There is huge opportunity for Islamic banks with surplus funds’

From Business Recorder -

LAHORE  (November 03, 2010) : Deputy Governor, State Bank of Pakistan, Yaseen Anwar has said there is a huge opportunity for Islamic banks, which have surplus funds to fill the credit gap in private sector created by conventional banks that are investing in treasury bills. He was talking to media at the 4th International conference on Islamic Banking and Takaful, which was organised by Alhuda Centre of Islamic Banking and Economics here on Tuesday.

He also said at present the Islamic banking was facing two challenges that were holding its growth; there was a need of capacity-building of Islamic bank institutions and awareness of Islamic banking products among the masses. “However, opportunities are there for Islamic banks to increase its market share by focusing on SMEs, micro-finance and housing finance,” he added.

Addressing the conference, he said Islamic banking was rapidly taking its roots all over the world. “It’s noteworthy to note that the assets of Islamic banking will exceed 1.3 trillion dollars soon and there are more than 1100 Islamic financial institutions operating all over the world,” he added.

He further emphasised upon the growth and development of Islamic microfinance and housing sector in Pakistan. He said the year on year deposit growth has also been an impressive 39 percent and the share of assets and deposits of Islamic banking have increased to 6.1 and 6.4 percent, respectively, in Pakistan. “In addition, Islamic banking branch network has increased to 667 branches and sub-braches now spread across the entire country,” he observed.

According to him, the recent growth coupled with a number of dedicated Islamic academic, legal, regulatory and supervisory institutions provide a solid platform for future growth and development of Islamic finance industry. In Pakistan, the Islamic banking was re-launched by the central bank in 2001 as an alternate and parallel system to provide an option to public to enable them to choose the products that best serves their needs. A comprehensive legal, regulatory and Shariah complaint framework was put in place before launching the initiative.

He said the initiative has been a big success; the Islamic banking industry has grown manifolds since 2001 and at present it has reached total assets worth Rs 411 billion until June 2010, showing an impressive year on year growth of 31 percent.

“Due to continuous growth in its deposits, the Islamic banks have surplus funds and have an opportunity to diversify their products mix by focusing on areas that are un-served and under-served, including tapping un-banked population, agriculture sector, SMEs and housing finance,” he said.

According to him, there are also advantages available for Islamic banks to offer financing of Musharaka and Modaraba basis, whose share of total financing is negligible. In order to steer the Islamic banking industry towards Musharaka and Modaraba financing, a task force on Musharaka and Modaraba financing has been established at SBP. Its key objectives are to review constraints faced in Musharaka and Modaraba financing, suggest recommendations for removing identified constraints and initiate Musharaka and Modaraba financing on a larger scale in Pakistan.

On the occasion, Muhammad Zubair Mughal, CEO AlHuda Centre of Islamic Banking and Economics, said the purpose of organising this conference is to highlight the image of Islamic banking and finance all over the world so that Islamic banking of Pakistan could convey its Shariah standardisation all over the world. Meanwhile, speakers and delegates from 24 countries participated in this event, including US, Malaysia, Indonesia, South Africa, Mauritius and Kenya. They presented their research-based speeches and presentations on Islamic banking and finance.

Among the speakers were Pervez Said, CEO of Dawood Islamic Bank, Salim Ullah, Head of Islamic Banking, State Bank of Pakistan, Justice Khalil-ur-Rehman, P. Ahmed, CEO of PakQatar Family Takaful, Alberto CEO of Shirkah Finance, Switzerland, Professor Khawajah Amjed Saeed Principal of Haley College of Banking and Finance, Professor Nadeem Feroz, The University of Montclair, USA, Dr Muhammad Qaseem.

Shariah Advisor of Dubai Islamic Bank, Qazi Abdul Samad Shariah Advisor of Bank of Khayber, Mufti Ehsan Waquar, Shariah Advisor of UBL, Captain Jamil Ahmed, CEO of Universally Insurance, Azeem Pirani, Regional Head of FWU AG Switzerland, Asim Khan, Executive Director of Dar Al Istithmar, UK, Shahid Muhammad.

CEO of Naymet Islamic Microfinance, Dr Amjad Saqib Executive Directory of Akhuwat, Dr Rafick Nabi Mohamod, Founder of Albarakah Multipurpose Co-operative Society, Mauritius, Khalid Waheed, CEO of Hum Securities, Nasre Nasser Eddien, Path Solutions, Kuwait and Muhammad Aslam, Head of Islamic Banking, HBL. The three-day conference would cover the topics of Islamic Banking and its Shariah issues, Shariah methodology, Takaful, Islamic Brokerage, Halal Industry and Islamic funds, Islamic Microfinance and Shariah standards.

Protecting consumers of microfinance in Pakistan

By Ayesha Zara Naeem, Lahore University of Management Sciences

Low-income earners in Pakistan have been offered financing opportunities for the first time, thanks to a recent surge in the activity of microfinance institutions (MFIs).

Microfinance theoretically involves the provision of loans or other financial services to lower-income-bracket borrowers, with little or no collateral required. These borrowers are able to take out small loans from MFIs to improve their businesses or living conditions. In Pakistan alone, the potential market for microfinance is an astounding US$27 million, with active borrowers and national gross loan portfolio size increasing in every financial quarter.

Despite the benefits that accompany the growth of MFIs, one aspect of microfinance lending that must be addressed is consumer protection, or the right of the consumer to make autonomous, well-informed decisions. In Pakistan, such protection is especially vital.

Not only does almost 56 per cent of the population have no access or experience with formal finance, but the majority of the individuals targeted by these institutions have extremely low literacy levels. The lower literacy factor, be it financial or otherwise, disadvantages most consumers by obstructing their understanding of the complexities of loan transactions. This lack of understanding can lead consumers to believe that access to finance is more essential than the appropriateness of the product’s costs or risks. This is sharpened by the fact that, for many lower-income people in Pakistan, microfinance is the only financing option available.

The MFI sector in Pakistan is highly differentiated and largely unregulated. Where some MFIs have a strictly non-profit social motive such as poverty alleviation or female empowerment, others may cater to slightly higher-income-bracket individuals and thus may become for-profit organisations.

The unregulated environment effectively means that MFIs do not have to observe adequate financial assessment before passing on a loan. In a poorly regulated developing nation, MFIs often justify higher costs by virtue of the added expense of providing individuals with basic levels of financial literacy, and the higher cost of enforcing compliance. This is often used as an excuse for not opting for responsible financial practices. For close-knit communities, such as those found in most rural areas of Pakistan, the ‘trust’ factor plays a major role in decision-making. A lack of alternatives causes lower-income-bracket individuals to rely faithfully on the MFIs for their financial needs. This should serve these institutions well, as often these individuals become long-term customers with the ability to make better financial decisions and fewer missteps in terms of unmanageable debt or repayment issues. This trust factor is a product of transparency in, and dependability on, the words and actions of the MFIs and cannot be stressed enough.

To achieve greater consumer protection within the MFI industry in Pakistan, there must be greater regulation. MFIs must develop transparent, unbiased, and nondiscriminatory ways of dealing with consumers.

While this need could be addressed by greater governmental regulation and policies, the adoption of self-regulatory methods by the MFI industry of Pakistan could better serve the institutions as well as the customers. Self-regulation means enforcing and adhering to self-proclaimed codes of ethics and practices and avoids the costs incurred due to governmental regulation—which ultimately makes credit more costly and limits the accessibility of microfinance. Ultimately, customers are more likely to use the financial services of a trustworthy institution, while the government is less likely to have to enforce regulation on a sector which adheres to general standards of customer protection.

Ayesha Zara Naeem recently graduated with a Bachelor of Science (Honours) in Economics from the Lahore University of Management Sciences.

This article is a finalist in the recent EAF Emerging Scholars competition.

Citibank to push for shariah-compliant microfinance banks

The International News, Pakistan –

KARACHI: Citibank will push the idea of establishing Shariah-compliant microfinance banks for the needs of millions of Muslims, left financially excluded because of Islam’s prohibition on interest, a senior official said on Monday.

“There are large microfinance banks in Indonesia, Bangladesh, Pakistan, Morocco, Egypt and India where the strength of the Muslim population is greater. But interestingly none of them are Shariah-compliant,” said Global Director Citi Microfinance Robert A Annibale.

“If something has become an impediment between the people and microfinance banks, it should be addressed,” he said. “There are some industry people who fear that business will be politicised, but that should not be a matter of worry.”

Pakistan’s microfinance banks and institutions have grown tremendously in just a few years, he said. “Relatively, when you look at the number of un-banked people in the country, the 1.9 million borrowers of microfinance banks, looks impressive.”

He said microfinance banks are not facing much of a funding problem, but rather difficulties in raising equity to meet regulatory requirements. “The real task is the scale — the level of outreach.”

Annibale said microfinance banks could work with other organisations like post offices, grocers and even gas stations to sell a range of banking services to the poor. “This way they save a lot of money in terms of infrastructure costs.”

The State Bank of Pakistan’s (SBP) credit guarantee facility, which encourages commercial banks to lend to their microfinance counterparts, will work as a catalyst for growth, he added. “The funding will come into microfinance banks. It will come from pension funds and investors who have tried other venues for investment.”

About lack of quality human resource in the microfinance industry, he said microfinance banks are now attracting a lot of graduates from leading universities around the world. “These graduates see that conventional banks are not growing and want to try something else. But most importantly, they are socially conscious and want to contribute towards a better change.”

Borrowers of terrorism-hit areas SBP devises procedure for mark-up rate differential payment

Shahnawaz Akhter, The INternational News –

KARACHI: The State Bank of Pakistan (SBP) on Thursday devised a procedure for payment of mark-up rate differential to the borrowers of terrorism-hit areas, a statement said.

The procedure was devised in pursuance of the Prime Minister’s announcement of fiscal relief package to rehabilitate the economic life in Khyber-Pakhtunkhwa, FATA and PATA and subsequent release of budgetary allocations by the Finance Ministry on account of interest and mark-up rate differential for first six months from January 1 to June 30, the central bank said.

Prime Minister Yousuf Raza Gilani on January 7 announced the relief package for the revival of agriculture, business and industry in areas adversely affected by the ongoing war on terror.

According to the procedure effective January 1, the central bank said that the banks, development finance institutions (DFIs) and microfinance banks (MFBs) would charge mark-up rate on all business loans (corporate, SMEs, agriculture and microfinance) outstanding as on December 12, 2009 of the borrowers of Khyber-Pakhtunkhwa, FATA, PATA at 7.5 percent per annum or six-month KIBOR offer side, whichever is lower, for the next two years, ie, up to December 31, 2011 except loans extended to cigarette, textile, cement, sugar and beverages sectors.

The SBP said that the loan disbursed on or after January 1 would not qualify for the relief. “However, loans rolled over or renewed after the date, to the extent of outstanding balance as of December 31, 2009 shall qualify for availing subsidy,” it said.

The central bank also allowed the facility to loans booked outside these areas on behalf of businesses operating or located.

The central bank advised the banks and development finance institutions to charge maximum rate of 7.5 percent per annum on the principal amount. “The differential between 7.5 percent per annum and applicable six-month KIBOR would be borne by the government as subsidy,” it said.

According to the procedure, the loans having fixed mark-up rates equivalent to or less than 7.5 percent would not qualify for the subsidy.

Similarly, no subsidy would be applicable if at any stage six-month KIBOR is determined equivalent to or less than the fixed rate, it said.

Regarding reimbursement of subsidy, the State Bank said that the mark-up rate differential would be reimbursed to the banks, development finance institutions and microfinance banks on six monthly basis in January and July each year subject to release of necessary budgetary allocation by the federal government for relevant fiscal year.

“The amount of subsidy payable in July 2010 shall be calculated, on the basis of amount outstanding as on December 31, 2009 on reducing balance basis for all scheduled repayments by the borrowers during the six months period,” the SBP said.

It, however, said that the dates for payment of support in next periods would be announced separately on receipt of the budgetary allocations from the government for respective periods.

In case a borrower had transferred its debt from one bank to another, than the cost of the mark-up rate differential would be borne proportionately by both the banks. “However final claim shall be submitted by the later bank and both the banks shall proportionately share subsidy to be received from the SBP,” it added.

Islamic microfinance bank in the offing in Pakistan

By Kashif Hussain, The Express Tribune –

KARACHI: Pak-Qatar Family Takaful is planning to establish the first Islamic Microfinance Bank in the country.

The bank will give preference to small and medium-scale businesses, said the CEO of Pak- Qatar Family Takaful, Parvez Ahmed, while talking to The Express Tribune on Tuesday. An additional investment of $250 million would be made this year to expand Pak-Qatar Family Takaful’s reach, acquire latest technology and provide innovative facilities to customers, he said.

He said the total investment of the company would reach $800 million. The microfinance bank would introduce Islamic insurance and special family takaful (insurance) products for provision of short-term loans on Islamic principles for the lowerincome group, he said. He said the company had achieved business of Rs500 million last year and this year it targets to take the figure to Rs1.5 billion.

The State Bank of Pakistan exempts MFBs’ time deposits of one-year, above

By Mushfiq Ahmad, Daily Times –

KARACHI: The State Bank of Pakistan has decided to exempt time deposits of one-year and above held by Microfinance Banks (MFBs) for maintenance of Cash Reserve Requirement (CRR), and time liabilities of one-year and above for maintenance of Statutory Liquidity Requirement (SLR).

According to a Circular (MFD Circular No. 2) issued on Thursday, Prudential Regulation No. 6 for microfinance institutions regarding maintenance of Cash Reserve & Liquidity Reserve has been amended wherein MFBs shall now maintain CRR equivalent to not less than 5 percent of its deposits (including demand deposits, and time deposits with tenure of less than 1 year). Time deposits with tenure of 1 year and above will not require any cash reserve. Similarly, time liabilities with tenure of 1 year and above of MFBs will also not require any SLR. The circular said MFBs shall also maintain SLR equivalent to at least 10 percent of its total demand liabilities, and time liabilities with tenure of less than 1 year.

Head of a major microfinance bank told Daily Times that this measure taken by the central bank is a positive sign, but it would not have any immediate impact. He said that less than five percent of deposits of microfinance banks are of over one year. “Our customers are very poor. They don’t have enough money to place in a long-term deposit. So this change is immaterial,” he said. “We would like to have long term deposits, but we don’t get them.”

He further said that most loans of microfinance banks are of one year or less. He said the mismatch in assets and liabilities exists in commercial banks in Pakistan, not in microfinance banks.

The State Bank said it has amended these regulations with a view to streamline calculations and reporting of CRR and SLR by MFBs. Furthermore, this exemption will encourage mobilisation of long-term deposits by MFBs, and greater utilisation of their financing resources towards onward lending, it added.

According to the Circular, Prudential Regulation No. 27 regarding Submission of Periodical Returns has also been amended under which MFBs shall henceforth submit their CRR and SLR statements along with bi-weekly (fortnightly) statement of affairs to Off-Site Supervision & Enforcement Department, State Bank of Pakistan. These instructions will be effective from bi-weekly (fortnightly) due on 28th May 2010 and onward, it added.

Roshaneh Zafar, Winner Of 2010 Global Leadership Award, Empowers Women In Pakistan With Microfinance

by ERICA LIEPMANN, Causecast Associate Editor

Each year, the Vital Voices Global Leadership Awards recognize a group of outstanding women from around the world who are creating social change in their communities.

In 2010, six dynamic women leaders from Afghanistan, Bahrain, Kenya, Brazil, Pakistan and the U.S. were honored for their achievements defending human rights, empowering women and addressing ongoing issues in their countries.

Roshaneh Zafar, the award recipient from Pakistan, was honored for her work bringing economic empowerment to her country’s poorest women. Since founding the Kashf Foundation, the first Pakistani microfinance organization to focus on women, in 1996, Zafar has helped over 300,000 women gain economic independence.

Read more about her inspiring story and watch below:

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