After years of pondering over ways to give an impetus to promoting the growth of Islamic banks, Pakistan’s central bank is keen to launch the first ever Islamic equivalent of regular treasury bills. The planned move, according to Shamshad Akhtar, the central bank governor, promises to create an important investment opportunity for the small community of Pakistan’s Islamic banks, whose share of the market remains well below 3%.
Ms Akhtar is eager to point out that the pace of growth of Islamic banks is promising enough, to the extent that there are many prospective takers across the predominantly Muslim country. Issuing new equivalents of treasury bills that are compatible with Islamic norms, however, would give an important investment opportunity to the six Islamic banks that have so far been licensed in Pakistan.
Missed opportunity
Pakistan’s central bank has so far issued treasury bills worth Rs1000bn ($17.5bn) but has never issued an Islamic equivalent of that product. Consequently, Islamic banks have been kept out of the opportunity to invest in an outlet that is central to the investment opportunities available to other conventional banks.
Unlike the treasury bills offered to conventional banks, Islamic banks must only invest in such outlets that are backed by tangible assets in compliance with Islamic norms. Therefore, ahead of the issuance of Islamic treasury bills – proposed to be called baitul maal certificates – the Pakistani government in partnership with the central bank has to identify tangible assets against which the certificates are to be issued.
“This new development opens up a major new outlet for Islamic banks and helps us lift our growth potential,” says a senior executive at a Pakistani Islamic bank. “In Pakistan, the government is the largest borrower and if we can lend to the government in ways that are compatible with Islamic conditions, we should then be better placed to aggressively go out and seek more customers.”
This move follows interest from pious Muslims from the oil rich Middle East, seeking to expand investments in Pakistan. For example, a visit to Pakistan last year by Sheikh Mohammad bin Rashid Al Maktoum, prime minister and vice-president of the United Arab Emirates, led to announcements by two UAE-based property developers, Nakheel and Emaar, promising to invest more than $40bn in new property developments in Karachi and Islamabad.
Alongside this announcement it was reported that Dubai Islamic Bank (DIB), had promised to set up at least 50 branches across Pakistan in the next three years, making it the largest expansion ever by a foreign bank in the country. The DIB’s planned expansion has prompted interest in the future scope of Islamic banks from being just deposit takers and selective lenders to becoming robust providers of a wide range of services, from credit cards to innovative ways of managing wealth, as well as offering a range of products from personal consumer loans to packages for financing home and car purchases.
Privileged niche
Establishing new Islamic banks and expanding the Islamic banking operations of existing banks also helps to get around an effective cap imposed by the central bank on issuing licences for new conventional banks. The central bank issued its latest Islamic bank licence in February and is willing to consider requests for more, provided their sponsors meet all the regulatory requirements.
The entry of Islamic banks into Pakistan comes as profits are growing for the country’s mainstream banks. This has followed the government’s successful reform process begun 10 years ago, in which all the large public sector banks have been privatised, bar one.
In 2006, Pakistani banks became the focus of international banks when Standard Chartered – the global player that specialises in emerging markets – successfully purchased Pakistan’s privately-owned Union Bank. The deal was worth almost $500m and set the pace for large international banks to consider similar deals in the Pakistani market. Central bank officials and bankers say that at least two international banks are in the market, engaged in behind-the-scenes negotiations for the purchase of two local banks.
“With Pakistani banks looking generally so promising, this is a good time for the entry of Islamic or non-Islamic banks,” concludes the Islamic bank executive.
