ISLAMIC BANKS PLAY MYOPIC ROLE IN SME DEVELOPMENTS
TARIQ AHMED SAEEDI
Sep 26 - Oct 2, 2011
Speaking at a World Islamic Finance summit last week, deputy governor State bank of Pakistan Muhammad Kamran Shahzad said Islamic financial institutions have aggregated only three per cent of their assets in agriculture sector. When it comes to small and medium enterprises (SME) financing and micro financing, the banking portfolios of Islamic banks are also insignificant. Islamic banks had 0.3 per cent of SME borrowers as of March 2011. Islamic banks should come forward to help SME sector grow itself, Mr. Shahzad emphasized. Conventional banks, on the other hand, managed eight per cent of their advances in SME sector, which also is not appreciable given the space of expansion.
Why thin Islamic banking portfolios in above mentioned essential sectors of the Pakistan's economy is a point of concern for not only a top official of the central bank but also other stakeholders is because of fast growth of Islamic financial industry in the country. On the contrary, its role in economic growth is not that much considerable.
Over the years, the assets of Islamic banking industry have been witnessing stunning growth rate. SBP's bulletin showed the industry recorded 30 per cent year on year growth in assets in December 2010. Earlier, the rate stood at 32.7 per cent. Rates were 34 per cent in 2008, 73 per cent in 2007, 65 per cent in 2006, 64 per cent in 2005, and gigantic 239 per cent in 2004. Islamic banks enjoyed an asset base of Rs560 billion forming 7.5 per cent of the country's banking system. Notably, its assets accounted for Rs13 billion and share in industry was meagrely 0.5 per cent in 2003. Numbers of branches of Islamic banks have also increased extensively since then. From 17 branches in December 2003 to today's 800, a leap jump has been recorded. Window operations from conventional banks also stretched the outreach of Islamic banking industry in the country.
Why deputy governor stressed on Islamic financing is understandably because of their potential in extending the financial assistance to the underprivileged sectors of SME and agriculture.
Credit allocations to faming sector are on the rise and annual target for every next year is higher than that of preceding year. Though it is not as per the requirement, lending to agriculture from overall banking system is relatively substantial when compared its volume with the SME sector.
Banks behave cautiously while dealing with the sectors they consider less profitable or risk bearing. Unfortunately, SME sector is considered risky avenue of parking funds by banks that as seen are more interested in risk aversive investments for example in treasury bills and commodity operations. Bad assets also lead to diversion in credit flows from the sector that formed 8.6 per cent (Rs303 billion) of total outstanding banking portfolio as at end of March 2011. Its nonperforming loans stood at Rs101 billion. At that time, Islamic banks shared the minimal 1.1 per cent (Rs3.5 billion) of total SME outstanding amount.
Shariah-compliant SME financing has a bright prospect to penetrate the market. Through Musharka and Mudarba modes of financing, the banks can help in economically empowering people. They can attract funds-seeking small and medium businesses that are unwilling to take financial assistance from conventional banking system or unbanked. Normally, small and medium businesses go to the informal channels to meet their financial needs. High cost of borrowing makes their capital acquisition irrelevant. Collateral demands from leasing and other financial institutions discourage enterprising entrepreneurs to the extent that they wind up expansion projects or shelve upgrades. Assets-based model of Islamic banking has a built-in deterrent to risky investments. Mr. Kamran also emphasized on Musharka and Mudarba modes of financing that he said would be for the mutual benefits of financial system as well as SME sector.
Internationally, SME sector is being paid attention to generate employment and reduce poverty. Indian government is leveraging the power of small businesses to get it burgeoning population out of the crushing poverty. China has long banked on the sector to change its economic outlook. The Asian country encourages cottage industries and small and medium companies to accelerate economic activities and exports. Home-based factories are commonplace in Chinese rural settlements with households involved in manufacturing of knickknacks for instance. Easy access to finance is one of the main reasons of thriving SME sector in the country feeding its domestic economy and supporting the exporting sector.
Domestic economic building is neglected in Pakistan despite that suspended measures are often being adopted. Lack of coordination in government's departments or particularly its initiatives often cancel out the positive measures. Thousands of students are graduated from vocational and technical training centres every year. The army of skilled labours remains unemployed due to job markets oversupplied with job-seeking candidates. Privately-run vocational institutes have somehow made plans on induction about outgoing lots. SMA Rizivi Textile Institute, managed by industry leaders, is for example preparing human resources to meet the needs of technical jobs in the country's largest exporting sector. In view of the progress the institute is making, a change is expected on the front of human resource development. However, such individual example is not adequate to improve the employability condition of enormous skilled workforce in the making or already ready for jobs in the also-ran public-run technical and vocational institutes.
Making and implementation of policies can enable unemployed youth to earn money from diversified sectors in both rural and urban areas. Supports to farmers and development of cottage food processing industry can upgrade the living standards of downtrodden rural population. Similarly, in urban and suburban settlements a crowd of unemployed youths are vegetating or directionless because of lack of supports. Small businesses such as of mechanics, electronics technicians, etc. are just doing businesses. The faith-based driven financing system can explore the majority of unbanked population harbouring negative perception about interests.
Lower interest rate can increase the financial outreach to un-served finance seekers. It is also unfortunate for the domestic sector that it is operating without a domestic trade policy. Deputy chairman planning commission Nadeem-ul-Haq has said until internal dynamics are realigned under the guidance of such a policy, it is difficult to get hold of latent potential of the external economy.