Islamic Long Term Financing Facility (ILTFF) under refinance facilities by SBP

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Refinance facilities are targeted loans from State Bank of Pakistan (SBP) to support exports and industrial growth with the ultimate objective of promoting overall economic development of the country. Over the years, SBP has introduced special schemes under its refinance window to ensure adequate supply of financing to the value added industries at competitive rates for enhancing their production capacity and meeting working capital requirements.

These schemes mainly include Export Finance Scheme (EFS) to ensure short term credit availability for exporters and Long Term Financing Facility (LTFF) for encouraging export led growth on the long term basis. In addition to promoting exports of the country, SBP has also introduced some special medium to long term refinance facilities at subsidized rates for other sectors such as schemes on renewable energy, establishment of silos, warehouses & cold storages for storing agricultural produce and purchase of machinery for SMEs. These schemes are regularly reviewed to effectively achieve the desired objectives.

Now since Islamic Banking has grown by covering 12.4 % of total banking assets hence the Islamic Long Term Financing Facility (ILTFF) has been offered to Islamic Banking Institutions (IBIs). This facility would be based on Mudarbah concept (Mudarabah is an Islamic contract in which one party supplies the money and the other provides management expertise to undertake a specific trade. The party supplying the capital is called owner of the capital. The other party is referred to as an agent who actually runs the business).

State Bank of Pakistan (SBP) shall make mudarabah investment in Islamic Banking Institutions (IBIs).SBP will act as Rab-ul-Maal by providing mudarabah investment facility to the Participating Islamic Banking Institutions (PIBIs), in the form of investment in the PIBI’s general pool, and the PIBI shall act as the Mudarib of general pool. The exposure of SBP under the scheme shall be on all assets of the PIBI’s general pool to the extent of SBP’s investment in general pool, and therefore shall not be limited to the assets financed under the scheme.

The PIBIs shall provide long term local currency finance for imported and locally manufactured new plant and machinery to be utilized by eligible export oriented projects. b. The facility shall be available to the export oriented projects only if their annual export is at least equivalent to USD5, 000,000 or if at least fifty percent (50%) of their sales constitute exports, whichever is lower.

The mudarabah investment made with the PIBIs shall mature on the due date agreed with SBP, and SBP is authorized to deduct outstanding balance of its investment in the general pool as per “Instructions for Profit & Loss Distribution and Pool Management for Islamic Banking Institutions”.

However risk management in the process would remain a major question. Further based on PIBs how much Islamic Banking institutions would charge from the beneficiaries as compared to rates available to Refinance facilities under conventional counterpart is another question. On normal Export Refinance Schemes the rates are around 3.0% with spread whereas in case of PIBs the rates are around 8-9 %.

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