Islamic Banking & Finance Page 7th December 2018

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What shape Meezan Bank Pakistan is going to acquire in future

Muhammad Arif

Since some time three banks in Pakistan i.e. Bank Alfalah (BAFL), Meezan Bank (MEBL), and Faysal Bank (FABL) owned by foreigners from the Gulf are looking to sell them off as they want to seek exit opportunity from Pakistan’s banking industry.

However the matter is still at halt due to SBP informal ‘currency controls’ as In such a case, any payment made to them will likely involve the Pakistani acquirer drawing down the country’s dollar reserves by selling rupees and buying US dollars in the currency market and then sending that cash abroad to the sellers’ home country (in this case, UAE, Kuwait, and Saudi Arabia respectively).

 As an alternative State Bank may ask any acquirer of these banks to either raise the money to pay the sellers from outside Pakistan, and then make the payment without any money ever traversing through the Pakistani banking system at all (and thus not impacting the country’s foreign exchange reserves), or if the money must leave Pakistan, that it do so in small installments paid out over an extended period of time. Both of these conditions are unlikely to work, the first being difficult if not outright impossible for the buyers, and the second being unacceptable to the sellers.

For the first time in Pakistani history, three perfectly healthy and viable banks are simultaneously up for sale. None of them is a distressed asset holder being sold by sponsors who had hastily gotten into the banking business and made too many bad loans that they did not have the capital or the stomach to be able to cover.

None of these banks are like nationalized banks filled with a balance sheet of politically motivated bad loans and an employee roster of people who want a paycheck for doing very little.

Among these banks Meezan Bank is the most valuable, as measured by its market capitalization, which is higher than that of Bank Alfalah.

As of Sep 2018 its asset base is Rs 842 billion against Rs 782 billion as of Dec 2017 Its deposits have gone to Rs 711 billion as of Sept 2018 from Rs 673 billion as on Dec 2017.

Hence if anything goes against the Meezan Bank is its deposit base that is growing too fast for its management to be able to profitably deploy in loans. The task is made much harder by the fact that – unlike other banks – it cannot buy long-term government bonds instead it has to rely on short term Sukuk with low rates of profits.

The longest tenure on a Shariah-compliant government bond in Pakistan is of three years, and its yields are typically lower than a conventional three-year bond. Conventional banks have responded to the historically low-interest rates in Pakistan by shoveling money into long-term government bonds, where they can earn a nice spread of several basis points above the one-year bond. Islamic banks, Meezan has been working with the government to introduce a Shariah-compliant version of the 10-year bond.

In the meantime, when Meezan Bank is desperate to deploy its capital into corporate and commercial loans, and its existing and prospective client base know that, which is why they are able to bargain down for lower rates than they would pay on conventional loans.

It cannot rely on the religiosity of CFOs and corporate treasurers for higher rates, because Meezan Bank appears to have already run through the list of companies that bank only with Islamic banks and now has to compete for the Shariah-agnostic business alongside conventional banks.

Meezan Bank started its existence in 1997 as Al-Meezan Investment Bank, an institution with a limited licence to build up a corporate and investment banking franchise. At the time it started out, Al-Meezan Investment Bank was so small, and considered so insignificant, that it did not even have a full-time CEO. Irfan Siddiqui, the man who was given the job (and still has it) was serving as general manager (effectively COO) of Pak-Kuwait Investment Company (PKIC), a joint venture between the governments of Pakistan and Kuwait. Siddiqui continued in both capacities until at least 2001. However after joining Meezna Bank he tried to contact Gulf Arab states for its growth.

Meezan Bank’s current shareholding is now dominated by Noor Financial Investments Company, a publicly listed company in Kuwait that manages the wealth of several of that country’s richest families. Noor Financial owns 49% of the bank and has publicly made it known that its shares are up for sale. Most notably, in 2013, they tried to sell the bank to Habibullah Khan, the Karachi-based billionaire who owns Mega Conglomerate, a shipping and logistics conglomerate that has since branched out into real estate development and other industries as well. That transaction, however, was blocked by the State Bank of Pakistan, in part because Habibullah Khan was using an offshore company to conduct the transaction.

Meezan Bank’s rapid growth makes it an attractive acquisition target, though the one risk it has is the fact that the founder CEO Irfan Siddiqui is unlikely to continue the job for much longer, having served in it for what is effectively more than 21 years.

The issues confronting Meezan Bank now at present are-

  1. Continuity of Management after Irfan Siddiqui leaves.
  2. Investment avenues in short to absorb growing deposits on long term basis.
  3. Reformation of treasury department that some times do transactions with conventional banks on conventional basis for its day to day liquidity management.
  4. Sariah advisory committee role to focus on ways that how to compete with conventional market using Islamic financial products.
  5. Though it is collaborating with IBA for its research activities but that has done nothing apart from holding annual seminars. Research activities require bringing agreement on definition of Riba, formulation if Legislation for Islamic Banking and Finance, Short term and long term market products, to make Islamic banking active part of macro policies, fresh curriculum of Islamic Banking and Finance for education. These areas are totally missing areas and totally in control of Muftis who know nothing about the financial market dynamics.

Whether India can install Islamic Banking in near future in its country

Mubesher Mir

In India while interest-free institutions can be traced prior to the country’s independence the real effort by Indian Muslims began during first non-congress government in 1970s. Nothing happened as the idea of Islamic banking itself was under formative stage then. Unrestrained proliferation of Non-Banking Finance Companies (NBFCs) in early 1990s saw the emergence of many community led institutions that claimed to work on Islamic principles of shunning interest and sharing of the risk and rewards with shareholders and depositors. In late nineties RBI introduced large scale changes in NBFC regulations which eventually led to closure and collapse of hundreds of NBFCs in the country including some prominent Islamic NBFCs. After the new NBFC regulations the only Islamic Finance Company that survived was Kerala-based Alternative Investments and Credits Ltd. (AICL). In 2009 Kerala Government tried to copy this model by promoting an Islamic NBFCs (Al-Baraka Financial Service Ltd.) that may work without indulging in interest. The idea was to seek investments from public and rich NRIs and use the funds to develop infrastructure in the state. All those contributing to the funds would be paid dividend instead of interest. Very soon a PIL was filed against Al-Baraka to end the story.

While Islamic-friendly products can be found in India’s non-banking finance companies – cooperative societies and chit funds – these are not regulated by the central bank.

On the face of it, there are two reasons cited by government to disallow Islamic banking. One, there are other vehicles of financial inclusion, like Jan Dhan accounts. So, the argument goes, why should a “secular” banking system tailor-make financial products aimed at one particular community? The second argument meted out is that enabling Islamic banking would require changing laws, rewriting the RBI’s holy books as it were, since interest is the sine qua non of banking. That requires legislative support, which brings us back to the BJP.

The third underlying – and unstated – objection is the fear that Islamic finance will be used to fund terror, or channel terror money. The simple way of looking at this is that Islamic banking is misunderstood. But the reality is a growing suspicion about, among other things, the committee of experts (the Sharia boards and committees) who oversee such banking decisions in the name of faith.

Plans of Sustain Development Goals of Islamic Banking in Africa

Manzar Naqvi

It is anticipated that 60% of global population growth till 2050 is set to come from the Africa, the rate of return on foreign investments is higher in Africa than any other developing region – 9.3% and growing fast. However, without sustainable development plans, these investments will fail.

All Multilateral Development Banks unanimously agree that development financing needs far outpace their own resources, as well as available public funds. Recent estimates put the annual funding gap in African infrastructure investment between US$87 billion and US$112 billion. The financing gap to deliver the Sustainable Development Goals (SDGs) for the world is estimated at around US$2.5 trillion annually. The conventional approaches to face these challenges are inadequate; a paradigm shift in the development community is clearly needed so that no one is left behind.

All 57 of the Islamic Development Bank’s member countries – 27 are in Africa d. However they face disproportionate and complex economic challenges. The current development model, which depends on exporting raw materials, doesn’t create added value in their home market or support much needed employment opportunities. The results have been higher unemployment, especially for young people, and a rise in migration.

The development and donor community should understand that financing is not an end in itself, but a means to empower people to take the lead in improving their lives. With the development landscape evolving, the Islamic Development Bank has re-established its relevance by aligning development financing model with the changing needs of member countries.

African governments know better than most that extending aid without a design for impact offers only short-term solutions. In new strategic roadmap, the Islamic Development Bank has adopted a different development model. This model transforms us from a development bank to a bank for development and developers, with a focus on root causes of development challenges, rather than symptoms.

Member countries alone need about US$700 billion a year to finance the SDGs. New development model attempts to address this gap in a long-term way through playing the role of catalyst for development, thereby transforming the Bank from on-balance sheet funding provider to a development enabler, market creator, and investment facilitator. It prepares people for the future economy by focusing on: partnership, especially with private sector; science, technology and innovation; the global value chain; and making education more relevant to the economy. IDB is committed to the implementation of the 2030 Agenda for Sustainable Development, as articulated in the SDGs, and we believe in building strong partnerships to achieve it. IDB believe that governments should not only play the role of service providers. Governments must see their roles in creating an enabling environment, where all economic agents in the market play a role in development.

There is a number of pillars to IDB new strategy, but we may focus here on three areas that are particularly pertinent to members in Africa: harnessing the power of the private sector; increasing investment in innovation-led development initiatives; and empowering young people.

Financing for development is a huge challenge that will only be met through dramatic increases in private investment, but trillions of dollars are currently invested in negative or very low-yield assets. As such, the role of the private sector in the economic and social development of countries is gaining more and more predominance globally and IDB is fully committed to accessing private funds and institutional investors in a variety of ways. For example, IDB successfully initiated the annual Member Countries Sovereign Investments Forum to build on the growing importance of sovereign investments in member countries in order to promote and accelerate joint investment. Last year, IDB initiated the Public-Private Partnership Forum, reflecting ones belief of the advanced business model in helping increase private sector investments in economic and social areas, with the objective of meeting the community’s needs for goods and services through innovative financing methodologies.

The Islamic Development Bank has also significantly increased its investment in promoting science, technology and innovation, driven by our commitment to support the investment of human capital. Earlier this year IDB launched its flagship ‘Engage’ online platform to encourage knowledge transfer between scientists, innovators and entrepreneurs all around the world who are tackling sustainable development challenges. It is supported by IDB US$500m Transform Fund, which provides seed money for start-ups and SMEs to develop ideas and facilitate the commercialization of technology within member countries. The Engage platform and Transform Fund focus on accelerating progress towards six SDGs, namely SDG 2 (zero hunger), SDG 3 (good health and well-being), SDG 4 (quality education), SDG 6 (clean water and sanitation), SDG 7 (affordable and clean energy), and SDG 9 (industry, innovation and infrastructure).

The inaugural recipients of the Transform Fund will be featured during the upcoming Transformers Summit, which the Islamic Development Bank will convene for the first time in order to connect entrepreneurs, innovators and global leaders to discuss the role of science, technology and innovation) in achieving Sustainable Development Goal 11 (sustainable cities and communities).

With these initiatives, IDB aspiration is to help member countries provide the right environment to reduce the brain drain of young innovators and entrepreneurs’ migration to developed countries. Education is the key to unleashing the potential of future generations, and that’s why IDB fund skills and education training – especially for women and young people in rural areas – that enables access to the labor market and improves their life prospects. For example, the Islamic Development Bank Scholarship Program promotes excellence in science within member countries. To date, IDB have supported over 13,000 students, with funding of US$133.7 million, and 90% of graduates have returned to their respective countries to join their home institutions.

Ethiopia’s former emperor Haile Selassie once remarked, “We must become bigger than we have been: more courageous, greater in spirit, larger in outlook. We must become members of a new race…owing our ultimate allegiance not to nations but to our fellow men within the human community.” One cannot think of more fitting words to rally IDB member countries and beyond for the accelerated advancement of all African countries.

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