corporate interest in Islamic banking
Corporate interest in Islamic banking is still in
initial stages but it is growing. Lately, the Islamic
banks have established contacts with some major private
as well as state-run companies and are helping them
raise large amounts of money through various Shariah-compliant
modes of financing.
Dawood Hercules Chemicals Ltd has signed an agreement
with Meezan Bank and Habib Bank for arranging Rs8.5
billion. An official of the Meezan Bank said that the
company would start receiving the funds before the end
of this month. The money will be used for a variety of
purposes including financing of new projects and
restructuring of conventional loan portfolio.
The two banks will arrange this largest-ever Islamic
financing through multiple structures each of them
tailored to meet the specific needs of the company.
Recently, Meezan Bank has also acted as co-lead manager
in the second Sukuk al Ijarah issue of Rs8 billion
offered by Water and Power Development Authority (Wapda).
And it has worked as joint lead manager in the Rs2
billion Sukuk al Musharaka issue of Sui Southern Gas
Ittehad Chemicals has negotiated Rs1.1 billion
financing through a Shariah-compliant mode of financing
from a consortium led by Standard Chartered. “We want
to use this six-year financing to restructure our old
loans portfolio,” said Ittehad Group Chairman M. Usman
Ghani Khatri, meaning that the Islamic financing would
be used to repay conventional loans. Other banks
participating in the syndicate include UBL, Faysal and
Officials of Shariah-sensitive Sitara Group, Dawood
Hercules Group and Ittehad Group say that they plan to
gradually cleanse their entire conventional loans of
the element of interest.
But they frankly admit that in so doing they would
ensure that the financing through Shariah-compliant
products is not too expensive and that they cover all
National Industrial Parks Development & Management
Company (NIP) recently mandated Emirates Global Islamic
Bank to act as financial advisor and lead arranger for
Rs2 billion Sukuk. A subsidiary of Pakistan Industrial
Development Corporation, NIP would use this money for
developing a world-class park in Korangi, Karachi.
Orient Petroleum Institutional Inc. has appointed Dubai
Islamic Bank Pakistan as financial advisor and lead
arranger for a $35 million syndicated Musharaka
facility. Earlier, the bank has also acted as financial
advisor and lead arranger in the Rs4.2 billion Sukuk
issue for Karachi Shipyard & Engineering Works. The
KSEW will use the money for upgrading the shipyard
Dubai Islamic Bank has also participated in two Sukuks
worth Rs1.725 billion issued by Sitara Chemicals for
the expansion of the existing chemical plant and the
setting up of in-house power generating facilities.
Engro Chemicals has also awarded the bank the mandate
for arranging Rs2 billion Islamic financing facility,
which it would use for its urea manufacturing expansion
project. The bank also acted as advisor on the $150
million mandate for Port Qasim expansion awarded to
These are some of the recent corporate deals aimed at
seeking Islamic finance—also continuation of the trend
seen last year.
In 2006, financing and investment made by Islamic banks
and dedicated Islamic banking branches of conventional
banks rose to 2.4 per cent of the entire banking
industry from 1.8 per cent in 2005. This moved up
further to 2.5 per cent in March 2007.
Currently, there are five fully-fledged Islamic banks
and 13 conventional banks run dedicated branches. The
total number of bank branches involved in Islamic
banking stood at 170 at the end of March this year.
Over the last few years, Islamic finance has grown at a
good pace across the globe and is expected to grow at
10-12 per cent per year over the next decade. The
current market for Islamic financial product is
estimated around $300 billion. The UK, the USA and the
Middle East have emerged as main centres of Islamic
financing at a time when the world is wallowing in
Top officials of Islamic banks say that the clientele
of Islamic banks comprise mainly three categories of
corporates and individuals. First, the Shariah-sensitive
people, whether depositors or borrowers whose primary
concern is Riba-free transaction; second, those in
search of more competitive products; and third, the
companies and individuals whose chief concern is
earning highest return on deposits and paying lowest
mark-up on borrowing.
“Islamic banks are now trying to meet the requirements
of the second group,” said Dr. Imran Taqi Usmani,
Shariah Advisor of the Meezan Bank. He said that the
banks continue to reach out to the first group for that
is their niche market.
Currently, the banking spread of Islamic banks is the
highest. (Whereas the gap between average lending and
deposit rates of the entire banking industry was 751
basis points in June 2006, the wedge between the
lending and deposit rates of the Islamic banks stood at
854 basis points. More recent data relating to the
spread of Islamic banks are not available).
Since January 2005 when the first-ever $600 million
sovereign Sukuk was launched in the international
market, local Islamic banks have established Sukuk as a
trademark tool of Islamic banking. The financial market
has accepted them and banks as well as brokerage houses
continue to underwrite Sukuk issues.
“The tradability of these certificates with some
conditions will lead to the establishment and growth of
a Shariah compliant secondary market,” says a senior
executive of a local brokerage house. But he feels that
it might take some time for the market to start active
trading in Sukuk, adding that as the number of Sukuk
issues grows, the active trading would emerge.
After successfully introducing the Sukuk based on
different modes of Islamic financing like Ijarah,
Musharaka and Murabaha, the Islamic banks are now
trying to develop the Islamic version of a running
finance. “We are negotiating with a chain of
superstores to help them raise running finance,” said a
senior official of a local Islamic bank.
He said since the Shariah does not allow a conventional
running finance what his bank is trying to do is this:
“We will enter into a Musharaka with them but the
agreement would relate to specific items only and not
for the supermarket as a whole.”
“While we’ll share the profit and loss in the trading
of those particular items, they would be allowed to
meet their overall indirect expenses like workers’
wages and utility bills out of our investment.”
At the end of March this year, all Islamic banking
branches were catering to more than 24,000 borrowers—a
tiny percentage of the overall 4.8 million borrowers of
the banking industry. But Pakistan’s Islamic banking is
only five-year old.
Observers say that rising liquidity in the
international market particularly in the Middle East
(as a result of oil prices boom) would take the Islamic
banking to new peaks. “A lot of activity is taking
place in Islamic banking in the Middle East and as the
Arab stakes increase in local Islamic banking, we’ll
see more growth here,” said deputy head of a foreign
Growing liquidity in Pakistan has helped Islamic banks
show a faster growth in expanding their deposit base
than enhancing their lending profile.
Whereas they have only 2.5 per cent share in overall
financing of the banking industry, their share in
deposits is a bit higher—three per cent to be specific.
(The number of account holders in Islamic banks stood
over 164,000 in June 2006, whereas the total number of
accounts in the entire banking industry was 26.3
Institute of Bankers Pakistan Website.