LENDING TO AGRICULTURE & SME SECTORS
TARIQ AHMED SAEEDI
Apr 9 - 15, 2012
Islamic banking industry is thriving on the rising awareness of people about the banking services in Pakistan and banks expanding outreach for financial inclusion supported by the central bank's financial sector growth-oriented policies and reformative regulations. Noticeably, share of Islamic banking ramped up to 7.8 per cent from little over 4.9 per cent four years back. The growth rate has been impressive in this period, which is not less than 30 per cent year on year. Deposits also depicted annual growth of staggering 34 per cent to have touched the mark of Rs521 billion by the end of last year.
In spite of the startling progress in all fronts, Islamic banks have not played any important role in improving the financial access of agriculture and small and medium enterprise (SME) sectors, which are the mainstays of the national economy.
Agribusiness holds three to four per cent in total financing by the Islamic banks. Share of overall agriculture sector in financing portfolio is rather more disappointing. It was not more than 0.1 per cent until December 2011. The major consumer of funds of Islamic banks is corporate sector that accounts for 73 per cent share in total financing portfolio.
The weighty financing concentration of Islamic banks in textile sector is a good sign. After all, textile sector is the backbone of Pakistan's economy earning the country 60 per cent of its export revenue.
However, it should also increase penetration in the agriculture sector that accounts for 21 per cent of gross domestic product (GDP) and approximately 60 per cent of the population earns incomes from the sector directly or indirectly. If insolvency risk is high in agri credit, then banks can help farmers to improve their repayment capabilities as governor state bank of Pakistan (SBP), Yaseen Anwar, said, "banks need to create credit absorption capacity of farmers through adoption of best modern farming practices, development of storage and marketing systems and resolution of other real side issues."
July-December agriculture credit disbursement from all financial institutions was 23 per cent higher at Rs125 as compared to Rs102 billion in the same period last year. This showed the increasing confidence of financial institutions on agriculture sector. SBP is facilitating banks to enhance agri financing.
Although there is no restriction in Islamic banking system on dealing with the non-Muslims, its target market is Muslim population at least in Pakistan, majority of which have faith in Islamic doctrine, Shariah-compliance being one of them.
Poverty-stricken farmers are under the tight clutches of exploitative lending system in the country. Conventional banks have unbearable interest charges while informal loans squeeze the income of poor rather than improving their standards of living.
Islamic banks should move forward to help the rural economy deal with the economic backwardness. Borrowers would be interested to take the loans from Islamic banks because of their Shariah-compliance. Interest/usury is prohibited in Islam is a widely known belief. Islamic banks could use the principal stance of avoiding interest as an effective marketing means to persuade underserved communities towards banking system.
SME is one of the prime drivers of the economy, main source of income of assorted businesses, and leading suppliers of inputs to large-scale industries besides finished goods in the market. The sector constitutes 98 per cent of the business establishment in Pakistan and accommodates nearly 80 per cent of non-agriculture workforce. Notably, this sector is also not the priority segment of lending institutions. The share of SME financing in total financing mix of the banking industry in general has been shrinking year on year. Accumulation of nonperforming loans is termed the main reason behind the downward trend-16.2 per cent in 2007 to 7.7 per cent in 2011.
Ironically, even if banks are ready to finance the small and medium companies, the funding is for meeting their short-term needs instead of adequate financing to their long-term, resources-required, projects of for instance research and development, experimental new launches, or expansion to international arena. Long-term financial support can enable them to scale up production, improve quality, and become larger at later stage. The economic windfalls of robust domestic economy will unquestionably be great as witnessed in China.
In Islamic financing portfolio too, SME accounted for tad 5.2 per cent share as of December 2011. Just like conventional banks, Islamic banks also find it opportune to perk up its investment portfolios. While financing mix stood at Rs211 billion, investment portfolio amounted to Rs274 billion in December 2011. This pushed up the share of investment in total assets to 43 per cent because of on and off issuance of Sukuk. Government securities have become the favourite investment avenues for the banks in general. It is worthwhile to note that bad debts of Islamic banks were not as much considerable as that of conventional banks.
"The overall asset quality of Islamic banks is significantly better than the banking industry as a whole with nonperforming financing ratio being less than half of that of the banking system," noted a central bank's report.
The former IMF Executive Director Dr. Mirakhor was reported as saying Islamic finance is like "a movement toward becoming more other conscious...having consciousness about the other fellow, about the general public interest." And, that is in a wide contrast to the "simple narrow basis of self interest which motivates, supposedly, the economic agents in the liberal economic system," he maintained.
Profit maximization motives or hardboiled loan contracts cannot differentiate Islamic banks from mainstream conventional banking system. Shariah-compliance is based on primarily risk sharing and egalitarian approach, which must be translated into the well-being of the society and betterment of the economy.