooperation. CPEC is aiming at improving the infrastructure of these areas. Development of road and rail networks comes under infrastructure developmental projects highlighted by the CPEC, and spill over benefits will, as a by-product, have an impact on housing, cement, steel, stone crushing and other related industries.
Relocation of business from China is another potential opportunity which will result in job opportunities for over 85 million employees globally. Many Chinese firms have approached ICBC for setting up businesses in Pakistan. It is estimated that if only 4 percent of Chinese trade is routed through Pakistan, it will amount to US$ 180 billion. According to Mr Nadeem, Chinese banks claim tax exemptions on the interest income on lending to CPEC projects in the energy sector. This tax break is a huge incentive for Chinese banks and businesses to enter Pakistan’s market.
Dr. Sulaiman Liu, from Al Sadiq Consulting China, presented the Chinese banks’ view of looking at CPEC projects. He explained that they preferred RMB-based investments, e.g. RMB Sukuk, to lock in the currency exchange rate risk. He mentioned that Pakistani and Chinese Governments have signed currency swap agreements – these stabilize the economy in the possibility of currency devaluations. Mr. Irfan Siddiqui, CEO Meezan Bank Limited, mentioned that the Government of Pakistan had issued foreign currency Sukuk recently. Therefore, the possibility of issuing RMB Sukuk which are appropriate to these CPEC projects was certainly there.
Mr. Ahmed Ali Siddiqui concluded the session by appreciating the work being down for the economic development in the region. He remarked that sessions like these between Pakistan and Chinese industry partners should continue in future, so that we can have a practical action plan for gaining maximum benefit out of CPEC.
The highlights of the session were that:
– Issuance of multicurrency Sukuk to finance CPEC infrastructure projects is very attractive to both Pakistani and Chinese investors as it aids in avoiding foreign currency risk.
– Job creation for over 85 million employees globally as a result of potential for relocation of businesses from China.
– Infrastructural developmental projects highlighted by the CPEC, will have spill over benefits which will impact housing, cement, steel, stone crushing and other related industries
– It is estimated that US$ 180 billion will be generated even if only 4 percent of Chinese trade is routed through Pakistan