Pakistan's Summit Bank eyes Burj Bank for Islamic banking entry

May 3 Summit Bank has received approval from Pakistan's central bank to conduct due diligence on Burj Bank, it said in a stock exchange filing, in the latest bid for the unlisted lender, which is seeking to boost capital through a stake sale.

The acquisition of a majority shareholding in Burj Bank would fit the long term strategy of Summit Bank, which is planning to convert its operations to conform to Islamic principles that include bans on interest and gambling.

Burj Bank, one of the country's five full-fledged Islamic banks, held 4.4 billion rupees ($42 million) in paid up capital as of December, compared with the regulatory minimum of 10 billion rupees.

Last month, Burj Bank said it had shortlisted three financial institutions to conduct due diligence on a non-exclusive basis. It also received an extension from the central bank to meet the mimimum capital requirement until June 30.

The Islamic lender has previously attracted interest from state-owned National Bank of Pakistan and MCB Bank Ltd , both conducting their own due diligence in 2014, but a sale has not materialised.

The largest shareholders of Burj Bank are Bahrain's Bank Alkhair with a 37.9 percent stake and the Jeddah-based Islamic Corporation for the Development of the Private Sector, which holds a 33.9 percent stake. 

(Reuters / 03 May 2016)

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Pakistan eyes Rs100bn in sukuk for power project

ISLAMABAD: The government will guarantee Rs100 billion ($955 million) worth of Islamic bonds (sukuk) to fund what would become the country’s fourth largest hydropower plant, aiming to address power shortages that have hindered economic growth.

The deal would be one of largest infrastructure sukuk sold to date, helping expand a funding format that has largely been confined to handling mid-sized deals with shorter tenors.

The 10-year sukuk, to be privately placed by the Neelum Jhelum Hydropower Company (Private) Limited, was given a preliminary AAA rating by credit rating agency JCR-VIS with a stable outlook.

The rating will be finalised upon review of legal documents and the issuance of the government guarantee, which will cover the issuance amount and profit payments, JCR-VIS said in a statement.

Unlike conventional bonds, sukuk are investment certificates which follow religious principles that forbid interest payments, instead paying returns linked to an underlying asset.

The project’s total cost is estimated at Rs40bn, with around three quarters of that being funded through debt. The plant would generate 969 MW of power adding around 5 per cent to the country’s total installed power generation capacity, with the first generating unit expected to start operation in mid 2017.

Infrastructure sukuk have been slow to appear, partly because they often require the transfer of assets into special purpose vehicles, which can be problematic for political or legislative reasons when it comes to large state projects.

(DAWN / 13 April 2016)

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Prospects of Islamic banking in Pakistan

LONDON: 

A hallmark of Islamic banking and finance in 2015 has been the resilience of Islamic retail banks in the Gulf Cooperation Council (GCC) countries in the wake of historically low oil prices.

The year has proven to be a testing period for the global Islamic financial services industry, with the gradual exit of the likes of Islamic Bank of Asia in Singapore and the visible diminishing enthusiasm in Islamic banking and finance of global banks.

Pakistan ranks third in Islamic finance awards

Furthermore, Islamic asset management industry has also been slow in attracting new players from the western world. While the likes of Amana Growth Fund managed by Saturna Capital and Shariah-compliant funds by Azzad Asset Management have continued to excel, new players like Arabesque Asset Management, despite having some of the most impressive investment philosophies and methodologies, have yet to make a mark.

SEDCO Capital is another success story. It has shown great commitment to offer Shariah compliant funds with social responsibility in the heart of its investment philosophy.

However, other socially responsible Shariah compliant funds have not been as successful as the ones mentioned. For example, F&C Responsible Shariah Global Equity Fund’s assets under management (AUM) have shrunk from over $50 million in 2014 to $4.5 million at the end of October 2015.

There is some anecdotal evidence that sensitive investors prefer dealing with fund managers who manage only Shariah compliant funds and portfolios. Conventional fund managers managing compliant funds are fast going out of favour of Islamic investors. With this backdrop, Islamic asset management industry is poised for growth in Pakistan, where Islamic financial institutions adhere to Shariah standards more religiously than in many other countries.

This is consistent with what has for long happened in Islamic retail banking, which is dominated by full-fledged Islamic banks. Conventional banks offering Islamic financial services through dedicated Islamic branches or Islamic windows only feature marginally in Islamic retail banking.

There are certain exceptions to this general observation.

The likes of ADCB in the UAE and Bank Alfalah in Pakistan operate vibrant Islamic windows and close sources suggest that these banks are preparing for full-fledged subsidiary Islamic banks.

MCB Bank in Pakistan has already received a licence for full-fledged subsidiary Islamic banks and is in fact preparing for its full launch in 2016. On December 16, 2015, the board of directors of MCB Bank Limited approved the sale of the bank’s entire Islamic banking operation to its wholly-owned subsidiary MCB Islamic Bank Limited (MCBIBL) for Rs7.946 billion. The bank’s extraordinary general meeting to approve the transaction is scheduled for 8 January 2016.

While the global Islamic financial services industry continued to grow, it is the second consecutive year of single digit growth – 7.3% in 2015 – as opposed to 9.3% in the previous year. In fact, Islamic banking and finance has grown with a declining rate since 2013 when it grew by only 12.3%, compared with the 2012’s growth of 20.2%.

In this context, predictions by some industry observers and consultancy firms of the estimated size of the industry to reach $3.5 trillion seem to be exaggerated.

The Global Islamic Finance Report (GIFR) 2015 predicted that Islamic financial assets would reach $5.3 trillion by the end of 2020. However, in expectation of further slowdown in the growth of Islamic financial assets in the wake of low oil prices, continued social disorder and political conflict in some of the key IBF markets, Edbiz Consulting, the publisher of the report, has decided to revise future size estimates.

Situation in Pakistan

In Pakistan, however, Islamic banking has continued to grow, with share of Islamic banking assets in the national banking sector having grown to 11%. The industry is poised for further growth, as the fundamentals are right.

The State Bank of Pakistan, which commissioned Edbiz Consulting to conduct a survey ‘Knowledge, attitude and practices of Islamic banking in Pakistan’ in 2014, has confirmed time and again that there is an overwhelming and evenly distributed demand in the urban and rural areas of the country for Islamic banking.

Pakistan slips in WEF competitiveness rankings

According to Edbiz Consulting, the demand for Islamic banking is as high as 95% among the households at the retail level. “Demand stands at 73% among the businessmen,” according to the SBP survey, which is based on 9,000 households nationwide and includes banked and non-banked customers, and 1,000 corporates.

(The Express Tribune / 28 December 2015)

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Pakistan is upbeat on Islamic banking

Upbeat on shariah-compliant modes, Pakistan has just launched Islamic branchless banking claiming it to be "the first" - globally.

At the same time, State Bank of Pakistan (SBP), the central bank, just unveiled vast opportunities for foreign and domestic investors to come into the fold of all types of conventional and Islamic banking to invest and earn big dividends.

The first to take up the Branchless Islamic Banking (BIB) are Kuwait-based Meezan Bank and Ufone, a subsidiary of Pakistan Telecommunications Corporation (PTCL), partly owned by etisalat. The new ventures will carry the brand name of "Meezan-Upaisa," and it is the only Shariah-based branchless banking service.

The other cellphone-based branchless conventional banking in the country are Mobicash Waseela Bank operated by Mobilink, EasyPaisa-Tameer launched in cooperation with Norway-based Telenor, Ypaisa-U bank of Ufone and Timepey-Askari Bank.

While launching the new BIB customer service across Pakistan, SBP governor Ashraf Mahmood Wathra said this is the first product of its kind, not only in Pakistan, but in the whole world. "We have granted the permission to launch this unique service in order to facilitate 95 per cent of Pakistanis who will like to deal only with Islamic banking services, and have remained away from the current conventional banking services, because of their Islamic faith," Wathra said.

SBP, which recently conducted a survey 'Knowledge, attitude and practices of Islamic banking in Pakistan', said there is an overwhelming, and evenly distributed, demand in the urban and rural areas of the country for Islamic banking. The demand for Islamic banking is as high as 95 per cent among the households at the retail level. "Demand stands at 73 per cent among the businessmen," according to the SBP survey, which is based on 9,000 households nationwide and includes banked and non-banked customers, and 1,000 corporates. Meezan Bank and Ufone took a full year to develop the BIB model, which has now been launched.

Win-win situation

"With this new collaboration, we aim to capitalise on the strength of both the parties - Meezan Bank's strength in Islamic banking and Upaisa's geographic footprint in facilitating customers, making it a win-win situation for all. This is because Upaisa is at the forefront in providing branchless banking services, and its collaboration at various levels and Meezan Bank holding over 50 per cent of the Islamic banking share in Pakistan," Ufone President Abdul Aziz said.

Asher Yaqub Khan, chief commercial officer of Ufone, said Islamic branchless banking will accelerate the goal of financial inclusion of the economy to a great extent.

President and chief executive of Meezan Bank Irfan Siddiqui said his bank has played a vital role in expanding access to Islamic financial services in Pakistan. "This initiative is poised to accelerate financial inclusion by adding convenience and greater reliability, deepening the role of Ufone through enhancing the value it provides to its customers and that of Meezan Bank in expanding the reach of Islamic financial services to every citizen in the country."

The two partners - Meezan Bank and Ufone - hope that their partnership will expand Islamic system footprint to its maximum potential customers and facilitate them to avail branchless banking services with utmost ease and convenience under the Islamic system. This will be the fist milestone in the ambit of Islamic branchless banking.

"Our partnership will provide the service at 10,000 points of service across 500 cities, districts and  villages. BIB will not only promote micro-financing but also finance for agriculture and small businessmen. It will also encourage savings by the general public, based on profit and loss model."

What is the size and scope of banking, and branchless banking, both in the conventional and Islamic modes? Wathra indicated this on the basis of current surveys conducted by the central bank.

Speaking at the launch of the Meezan Bank Ufone initiative he said it has opened up several new opportunities for the entire banking sector, as it will provide access to the people of low income groups. "There are 12,000 bank branches, 95 per cent of which are online, whereas 25,0000 branchless banking agents are serving low-cost and convenient access points. They are serving the needs of masses for cash-in and cash-out, domestic remittances, and bill payments."

Wathra also said that at present 9,600 ATMs have been installed, which are inter-connected through a local switch, providing payment facilities at merchant points. He said 42 million bank accounts have been opened, about 26 million plastic cards have been issued, and over 10 million mobile-wallet accounts are offering basic financial services on finger tips.

"Inspite of this big expansion of the banking services, there is no room for complacency. Pakistan, where 190 million people reside in geographically diverse areas, only 23 per cent of the adults currently avail any form of financial service. The access of people to a formal bank account is only 16 per cent, whereas only two per cent of adults have availed any form of formal credit. It is quite evident that the conventional approach of brick and mortar branches will never adequately serve the millions of unbanked masses in Pakistan," Wathra said.

SBP's recent surveys show that the market share of branchless or mobile-based, conventional banking mode Easy-Paisa is 54 per cent, United Bank's UBL-Omni 20 per cent, Mobicash of Mobilink 14 per cent and Ufone's Upaisa four per cent.

It shows that as far as the future of all types of banking services is concerned, sky is the limit. And here lies the vast money making opportunities for foreign and domestic investors and banks to make good dividends.

(Khleej Times / 29 November 2015)

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Pakistan AFRIDI FOR ISLAMIC FINANCIAL LAWS IN BUSINESSES

Lahore—Pak-China Joint Chamber of Commerce and Industry (PCJCCI) Saturday called for making the businesses and commercial activities in accordance with Islamic financial laws. 

The PCJCCI President Shah Faisal Afridi told APP here that Islamic banking has proved over time that it is based on firm and sound economic principles and has a good potential to become an alternative system of banking especially in view of the global financial crises. However, efforts should be made to modify the existing structure to provide better products andquality service within the ambit of Islamic laws, he said. He said all stakeholders should understand the limitations at this stage and work towards its advancement to develop an economic system truly reflective of the sacred principles of Islam. 

According to Global Islamic Finance Report, Pakistan ranked at number nine in the world in terms of development of Islamic financial services industry in the country, and second largest Islamic market (population-wise) after Indonesia, and could become the most important player in Islamic banking and finance, if it attained 20 percent market share. Faisal Afridi said, “Time has come where we should look ahead and concentrate to develop innovative products with more perfection and purity.” 

He mentioned that growth of Islamic banking in the country has been over 30 percent in last few years, which is certainly above the average global growth rate of Islamic banking and finance. “If this trend continues, then one should expect that in the next three years Islamic banking assets will at least double from its current size of Rs 926 billion.” 

“If that happens, the country will stand next to a number of Gulf countries and Malaysia where Islamic banking represents between 20 and 30 percent of the market share,” he added. He said, at present there are more than 600 Islamic banking branches throughout Pakistan and 19 Islamic banking institutions are offering commercial banking services as he appreciated the new Islamic banking strategy by the State Bank of Pakistan to double the number of Islamic banking branches in next four years. 

“To achieve the desired goal, we need highly competent, motivated and involved persons with required knowledge of conventional banking and finance as well as knowledge of Islamic Shariah,” he asserted. Faisal Afridi mentioned to product innovation, development and research, flexible and practical application and enforcement of shariah principles, creation of global financial hubs and regulators as key drivers for growth and competitiveness of Islamic finance industry.

(Pakistan Abserver / 28 September 2015)

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Standard Chartered’s Pakistan subsidiary gets over first hurdle in Islamic banks contest

The Pakistani subsidiary of Britain’s Standard Chartered was among the winners of the first round ofGlobal Finance’s debut contest for Islamic banks as part of the famous financial periodical’s annual competition for the title of the world’s best digital bank.

Besides Standard Chartered Pakistan, there were three first-round winners of what was a country-level competition for the World’s Best Digital Islamic Banks awards, which is part of the 2015 World’s BestDigital Banks contest.

They were Kuwait’s Boubyan, Kuveyt Turk, which is a Turkish subsidiary of the Kuwait Finance House bank, and Abu Dhabi’s Al Hilal.

Islamic banking is banking compliant with sharia, Islamic law.

Winners in the World’s Best Digital Banks competition were only selected from banks that had entered the contest, the New York-based magazine said in a statement.

It said the criteria were “strength of strategy for attracting and servicing digital customers, success in getting clients to use digital offerings, growth of digital customers, breadth of product offerings, evidence of tangible benefits gained from digital initiatives, and web/mobile site design and functionality”.

The overall regional and global winners, and global subcategory winners, will be named at Global Finance’s Best Digital Bank Awards dinner on October 27, which will follow the magazine’s Digital Bank Conference. Both events will take place at The Brewery, an event and dining venue in London’s City.

(Emerging Markets.Me / 03 August 2015)

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Pakistan: SBP to set up centers of excellence in Islamic finance at 3 institutions

The State Bank of Pakistan (SBP) held a signing ceremony for Financial Innovation Challenge Fund (FICF) on promoting excellence in Islamic finance in Pakistan under its financial inclusion programme funded by the UK’s for International Development (DFID) funded. The signing ceremony marks the beginning of the implementation phase of the FICF innovative Islamic finance education and research projects in partnership with leading higher education institutions which was earlier launched by Finance Minister Ishaq Dar on January 9, 2015.

SBP Deputy Governor Saeed Ahmad, who is also the FICF advisory committee chairman, hosted and witnessed the signing ceremony. The chairman congratulated the successful institutions for proposing projects which will build platforms for Islamic finance education and research in Pakistan. He shared that the committee held a series of long meetings to select the best projects from the long list of proposals received under the challenge round. The decision was based on well-defined uniform evaluation criteria including uniqueness of the proposed innovations, sustainability of the ideas and potential for financial inclusion to establish value for money.

Saeed Ahmad, while sharing his enthusiasm and hope, urged the successful institutions to implement their projects over the next 12 months to ensure timely completion to further build Islamic finance education research infrastructure in Pakistan. He hoped that the centers of excellence would meet the growing human resource and knowledge gaps through quality and value-added services and knowledge products.

At the ceremony, three projects were signed with Institute of Business Administration (IBA), Lahore University of Management Sciences (LUMS) and Institute of Management Sciences (IM Sciences).

The FICF is a component of the larger financial inclusion programme (FIP) being implemented by the SBP under the funding assistance of UK aid to spur innovative financial inclusion in Pakistan. The first and second round of the fund was held on financially inclusive government to person (G2P) payments and promoting rural and agricultural finance accordingly.

(Pakistan Today / 31 July 2015)

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The ownership and control of Islamic banks in Pakistan

LONDON: 

There are five Islamic banks operating in Pakistan and it should be interesting to find out who owns and eventually controls them. 

To any keen observer of Islamic banking, it should not come as a surprise that the significant shares of paid-up capital actually comes from the high net worth families and institutions in the Middle East, especially the six countries comprising the Gulf Cooperation Council (GCC).

A non-academic investigation into the networks that control Islamic banks in Pakistan reveals that it is not only the shareholders, but others as well who exert their influence and control.

The first table shows that there are six countries, Kuwait, Saudi Arabia, UAE, Bahrain, UK and Singapore, from where individuals and institutions have invested in the five fully-fledged Islamic banks in Pakistan.

Though Malaysia’s Maybank has invested in MCB to have an influence on the development of Islamic banking in Pakistan, especially in the wake of MCB’s awaited Islamic banking subsidiary, Malaysian investors have been reluctant to invest in Islamic banking in Pakistan. This is an important exclusion, given that Malaysia, otherwise, is a major player in the global Islamic financial services industry.

It should be obvious that Islamic banking in Pakistan is controlled by governments (Kuwait), institutions (Dubai Islamic Bank, Al Baraka Bank, Bank Alkhair and Islamic Development Bank) and some individuals. The objective of this control function is purely business since the shareholders would like to preserve their capital and ensure maximum return on their investments.

One thing that is not so explicit from the above information is the fact that almost all of these banks are advised by the graduates of Darul Uloom Karachi, Jamiatul Uloom Islamia Binnori Town Karachi and Jamiatul Rasheed Karachi – well-known religious seminaries of Deobandi school of thought.

Overall, the Shariah advisory input comes from local as well as foreign Shariah scholars. Burj Bank is the only Islamic bank that has representation of Brailvi school of thought on its Shariah board. Table below lists the Shariah advisors of the five Islamic banks in Pakistan, and their religious affiliations.

The Deobandi school of thought dominates Islamic banking in Pakistan. It is fair to say that State Bank of Pakistan (SBP) has adopted a Shariah regime that tries to dilute the control of any particular school of thought or institution on Islamic banking.

As a vast majority of Muslims in Pakistan belong to Barelvi school of thought, it is important to create more awareness of Islamic banking by way of engaging more of the seminaries run by Barelvi scholars.

The above argument in no way should be taken against Darul Uloom Karachi or Sheikh Taqi Usmani, as both of them have played an instrumental role in the development of Islamic banking not only in Pakistan but also in other parts of the world.

Also, the argument here should not be deemed as an attempt to accentuate religious sectarian differences. In fact, Islamic banking and finance on a global level has helped dilute the juristic divide across different schools of thought. Bringing more Barelvi scholars into the domain of Islamic banking will help in creating harmony across different religious sects.

One particular institution that has advocated Islamic banking on academic and intellectual levels is International Islamic University Islamabad (IIUI). Its exclusion from Shariah advisory function at the level of Islamic banks can perhaps be explained with the geographical location of Pakistan’s financial district where SBP is located and all of the Islamic banks are headquartered.

In Islamabad, on the other hand, where Securities and Exchange Commission of Pakistan is based, there is adequate representation of IIUI both at institutional and regulator levels.

Inclusion of courses on banking and finance into the curricula of religious seminaries should only be beneficial for the graduates of such institutions. Islamic banking is growing in Pakistan and any religious seminary that reforms its curriculum to accommodate teachings of Islamic banking and finance is poised to benefit from this growth story.

The employment opportunities in Islamic banking and finance are not limited to Pakistan. In fact, a considerable number of graduates of IIUI are serving Islamic financial institutions in other parts of the world, especially in the Middle East.

Preparing students of religious seminaries for a vocation in Islamic banking and finance has far reaching economic, social and religious benefits. Therefore, it is important that the government initiates a nation-wide drive to create awareness of Islamic banking and finance in the religious seminaries. The SBP in this respect can lead a drive for promoting Islamic financial literacy in religious educational establishments in general and the amongst masses in particular.

(The Express Tribune / 01 March 2015)

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Pakistan picks banks to hold dollar sukuk roadshows, will start Monday

 Pakistan has mandated four banks to arrange fixed income investor meetings starting Monday ahead of a potential issue of a U.S. dollar-denominated Islamic bond, a document from lead managers said on Sunday.

The sovereign, rated Caa1 by Moody's and B- by Standard & Poor's, has picked Citigroup, Deutsche Bank, Dubai Islamic Bank and Standard Chartered to arrange the roadshows and the possible deal, it showed.

Pakistan will hold roadshows in the United Arab Emirates on Monday, before heading to London and Singapore on Tuesday, with a 144A-compliant, benchmark-sized sukuk to follow, subject to market conditions, the document added.

Benchmark size is traditionally understood to mean upwards of $500 million. If a debt issue is 144A-compliant, investors in the United States can buy the offering.

The sukuk uses a sharia-compliant sale and lease-back structure to underpin the transaction. Proceeds will be used to purchase land comprising the M-2 Motorway, which connects Lahore to the capital Islamabad.

Political instability in Pakistan had temporarily caused some uncertainty around the sovereign sukuk issue as Prime Minister Nawaz Sharif came under pressure from weeks of demonstrations calling on him to resign.

Pakistan, a favourite with frontier market investors since peaceful elections were held there last year, sold $2 billion of dollar-denominated bonds in April after attracting $7 billion in investor orders.

In September 2013, the IMF saved Pakistan from possible default by agreeing to lend it $6.7 billion over three years.

The sukuk will be issued by Pakistan International Sukuk Company and is expected to be listed in the Luxembourg Stock Exchange.

Pakistan's external debt was about 19 percent of gross domestic product (GDP) on June 30 and it had a fiscal deficit of 5.5 percent of GDP in 2013-2014, it showed.

(Reuters / 23 November 2014)

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Pakistan's Asia Insurance to enter takaful market

Lahore-based Asia Insurance Company Ltd will seek shareholder approval next week to offer Islamic insurance (takaful) products, the latest insurer seeking to expand into the sector.

Asia Insurance joins a growing list of firms in offering sharia-compliant products including United Insurance Company and EFU insurance group , the largest private insurance group in the country.

In May, Pakistani regulators introduced new takaful rules that allowed conventional firms to enter the sector, aiming to increase insurance penetration which remains the third-lowest in Asia.

An alternative to conventional insurance, takaful follows religious guidelines including bans on interest and pure monetary speculation and a prohibition on investing in industries such as alcohol and gambling.

Asia Insurance will seek approval to allocate 50 million rupees ($492,853) in capital to its takaful operation, the minimum capitalisation requirement, the firm said in a bourse filing.

It will also seek to increase its authorised capital to 500 million rupees from 300 million currently.

(Reuters / 24 November 2014)

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Pakistan raises $1b through Sukuk

ISLAMABAD: 

In a second largest single transaction in less than a year, Pakistan has raised $1 billion from international debt markets through the issuance of five-year dollar-denominated Sukuk bonds. This will help Islamabad build foreign currency reserves to the satisfaction of the International Monetary Fund (IMF).

The transaction is expected to restore international investors’ confidence, which was shattered after an unsuccessful attempt to sell stakes in the Oil and Gas Development Company Limited (OGDCL).

The government decided to accept offers of $1 billion for a five-year tenor at a profit rate of 6.75%, which is half percentage points lower than the price at which the five-year Euro bond was sold in April 2014, the finance ministry said on Wednesday.

Unlike the Euro bond that was issued without collateral, the government has pledged the Islamabad-Lahore Motorway to raise funds that helped it keeping the interest rate below the Euro bond transaction when it raised $2 billion. Sukuk is Islamic bond that has to be backed by collateral.

The 6.75% interest rate for $1 billion is 5.17 % over and above the benchmark five-year US Treasury rate. Very low interest rates in Western and European markets amid fears of global slowdown of economies have also increased interest in highly lucrative sovereign papers issued by developing economies.

The government was seeking to raise only $500 million. However, investors showed a very high interest and made subscription of $2.3 billion, which was nearly five times of the target amount, said the ministry.

It decided to raise $1 billion to offset impacts of the failed OGDCL transaction on foreign currency reserves. The successful transaction may revive the investors’ interest in upcoming Habib Bank Limited capital market transaction. The government is hoping to raise $1.2 billion by selling its remaining 42.5% stakes in the HBL.

The IMF has asked Pakistan to increase its official foreign currency reserves to $13 billion by June next year from the present $8.5 billion.

The geographical interest of investors was well distributed with 35% subscriptions coming from Europe, 32% from the Middle East, 20% from North America and 13% from Asia. The order book comprised top quality investors from all parts of the globe, the finance ministry added.

Finance Minister Senator Ishaq Dar said the success of transaction was a reflection of confidence of the international investors’ community in Pakistan’s economic policies. He added that the profit rate of 6.75% compares favourably with the average weighted cost of comparable domestic debt of about 11% in Pakistan, and will save the country about Rs5 billion annually in debt servicing.

The proceeds of the Sukuk will go to the State Bank and the rupee proceeds of an equivalent amount will be used for retirement of domestic debt.

(The Express Tribune / 27 November 2014)

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Pakistan picks banks to hold dollar sukuk roadshows, will start Monday

Pakistan has mandated four banks to arrange fixed income investor meetings starting Monday ahead of a potential issue of a U.S. dollar-denominated Islamic bond, a document from lead managers said on Sunday.

The sovereign, rated Caa1 by Moody's and B- by Standard & Poor's, has picked Citigroup, Deutsche Bank, Dubai Islamic Bank and Standard Chartered to arrange the roadshows and the possible deal, it showed.

Pakistan will hold roadshows in the United Arab Emirates on Monday, before heading to London and Singapore on Tuesday, with a 144A-compliant, benchmark-sized sukuk to follow, subject to market conditions, the document added.

Benchmark size is traditionally understood to mean upwards of $500 million. If a debt issue is 144A-compliant, investors in the United States can buy the offering.

The sukuk uses a sharia-compliant sale and lease-back structure to underpin the transaction. Proceeds will be used to purchase land comprising the M-2 Motorway, which connects Lahore to the capital Islamabad.

Political instability in Pakistan had temporarily caused some uncertainty around the sovereign sukuk issue as Prime Minister Nawaz Sharif came under pressure from weeks of demonstrations calling on him to resign.

Pakistan, a favourite with frontier market investors since peaceful elections were held there last year, sold $2 billion of dollar-denominated bonds in April after attracting $7 billion in investor orders.

In September 2013, the IMF saved Pakistan from possible default by agreeing to lend it $6.7 billion over three years.

The sukuk will be issued by Pakistan International Sukuk Company and is expected to be listed in the Luxembourg Stock Exchange.

Pakistan's external debt was about 19 percent of gross domestic product (GDP) on June 30 and it had a fiscal deficit of 5.5 percent of GDP in 2013-2014, it showed.

(Reuters / 23 November 2014)

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Pakistan central bank to phase in new Islamic finance rules

Pakistan's central bank will phase in new capital adequacy rules for Islamic banking subsidiaries and trade sharia-compliant government debt in the open market, addressing a lack of liquidity management tools in the sector.

The initiatives are part of an ambitious five-year plan by the regulator to promote Islamic finance through an array of proposed legislative changes, product incentives and instructions to market participants.

In April, the central bank said it was working on such tools as part of efforts to ensure a level playing field for Islamic banks in the majority-Muslim nation.

The central bank has revised the minimum paid-up capital requirement for Islamic bank subsidiaries to 6 billion rupees ($58.4 million), giving them a five-year period to raise it. The minimum paid-up capital requirement required for all other banks is 10 billion rupees.

The move would encourage conventional banks to establish subsidiaries rather than operate Islamic windows, a practice that allows lenders to offer Islamic financial services provided client money is segregated from the rest of the bank.

In a separate circular, the central bank said it would trade government-issued Islamic bonds (sukuk) with Islamic banks on a competitive basis, serving as a money market instrument and a monetary policy tool.

(Reuters / 20 October 2014)

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Pakistan's Islamic banking push faces industry gaps -study

Pakistan's central bank has released a study of Islamic banking, the first of its kind in the country, which shows latent demand for sharia-compliant finance but many obstacles such as small branch networks and a lack of product awareness among consumers.

Consumer outreach, rural banking and the need for stand-alone Islamic banks are among issues that must be addressed if the industry is to reach a regulatory target of 15 percent of total banking assets, from under 10 percent now, the study said.

Pakistan is the world's second most populous Muslim nation and the study, based on a nationwide survey of 9,000 households and 1,000 companies, confirmed widespread consumer acceptance of the ban on interest payments which underpins Islamic finance.

But the study also showed customers' choice of bank was only partly driven by religious belief, with only 23 percent of respondents citing this as the main reason to use Islamic banks, behind customer statisfaction and quality of service.

The findings have policy implications and could influence the strategies of incumbent Islamic banks as well as a number of conventional banks which plan to expand into the sector.

The study found 74 percent of bank customers were willing in principle to switch to Islamic banking, but 69 percent said the lack of an Islamic bank in their area was the reason for not switching.

As of December, Islamic banks had a combined network of 1,304 branches across Pakistan, with half concentrated in the urban centres of Karachi, Lahore and Islamabad.

Meanwhile, over 83 percent of customers of all types of bank did not understand Islamic banking services; unbanked respondents were further behind.

Forty-seven percent of respondents did not see a difference between the terms "sharia-based" and "sharia-compliant", and some said such terms were confusing and should be avoided. Sharia-compliant banking merely obeys the industry's rules, while sharia-based business also follows Islamic principles such as an emphasis on transactions based on real economic activity rather than monetary speculation.

There was also a mismatch when it came to the types of financial products on offer. Islamic banking customers were more familiar with equity-based contracts, even though most products on offer are debt-based; a product known as murabaha accounts for 40 percent of all Islamic financing contracts in Pakistan.

NEVER CONVENTIONAL

Pakistan introduced Islamic banking in the 1970s but for most people, it remains a new phenomenon: two-thirds of Islamic banking clients have had such a relationship for fewer than three years.

Conventional banks want to retain clients and several plan to offer Islamic financial products, but in doing so they will have to ensure a clear segregation of the two businesses.

More than half of all bank customers and 64 percent of nonbanked respondents, however, said they would "never" become a client of a conventional bank offering Islamic services.

Close to 70 percent of all respondents said lenders should offer Islamic banking either by establishing separate companies, or by converting themselves into full-fledged Islamic banks.

More than half of the companies in the study said they would prefer to raise finance though Islamic products, although most were neutral when it came to using Islamic bonds.

The study, conducted by London-based Edbiz Consulting and financed by Britain's Department for International Development, recommended that the role of sharia scholars be enhanced and made more public to help promote the industry.

(Reuters / 13 October 2014)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com