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Wider banking image: obvious and dire need for liquidity management products

Wider banking image: obvious and dire need for liquidity management products

Meezan Bank currently focusing on corporate to investment and branchless Islamic banking
Interview with Mr Irfan Siddiqui — President & Chief Executive Officer, Meezan Bank

PAGE: Kindly tell us something about yourself and your organization:

Irfan Siddiqui: I am the founding President and Chief Executive Officer of Meezan Bank Limited, Pakistan’s first and largest Islamic bank. My educational background includes a Foundation Course in Accountancy from Sunderland, UK and I am a Fellow Chartered Accountant from Institute of Chartered Accountants, England and Wales. I have served at a number of senior management positions including Chief Executive Officer at Al-Meezan Investment Bank Limited, as a General Manager at Pakistan-Kuwait Investment Company, Manager Finance and Operation at Abu Dhabi Investment Company and Senior Business Analyst at Exxon Chemical (Pakistan) Limited.

Meezan Bank was launched in 1997 as an investment bank with an initial equity of Rs252 million in 1997. For the first five years we functioned with a workforce of 30 people, then in 2002, the State Bank of Pakistan (SBP) issued Meezan with Pakistan’s first Islamic commercial banking license, and concurrently we took over the operations of Societe Generale (SG) in Pakistan. Converting SG’s four-branch conventional banking operations into a Shariah-compliant one was an achievement and we operated as Pakistan’s only Islamic commercial bank for the next two years. Since then, we have seen an average of 40-50% growth in the size of our branch network every year and today we have a nationwide network of over 600 commercial banking branches. In 16 years of operations, we are not only the largest Islamic bank in Pakistan; we rank today as the 7th largest bank in the country.

PAGE: Kindly tell us something about the products which need to be introduced by the banking sector in Pakistan:

Irfan Siddiqui: Pakistan’s banking sector has grown considerably, not merely in terms of sophistication but also in terms of market depth despite the consistent influx of challenges pertaining to political and economic instability. However, now is the time that a more aggressive focus is placed on encouraging banking in areas beyond the metropolitan or urban areas. Financial inclusion is a key objective of State Bank of Pakistan and Regulators in an economy where almost 100 million adults do not have access to banking services. The lack of access to adequate financial services is a major hindrance towards long-term economic growth of the country. I strongly feel that banks need to focus on providing products and services that go beyond their role of mere finance providers. For Islamic banks, despite the phenomenal growth and acceptance, the dearth of capital market instruments is a major challenge.

There is a critical need for the provision of adequate liquidity tools, an area where the government can play a major role by offering Islamic banks with instruments to place the excess liquidity of the entire Islamic finance sector at the same rate which is being offered to conventional banks. There is therefore an obvious and dire need for Liquidity Management Products in the country’s banking sector. Islamic banks are flooded with liquidity and Alhamdulillah we have been doing a great job in investing this liquidity efficiently in Corporate, SME/Commercial and Consumer businesses. However, there is still a great need for Islamic banks to invest with the government in the forms of Sukuks. There also exists an asset/liability gap management problem for this industry given the dearth of these instruments; and this challenge does not merely pertain to Islamic banks but to Islamic mutual funds, Islamic Takaful as well as to Islamic investors.

Liquidity management products can enable banks to deploy their excess liquidity easily. We, at Meezan have been working closely with the Regulator for launch of new Sukuks and while the Government and Regulators have taken great strides for the expansion of Islamic finance in the region, but much work still needs to be done. Furthermore, the rapid growth of the FinTechs in the past few years has strengthened the common belief that FinTechs do pose a near-term threat to the banking industry. The increased accessibility of new technology pertaining to financial services has appealed to the customers and has added further pressures on the banks to innovate.

At the same time, FinTechs also realize the costs associated with customer acquisition and the high barriers to entry in the financial services industry. What we have today is an opportunity to transform the banking industry by allowing collaborations with FinTechs, allowing them to play their role in the broader banking ecosystem. Most of their offered solutions are cost-effective and efficient therefore collaborating with FinTechs can further the penetration of banking in Pakistan. This collaboration between the banks and FinTechs will pave way for a diversified digital ecosystem, one that supports products such as digital nano credit and automated clearing. Furthermore it will also encourage global merchants to further simplify payment processing for the banking industry.


PAGE: Do you think taxes imposed on banking sector need to be rationalized?

Irfan Siddiqui: Yes, banking sector being one of the most documented sector of the country should be taxed at par with other corporate sectors. We appreciate that the corporate tax rates for other than banking sector has been gradually reduced to 30%, while the tax rate for banking companies is 35% which is very high. In addition, the rate of super tax on banking sector is also higher i.e. 4% as compared to 3% applicable to other corporate sectors.

The banking industry being a major contributor for collection of taxes on their own income and also being withholding agents, expect from the government in the upcoming Federal Budget for rationalization of taxation on its income in line with the other corporate sectors.

PAGE: What are your suggestions and expectations as a banker from the upcoming budget?

Irfan Siddiqui: In the forthcoming budget, relief for salaried individuals is expected which would be a positive step to encourage the workforce, regardless of any sector. This will also enhance productivity and consumer spending in the economy. In the upcoming budget we also suggest to take measures for broadening of tax base i.e. bring undocumented sectors into the tax net instead of further burdening the current taxpayers. Taxation on non-filers should not only be used for collection of indirect taxes rather than as a tool for bringing the non-filers into documented economy.

In order to encourage filing of returns, relief measures should be introduced in order to promote tax culture in the economy. Further we expect that the government will provide incentives to foreign investors and exports to improve the current deficit of balance of payment.

The budget should promote setting up small/medium scale businesses and enterprises as they provide more employment and contribute to boost economy and the banking sector as well in the form of increase in SME financings. Tax incentives for SME businesses should be provided in the form of reduced rate of tax and their tax return should be one pager. Reduction in tax rates and simplicity in tax return will increase the number of tax filers and will reduce undocumented sector of the economy.

For banking sector especially for Islamic banks the avenues for deployment of their excess liquidity should be enhanced. The availability of GoP Ijarah Sukuk continues to be a challenge for Islamic banks. During the year 2017 only one auction of Ijarah Sukuk was held but the size of the issue was small relative to the demand for such instruments. We expect and are hopeful that in the next year’s monetary and fiscal policy, this issue will be adequately addressed.

PAGE: How do you perceive the Islamic banking brand and what is it that your bank is trying that makes it more attractive from your competitors?

Irfan Siddiqui: Meezan Bank has always focused on the power of its Shariah compliance. We have a distinct corporate identity as the first Islamic Bank of Pakistan. For us, competition lies in creating value that is superior to other Islamic as well as conventional banks. At the heart of our strategy lies the customer and how we can help meet their financial needs through Shariah-compliant modes in a market that is primarily dominated by conventional banking. As we grow now, we will establish a strategy that will focus on the growing areas of Islamic banking from corporate to investment and branchless banking.

In addition, we are focusing heavily on the consumer segment by providing our customers with financing solutions for their personal financing needs. If you look at our numbers in 2018, you will see that we have optimized our balance sheet and will Insha’Allah continue to gain a larger market share in the country, particularly through penetration in the unbanked sector.

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