Growing corporate interest in Islamic banking


By Mohiuddin Aazim
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 Company.

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 Askari.

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 risks.

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 facilities.

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 Dubai World.

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 excess liquidity.

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 Islamic bank.

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 million).

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