Vibrant Financial Services Sector in Pakistan

[Riaz Haq]

Pakistan has been ranked 34 out of 52 countries in the World Economic Forum's first Financial Development Report, which was released in Pakistan through the Competitiveness Support Fund (CSF) in December, 2008.

The report is a comprehensive analysis of financial systems and capital markets in 52 countries that explores key drivers of financial system development and economic growth in developing and developed countries and serves as a tool by which countries can benchmark themselves and establish priorities for financial system improvement.

Arthur Bayhan, Chief Executive of the Competitiveness Support, told the media: "I am very happy to see that financial system in Pakistan is well reformed and competitive vis-à-vis Asia and Europe. Pakistan is ranked ahead of the Russian Federation (35), Indonesia (38), Turkey (39), Poland (41), Brazil (40), Philippines (48) and Kazakhstan (45)."

The United States narrowly edged the United Kingdom to take the top position in the Financial Development Index. The United Kingdom was second while China ranked 24 and India 31.

The Financial Development Index is based on three main pillars - Factors, Policies and Institutions, Financial Intermediation and Capital Availability and Access. These are further divided into sub - pillars.

Under Factors, Policies and Institutions pillar, Pakistan ranks 49th in institutional environment, 50th in business environment and 37th in Financial Stability. In the Financial Intermediation Pillar Pakistan ranks 25th in banks, 42nd in non banks and 17th in Financial Markets. Under Capital Availability and Access, Pakistan ranks 33rd.

Indicators showed that in business environment Pakistan had development advantage in Cost to Export, ranking 6th, Cost of closing business 5th.

In Financial Stability Change in Real Effective Exchange rate ranked 20th, External debt to GDP 10th, Frequency of banking crises 1st, stability index 15th.

In corporate governance Pakistan ranked at the very top in shareholder rights index, 14th in strength of investor protection.

In the Non banks pillar, Pakistan ranked 9th in the Real growth of direct insurance premiums. In equity market movement Pakistan ranked at the top again in equity market turnover.

Importance of Financial Services Sector:

Banks are often described as a nation's economic engine, in part because they provide financial intermediation functions between savers/investors who are looking for safety and growth and consumers/businesses who are looking for access to credit and capital.Banks also play a major role as instruments of the government's monetary policy aimed at regulating interest rates and money supply in the economy. The current economic crisis in the United States and Europe, marked by the ongoing weakness of major banks and the resulting credit and capital crunch, underlines the critical importance of the banking sector in national and global economies. Recognizing the crucial importance of the financial sector in global economic recovery, the Obama administration is allocating the bulk of the stimulus money to restore the health of major U.S. banks.

Banking in Pakistan:

Between 2002 and 2007, Pakistan's accelerated economic growth was underpinned by a strong banking sector. Classified as Pakistan’s and region’s best performing sector, the banking industry’s assets rose to over $60 billion, its profitability remains high, non-performing loans (NPLs) are low, credit is fairly diversified and bank-wide system risks are well-contained. Almost 81% of banking assets are in private hands. Likewise, the present foreign stake comes to 47% of total paid-up capital of all the financial institutions regulated by Pakistan's central bank, the State Bank of Pakistan.

Pakistan's foreign reserves hit a record high of $16.5 billion in October 2007 but fell to $6.6 billion in November, largely because of a soaring import bill. As the commodity prices rose and inflation in Pakistan reached near 25%, the State Bank of Pakistan was forced to raise its discount rates to as high as 15%. However, there has been a dramatic decline in the cost of imports such as oil during the last few months, spelling relief for Pakistan and other non-OPEC developing nations. The price of oil has dropped to about a quarter of what it was last summer.

Pakistan signed a $7.6 billion loan agreement with the International Monetary Fund in November to stave off a balance of payments crisis. It received its first tranche of $3.1 billion that month. In its first assessment since November, IMF has expressed satisfaction with Pakistan's progress. “Initial developments under the program have been positive,” IMF spokesman David Hawley told a regular news briefing, according to Pakistan's Dawn newspaper. “The foreign exchange rate has appreciated somewhat and preliminary information suggests that end-December targets for net international reserves and net domestic assets at the State Bank of Pakistan were met,” he added.

Pakistan's economy deteriorated sharply over the course of 2008, as inflation surged, and the current account deficits jumped on the back of rising oil and food prices, according to a World Bank report.

The report titled ‘Global Economic Prospects 2009’ says political turmoil and ongoing security concerns have also taken a toll on Pakistan’s economy, while the global financial crisis added substantial downward pressures on its financial markets. Pakistan and the International Monetary Fund agreed to lower the target for the gross domestic growth this fiscal year to 2.5 per cent from 3.5 per cent but many analysts said even achieving this target would be very ambitious.

The general deterioration in regional trade balances has been offset by large remittance inflows, which represent a sizable, and generally increasing share of GDP: during 2007, 14 per cent in Nepal, 8 per cent in Bangladesh and Sri Lanka, 4 per cent in Pakistan, and 3 per cent in India.

Given strong underlying growth dynamics in South Asia, the negative feedback effects of the global financial crisis are expected to be temporary. A relatively rapid rebound is expected in 2010, with a projected revival of GDP growth to 7.2 per cent.

During 2001-2007, former Prime Minister Shaukat Aziz, a banker by training and extensive experience in New York, understood the role of banking, finance, investment and consumer credit in economic growth of a nation. He focused on building strong banking, investment and finance sectors in Pakistan to underpin its economy. He strengthened capital availability, an essential and increasingly important economic input, in addition to labor and land improvements. With higher education budget up 15-fold and overall education spending up 36% in two years, he focused on education to improve the availability of skilled labor to fill new jobs. He pushed land development and public and private construction spending to improve infrastructure and facilities to attract greater business investment and create jobs. Mr. Aziz was largely successful in his efforts.

In general, there are primarily two types of banks in Pakistan: Commercial Banks and Investment Banks. Both types of banks provide financial services essential for Pakistan's economy to function and grow.

Commercial Banks:

Commercial Banks are privately-owned institutions that, generally, accept deposits and make loans. Deposits are money people entrust to an institution with the understanding that they can get it back at any time or at an agreed-upon future date. A loan is money let out to a borrower to be generally paid back with interest. This action of taking deposits and making loans is called financial intermediation. A bank's business, however, does not end there.

Most people and businesses pay their bills with bank checking accounts, placing banks at the center of our payments system. Banks are the major source of consumer loans -- loans for cars, houses, education -- as well as main lenders to businesses, especially small businesses. When banks are strong and the credit flows, it helps the overall economic growth. When banks are in crisis, the impact on business and consumers multiplies the weakness in the economy.

Following is an incomplete list of commercial banks in Pakistan:

* Allied Bank of Pakistan, Karachi
* Arif Habib Bank Limited, Karachi - (Formerly Arif Habib Rupali Bank)
* Askari Bank, Rawalpindi
* Atlas Bank, Karachi
* Bank AL Habib, Karachi
* Bank Alfalah, Karachi
* Crescent Commercial Bank, Karachi.
* Faysal Bank, Karachi www.faysalbank.com
* Habib Bank, Karachi
* Habib Metropolitan Bank, Karachi
* JS Bank
* KASB Bank, Karachi
* MCB Bank Limited (formerly Muslim Commercial Bank), Islamabad
* Mybank Limited, Karachi
* NIB Bank, Karachi
* PICIC Commercial Bank, Karachi
* Saudi Pak Non-Commercial Bank, Karachi
* Soneri Bank, Karachi
* Union Bank, Karachi - Standard Chartered Bank has acquired Union Bank
* United Bank, Karachi
* Bank Of Punjab, Lahore
* Citi bank,Islamabad
* Standard chartered Bank Ltd,Karachi
* ABN Amro Bank Ltd,Karachi Now merged in RBS (Royal Bank of Scotland)
* HSBC Ltd,Lahore


Investment Banks:

Investment banks provide four primary types of services: raising capital (private equity or public offerings of shares), advising in mergers and acquisitions, executing securities sales and trading, and performing general advisory services. Most of the major Wall Street firms are active in each of these categories. Smaller investment banks may specialize in two or three of these categories.

The list of investment banks in Pakistan includes the following:

* Al-Towfeek Investment Bank Limited
* Invest Capital Investment Bank Limited
* Atlas Investment Bank Limited
* Crescent Investment Bank Limited
* Escorts Investment Bank Limited
* First Credit and Investment Bank Limited
* First International Investment Bank Limited
* Fidelity Investment Bank Limited
* Franklin Investment Bank Limited
* Islamic Investment Bank Limited
* Jahangir Siddiqui Investment Bank Limited
* AMZ Securities
* Orix Investment Bank (Pakistan) Limited
* Prudential Investment Bank Limited
* Trust Investment Bank Limited

Finance Expo 2009:

Finance Expo Pakistan 2009 Exhibition was held last week in Karachi to showcase the most competent, dynamically growing and innovative companies that demonstrate the latest financial systems and methods stimulating the development of the banking and finance industry.

The Expo was an opportunity to network with decision makers, economists and experts of Banks, Takaful, Modaraba, Insurance Companies, Asset Management Companies, Stock Exchanges, Security Companies, Financial Education Institutes, & Leasing Companies and also of the fast growing industries like IT & Telecom, Oil & Gas, Alternative Energy & Power Industries, Agriculture, Pharma, Textile, Builders & Developers, Auto as well as Media.

The event is a platform for banking and financial institutions to come together and share ideas and the challenges presented to this rapidly growing industry.

The exhibition and conference highlighted the value that banking, financial institutions and other revenue generating industries bring to boost the economy of Pakistan. Moreover, the Event presents opportunities for displaying products, services and solutions towards the potential buyers.

Summary:

In spite of the international economic crisis, continuing political turmoil and rising militancy in Pakistan, the financial services sector has held up fairly well in the last year. Its future, however, remains tied to a measure political stability in the country that allows economic activity to occur unhindered. Let's hope the nation's political and ruling elites can find a way to find a peaceful way forward.


Related Links:

Introduction to Banking and Economy

Introduction to Investment Banking

Pakistan's Banking Reform

[Riaz Haq]

Here's Gulf News on Pak State Life growth in GCC nations:

In the UAE since 1978, the state-run SLICP has branches in Abu Dhabi, Dubai, Sharjah and Al Ain – which alone saw an 80 per cent business sector expansion.

In 2012, the Zone generated revenues to the tune of $18 million (around Dh66 million), with about 20,000 policy holders in its client base. It started with just 35 employees but now has about 100 staff members.

The revenue boom has been attributed to active sales staff and managers, who were given various prizes during the annual ceremony, held at the Taj Palace Hotel in Dubai. Policy holders too are being rewarded — with SLICP’s increased capacity to bestow eight per cent bonuses compared to only four per cent four years ago.

“I hope people will continue to take benefits through State Life. It has been the vision of the Pakistan People’s Party and the Ministry of Commerce to see that benefits reach the masses… The Gulf Zone office has performed well, and it will be converted into a Regional Office,” Fahim said.

The government-owned corporation is one of the few state companies that are actually profitable, SLICP Chairman Shahid Aziz Siddiqi was quoted as saying recently in an article in the International Herald Tribune.

Pakistan’s consul general in Dubai, Tariq Somro, added: “I hope the achievements of the Gulf Zone brightens the name of State Life and of Pakistan as well. People with good performance records should be rewarded, as always.”

The corporation is also making in-roads with non-Pakistanis as well, said Khalid Mahmood Shahid, Zonal Chief – Gulf Countries, SLICP. “We have policy holders in the UAE and elsewhere who are non-Pakistani — Lebanese, Emirati, Americans, British, Indians, Bangladeshis.

“That’s because we’ve got a number of special products not available through others, like one policy for both life partners without the other having to pay a premium — like a ‘buy-one-get-one-free deal.’”

Based in Karachi, SLICP is a nationalised insurer with 2012 total premium income levels rising almost 20 per cent to Rs53.9 billion (about Dh2 billion).

http://gulfnews.com/news/gulf/uae/general/uae-has-key-role-in-robus...

[Riaz Haq]

Here's a Daily Times report on State Bank Governor Yaseen Anwar's assessment of Pak economy:

KARACHI: Pakistan’s economy has the ability to navigate through choppy waters and the economic potential this country holds encourage all to become a part of the country’s future.

The Governor State Bank of Pakistan (SBP) Yaseen Anwar at Pakistan Navy War College Lahore said while our current economic situation was less than optimal and it was also very far from what might be described as an economic calamity.

Anwar said in 65 years, Pakistan has never gone through an episode of hyperinflation, Pakistan has never defaulted on its international and domestic debts, in fact our economy has grown consistently, but not spectacularly, over the past six decades.

This has been despite periods of international alienation and sanctions, three expensive wars, two hostile fronts, regular political upheaval, social unrest, sharp increases in the price of oil, and much, much more, he added.

State Bank has always ensured that the financial system of the country remains safe and stable. The robustness of our financial system is a direct consequence of the reforms process and the State Bank’s constant vigilance, he said.

There is a lot that can be improved in our financial system. He called for the development of efficient debt markets, even better regulatory and reporting practices and the broadening of the financial sector’s scope to include largely unbanked sectors of the economy, such as agriculture, small and medium enterprises and housing.

‘Despite this wish-list, the fact remains that our financial system is, by design, secure and does not pose any threat to the economy as a whole,’ he added.

The size of Pakistan’s undocumented economy is by some estimates, as large as the formal economy. The informal economy does not file taxes and while it does absorb a significant chunk of the labour force, it also evades corporate and labour laws, he said.

Although close informal relationships do make the economy more resilient, they do so at a cost to the overall economy, by eroding the ambit of the regulators.

He stressed the need for the greater integration of country’s domestic market with global markets but observed it does not mean that we should not have proper controls and mechanisms in place to safeguard our own interests. ‘Greater integration with financial markets will mean that capital will flow more quickly through our borders. It’s definitely something that will boost the national economy, but, as most East Asian countries learned in the 90s, it can be a double-edged sword.

Therefore having some capital controls in place, which reduce the volatility of capital flows, is a necessary regulation in this day and age, Anwar added.

More effective regulation is the need of the hour for our own economy, he said, adding it is an essential part of what is needed today to get the economy on a track for steady and sustainable growth.

He said the government’s footprint in some sectors of the economy was very large and quite negligible in other sectors.

Such divergence is unhealthy. Effective regulation is sorely lacking in other sectors. The tax machinery can be tightened considerably. One of the country’s most challenging problems today is the size of the fiscal deficit-and a large part of the solution lies in increasing our tax base by enacting regulation that encourages tax compliance, and punishes tax evasion, he added.

The government will need to borrow less money from the central bank. Borrowing from the central bank is popularly known as printing money, he said, adding if government borrowing from the central bank falls, inflation will follow suit.

Therefore, better tax collection is a necessary condition for faster economic growth. And for that we need to have more effective tax regulation, he added.

....

http://www.dailytimes.com.pk/default.asp?page=2013\03\06\story_6-3-2013_pg5_1

[Riaz Haq]

Here's PakistanToday on Non-Bank Financial services (NBFS) report:

KARACHI - The Securities and Exchange Commission of Pakistan (SECP) on Monday unveiled a document titled ‘Report of Non-Bank Financial Sector’ (NBFS) Reforms Committee’ for public feedback.
Prepared by senior SECP officials and leading market professionals, the report contains proposed reforms for the development of the non-bank financial (NBF) sector in Pakistan.
SECP Chairman Muhammad Ali, commissioners and leading professionals and businessmen from the financial sector attended the ceremony.
Addressing the ceremony, Ali said it was imperative that the SECP and the State Bank of Pakistan (SBP) work in close cooperation for effective and seamless regulation across the financial sector in a globally integrated market.
He said Pakistan’s financial sector was bank-centric with NBF sector accounting only 4.9 percent (excluding insurance sector) of the financial sector’s total assets. This dependence on the banking sector, he said, made the country’s financial system vulnerable to risks through lack of diversification and also restricted the scope of product innovation
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In terms of the proposed regime, capital market activities of all entities including that of commercial banks and DFIs are to be regulated by the capital market regulator (CMR), i.e., SECP and deposit taking/financing/lending activities of all the financial sector participants would be regulated by the banking regulator (BR), i.e., SBP. This recommendation is in contrast with the prevalent concept of entity based regulatory
domain in Pakistan.
Other proposed reforms for the mutual fund industry include distribution of mutual fund units through stock exchanges, reduction in the annual regulatory fee provided more than 50 percent of a funds’ net assets are held by retail clients, introduction of concept of expense ratio, introduction of multiple classes of units based on the investment amount, improving the skill set of key personnel such as fund managers by specifying a minimum criteria among others.
Investment finance services are broken down and redefined as stock brokerage, investment advisory, corporate advisory, securities financing and securities underwriting services and each component has been further defined. Flexibility has been offered to an entity to be reclassified as non-bank finance company to obtain either a full scope or limited scope. The suggested regime for IFS outlines a mechanism to transform existing brokerage houses as NBFCs to become part of NBF sector. The inclusion of brokerage services in NBF sector is expected to open up a new era of licensed activities for brokers including advisory and other ancillary services.
To facilitate the launch of the real estate investment trusts (REITs) in Pakistan, the committee has proposed a reduction in REIT fund size to address the issue of
capital constraints and allow launching of medium-size REIT projects having better potential for growth and return.
In order to develop non-banking financial services, the committee, in line with best international practices has proposed the implementation of the concept of activity based regulatory regime in Pakistan for cluster one entities. In terms of the proposed regime, capital market activities of all entities are to be regulated by the SECP and deposit taking, financing and lending activities of all financial sector participants will be regulated by the SBP....

http://www.pakistantoday.com.pk/2013/03/05/news/profit/secp-unveils...

[Riaz Haq]

Here's Daily Times on State Bank of Pakistan governor talking about mobile banking:

...The central policy objectives of SBP are to ensure safety, soundness and efficiency of the banking system, and to protect the interest of consumers, he said, adding that since branchless banking is becoming a vital component of the national payment grid, it is prudent for all stakeholders to ensure that appropriate measures are in place to mitigate inherent risks associated with it like access by unauthorised persons or criminals such as hackers, money launderers, terrorist financiers etc.

He said being fully cognisant of the risk factors involved in such unconventional modes of banking, SBP has been proactively monitoring developments and associated risks both at system and entity level in order to take appropriate corrective measures in a timely manner.

The SBP governor said that branchless banking has also proved to be an effective instrument in channelising the government to persons (G2P) payments in trying times like serving internally displaced persons (IDPs), and devastating floods for the last two years. The Benazir Income Support Programme (BISP) beneficiaries are also being served effectively through the same mechanism, he said, adding that In the coming days, this channel is expected to continue playing an important role towards the promotion of financial inclusion and the management of G2P programmes like salaries disbursements, pensions, BISP, Watan Cards, Pakistan Cards and tax collections services, etc. The existing branchless banking deployments can cater to the needs of over 10 million potential beneficiaries of G2P payments in Pakistan, he added.

Anwar said that four branchless banking models including Easy Paisa, Omni, Mobile Cash and Time Pey are fully operational while two are running live pilots. He said that the branchless banking current growth trajectory is expected to get further steeper in the years ahead.

He said that the number of agent network servicing branchless banking customers has reached 42,000. Therefore, the basic financial services can now be accessed in the remotest parts of the country through any of these agents. Approximately 194 million transactions worth Rs 813 billion and more than 2.0 million m-wallets have been opened till date, he said, adding that numbers will improve significantly. The infrastructure of payment systems and branch network is also showing an increasing growth trend, he said adding that the ATMs network has increased to 6,232 whereas branch network has reached 11,600 while 94 percent of our branches are now real time on-line. Similarly, the number of plastic cards has increased to 20 million and the number of POS machines has increased to 34,000 units. This is a significant achievement, and this also demonstrates the opportunity to bring the benefits of this infrastructure to millions of the unbanked population, he added.

While acknowledging that branchless banking has gained critical mass in a short period of time, the SBP governor was of the view that the market has to start shifting transactions from first generational services (person-to-person/bills payments) to second generational services (account-to-account and inter-bank transfer). The players need to expand their product portfolio by offering new products and services for their target market. In my view, this is part of an inevitable evolution which will ensure the long-term sustainable development of the sector, encourage micro savings and help in meeting the demands for inclusive financial services of the target market, he added.

http://www.dailytimes.com.pk/default.asp?page=2013\03\15\story_15-3-2013_pg5_1

[Riaz Haq]

Here's a Dawn Op Ed by Khurram Husain on Pakistan's hidden economy:

...More detailed metrics of economic activity also show great ‘tranquillity’ in the west (Balochistan & KP). Detailed figures on consumption of electricity by industrial and commercial categories of consumer, for instance, show very little change over the years.

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But take a closer look and you’ll find something odd. The State Bank has a data series on its website that shows something enormous, of truly gigantic proportions, stirring beneath the tranquillity suggested by the formal macroeconomic data.

Here is what the data reveals: the amount of money passing through the clearing houses of Quetta and Peshawar is so large that it rivals the amounts in clearing houses of cities like Faisalabad, Multan and Rawalpindi.

First some background. Every time you write a cheque and the other party deposits that cheque in their account, it goes through a process called “clearing”. Because banks don’t hold your money themselves — much of it is held by the State Bank — the task of actually taking the money out of the books of one bank and transferring it to the books of another every time a cheque is cleared, is performed by the State Bank at its clearing house.

The State Bank operates 16 clearing houses in cities all over the country. Every month it releases data on how many cheques were presented for clearing in each of these, and what the total amount cleared by cheques was.

If you take this data, which stretches back to 1999, and plot it for each city in Pakistan, you notice something very interesting. Remove the cities of Karachi and Lahore from the sample for the time being, because these are global cities in a sense with long-distance connections. Compare only the regional cities and here is what you’ll find.

Following 9/11, half the cities in the total sample will show a sharply rising trend in the amount of money going through their clearing houses. For the other half, the line is flat.

The cities that show a rising trend are led by Peshawar, with Faisalabad, Multan, Rawalpindi and Quetta in close succession. For Peshawar, the amount of money being cleared via cheque in the year 2011 crosses Rs1.3 trillion! For Quetta, in the same year, the amount is just under Rs900 billion, meaning between them these two regional cities are seeing almost Rs2tr going through their clearing houses in one year alone.

This figure compares with Faisalabad at Rs1.3tr, Rawalpindi at Rs1.4tr, and Multan at Rs826bn. Cities that show a flat trend over the entire reporting period include Sukkur, Hyderabad, Sialkot and D.I. Khan.

What the data shows is a steep intensification of transactions being cleared by cheque in some cities, and no change in others, meaning the pace of economic activity accelerated unevenly over the decade, sweeping some along its path and leaving others behind.

But what are Peshawar and Quetta doing on this list? With Faisalabad and Multan, it’s easy to understand. These are regional hubs, productive centres, large seats of agrarian operations.

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In fact, after Karachi and Lahore, it is Multan, Faisalabad and Rawalpindi that account for the bulk of transactions in branchless banking, which shows the intensification of activity in the clearing houses of these cities is accompanied by an overall deepening of the financial sector.
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http://dawn.com/2013/02/28/the-hidden-economy/comment-page-1/

[Riaz Haq]

Here are brief excerpts of two stories on griwing Islamic Banking industry:

1. Express Tribune:

Islamic banking is the fastest growing segment of Pakistan’s financial services sector, a fact that has caused many institutions to pile onto the Shariah-compliant bandwagon. Yet what is it that makes the Islamic banking customer tick? Why is there such a stampede of depositors at their doorstep? And can they continue growing at this rapid clip.

In our special report this week, The Express Tribune takes a look at what is making the Islamic financial services industry grow quite so fast. First, some of the statistics: According to data from the State Bank of Pakistan, between 2002 and 2011, deposits at Islamic banks grew at an average annual rate of 59.6%, compared to the banking sector average of 16.1% per year during that same period.

And lest anyone think this is simply the low-base effect, in the year to June 30, 2012, Islamic banking deposits grew 33.4% to Rs603 billion, a time during which the banking sector as a whole grew by a much lower 14.4%. Islamic banking now accounts for 9.4% of all deposits in Pakistan, up from virtually nothing a decade ago.

There appears to be no single comprehensive study that explains the rise in deposits at these institutions. Most of the academic studies reviewed by The Express Tribune reveal that substantial majorities of Islamic banking customers prefer the system largely owing to its perceived compliance with Shariah.

But according to a study conducted in 2008 by Naveed Azeem Khattak and Kashifur Rehman, professors at Shaeed Zulfikar Ali Bhutto Institute of Science and Technology (Szabist) and Iqra University respectively, a staggering 67% of Islamic banking customers also use conventional banks, largely due to what they perceive to be a wider range of services offered by conventional banks. Religion is important to the Pakistani banking customer, but they do not seem to be agnostic to service quality either

http://tribune.com.pk/story/538574/why-islamic-banking-is-growing-r...

2. PTI:

Islamic microfinance is rapidly gaining acceptance in Muslim and non-Muslim countries due to its remarkable success in poverty eradication, a leading industry official has said.

Muhammad Zubair Mughal, Chief Executive Officer of Pakistan’s AlHuda Centre of Islamic Banking and Economics (CIBE), said according to their estimates, the Islamic microfinance market has reached $1 billion.

Mughal was addressing the International Islamic Finance conference in Abu Dhabi recently.

He said currently more than 300 Islamic microfinance institutions are offering their services to 1.6 million clients in almost 32 countries.

“Due to Islamic microfinance’s significant role in reducing poverty, international donor institutions and multilateral organisations such as USAID, IDB, ADB, IFAD, UNDP, World Bank and IFC have clearly explained their policies in different countries...”, he said.

They have suggested further strengthening of Islamic microfinance, which will ensure the quick advancement of Islamic microfinance in near future, Mughal added.

http://www.thehindubusinessline.com/industry-and-economy/banking/is...

[Riaz Haq]

Here's a Dawn report on a new credit rating agency entry in Pakistan:

Finance Minister Ishaq Dar said on Tuesday that there was a need for a new international rating agency and Hong Kong-based Universal Credit Rating Group (UCRG) is a welcome addition in this regard.

Dar said this while appreciating the interest expressed by the UCRG to extend its activities in Pakistan, and provide services to companies, bourses and evaluate financial activities.

The UCRG Chairman Guan Jianzhong, leading a four-member delegation, met with Dar to explored ways and means to extend UCRG’s operations in Pakistan.

“Pakistan would like to benefit from UCRG’s expertise and services as we have an ambitious plan to launch infrastructure, power and mega projects in the near future,” the minister said.

In this connection, he referred to the Gwadar-Kashgar corridor, coal-fuelled thermal power plant and Lahore-Karachi motorway besides the need for floating financial products for financing public sector projects.

Senator Dar stated that the rating company based in China was positive news for emerging economies in the region including Pakistan.

Mr Jianzhong who was accompanied by UCRG Chief Executive Richard Hainsworth, International Affairs Dagong, Jialin Chen, and Wei Ding, managing director international affairs, Dagong, briefed the finance minister about the functioning of UCRG.

Three independent credit rating agencies from China, the United States and Russia launched the UCRG in Hong Kong. UCRG, comprised of Dagong Global Credit Rating, Egan-Jones Ratings Company, and RusRaiting, aims to set up a non-sovereign global credit rating agency which will reform the current rating system dominated by the three American-based firms, Moody’s, Fitch, and Standards and Poor’s.

Delegation visits ISE

The UCRG delegation during its visit to the Islamabad Stock Exchange (ISE) stressed that a dual-rating system was needed in the current financial system to balance rating risks.

The role of smaller rating agencies is becoming importance to counter the errors being made by the top three rating agencies who are being blamed for the recent financial crisis, the delegates opined.

“UCRG aims at providing some balance to the industry, traditionally cornered by Moody's, Standard & Poor's and Fitch,” Mr Hainsworth said while talking to the ISE members.

“Credit ratings are indispensable in global economic operation, and it is obvious that the current rating system needs reforming and introducing new thinking,” he added

Mr Guan highlighted about his plans to introduce in Pakistan, a new Yuan-based market, providing access to Chinese investors to Pakistan market and developing a Yuan-based bonds in regional markets outside China.

He stated that that the idea of UCRG was first proposed by Dagong in 2008 when the global financial crisis broke out.

President and CEO of JCR-VIS Credit Rating Company Limited Faheem Ahmad said that Yuan-based bond market can help Pakistan to lessen its dependence on the dollar. He lauded the efforts of the UCRG for creating a good competition amongst raters.

COO ISE Ahmad Noman gave a detailed presentation on ISE and criteria for strategic investors to acquire 40 per cent shares of ISE under Demutualisation Act.

The Chinese companies were invited to consider strategic investment in ISE.

There are more than 70 credit rating agencies worldwide and the big three US-based ratings companies alone hold a collective market share of roughly 95pc. UCRG may also prove to be a good alternate for many countries for their sovereign rating.

http://dawn.com/news/1038899/new-rating-agency-plans-operations-in-...

[Riaz Haq]

Pakistan ranks 8th in the world of Islamic Finance, according to a Guardian story. Here's an excerpt:

How it works

Islamic finance is all about sharing risk between financial institutions and the individuals that use them. To do that, the two parties are tied into a longer-term relationship with each other that is supposed to shift incentives and avoid cut and run financial deals.

So, for example, sharia-compliant mortgages mean that the bank and the borrower share the risks of repayment rather than charging any form of interest. Similarly, Islamic bonds like the one announced by David Cameron today involve both parties owning the debt, rather than a simple promise to repay a loan.

Since it's Islamic, that also means that financial trading is off-limits for things that are forbidden even if no interest is charged - so investments can't be made in alcohol, tobacco, non-halal meat products such as pork, pornography or gambling companies.

You don't have to be Muslim to use Islamic financial services - a fact which has stimulated further interest in the sector. The Islamic Bank of Britain reported a 55% increase in applications for its savings accounts by non-Muslims last year after the Barclays rate-fixing scandal.

In numbers

275: The number of Islamic financial institutions in the world.
75: The number of countries where they have a presence.
US$1.357 trillion: The value of the global Islamic finance services industry by the end of 2011.
US$4 trillion: The projected value of the global Islamic finance services industry by 2020.
£200m: The value of the planned Islamic bond being unveiled by David Cameron today.
11th: The ranking of the UK (up 4 places from 2011) in the Global Islamic Finance Report which weighs up variables like the number of institutions involved in Islamic finance industry, the size of Islamic financial assets and the regulatory and legal infrastructure.

Source: Global Islamic Finance Report 2012

Glossary

bay 'al-mu'ajjal: Instant sale of an asset in return for a payment of money (made in full or by instalments) at a future date
gharar: Describes a risky or hazardous sale, where the details of the sale contract are unknown or uncertain
ijarah: Leasing contract
istisna': Refers to an agreement to sell a non-existent asset, which is to be manufactured or built according to the buyer's specifications and is to be delivered on a specified future date at a predetermined selling price.
mudarabah: Profit and loss-sharing
musharakah: Joint partnership
qard hasan: Interest-free financing
riba' : Usury
sharikat al-'aqd: Contractual partnership
sharika al-milk: Proprietary partnership
sukuk: Islamic bonds
tahawwut: Hedging
takaful: Islamic insurance
wadiah: Safe custody
wakala: Investor entrusts an agent to act on his behalf
zanniyyat: probabilistic evidence

http://www.theguardian.com/news/datablog/2013/oct/29/islamic-financ...

[Riaz Haq]

Here's Reuters' report on plans to expand Islamic Banking in Pakistan:

Pakistan's Ministry of Finance has set up a committee to explore areas to promote Islamic banking in the world's second most populous Muslim nation, including studying converting conventional banks into sharia-compliant ones.

Regulators in Pakistan are rolling out a range of initiatives, such as a media awareness campaign, to expand Islamic banks' share of the total banking sector to 15 percent by 2017.

Islamic banks held 903 billion rupees ($8.4 billion) or 9 percent of total banking assets as of June this year, posting 27 percent year-on-year growth, central bank data showed.

The committee will submit recommendations on 10 areas by December 2014, including legal obstacles to converting banks into Islamic ones and changes required to remove those obstacles, a statement form the Ministry of Finance said.

Other tasks for the committee, which will be suported by the country's central bank, include formulating a comprehensive policy framework and timeframes for the industry's progression.

Proposals involving Islamic money markets, secondary market liquidity and maximizing equity-based financing rather than debt-based financing will also be explored.

Islamic finance follows religious principles such as a ban on interest and gambling, making interest-based transactions a major problem for Islamic banks, even those operating in the core industry hubs in the Middle East and Southeast Asia.

The commitee comprises scholars and regulators as well as bankers such as Afaq Khan, chief executive of Standard Chartered Saadiq, Muneer Kamal, chairman of the National Bank of Pakistan and Atif Bajwa, chief executive of Bank Alfalah.

http://in.reuters.com/article/2013/12/11/islamic-finance-pakistan-i...

[Riaz Haq]

Here's a report on the launch of secondary market for trading of Pakistan govt debt:

KARACHI — Regulatory approvals and operational procedures, including the appointment of market-makers, will be in place by the end of January to enable the commencement of trading in government securities through the Karachi Stock Exchange (KSE).
KSE Managing Director Nadeem Naqvi met Finance Minister Ishaq Dar last week, to discuss the implementation of secondary market trading of government securities on the stock exchange through the KSE’s Bonds Automated Trading System (BATS) platform.
In an exclusive interview on Wednesday, Naqvi said that government securities that will be traded on the KSE include market treasury bills, Pakistan Investment Bonds (PIBs) and, at a later stage, Sukuks and other government papers.
“The government’s objective is to enable retail investors to invest in government securities using the settlement process of the Central Depository Company (CDC),” Naqvi said, adding that the development will broaden the investor base of government securities.
He noted that another objective of allowing the trading of government securities on the bourse is to attract international fixed-income funds to invest in Pakistan’s local currency government securities.
Currently, the government issues PIBs and holds auctions for market treasury bills in which only selected banks and financial institutions take part as ‘authorised primary dealers’. For the fiscal year 2013-14, the State Bank of Pakistan (SBP) has appointed 11 banks/financial institutions as primary dealers of government securities.
Under the current mechanism, secondary market transactions take place among these institutions through the Bloomberg Bulletin Board facility on a counterparty risk basis, also known as over-the-counter (OTC) transactions.
According to KASB Securities research analyst Farrukh Khan, a change in the intermediation process offers a significant scope for government securities, as their ownership is currently concentrated in the banking sector.
“Scheduled banks currently own 84 per cent of treasury bills, 53 per cent of PIBs and 91 per cent of Ijara Sukkuks. The rest of the ownership is divided between corporate entities, insurance companies and mutual funds,” Khan said. Retail investors have little direct ownership of government bonds and bills, as most of their savings are parked in either bank accounts or invested in the National Savings Schemes (NSS), he added.
“Despite distribution challenges, total money invested in the NSS is Rs 2.5 trillion, which is 35 per cent of the total banking sector deposit size. This highlights the enormous potential of this product (T-bills and PIBs),” Khan noted. —Internews

http://main.omanobserver.om/?p=42430