KARACHI: The Shariah-compliant ‘lender of last resort’ facility is under review at the State Bank of Pakistan.

Moreover, conventional insurance companies have been allowed to open Shariah-compliant windows, according to latest bulletin on Islamic banking issued by the SBP.

A lender of last resort is an institution willing to extend credit when no one else will.

The State Bank provides loan and re-discount facilities to scheduled banks in times of dire need when they find no other source of funds.

After the issuance of Sukuk (Islamic bonds), the development of Shariah-compliant lender of last resort facility would be a milestone for growth of Islamic banking in Pakistan which has already been increasing with unexpectedly high growth rate.

The bulletin said that there was a need to develop Shariah-compliant financier of last resort facility and to develop the capacity of Takaful industry to provide Shariah-compliant insurance of deposits.

“Shariah-compliant lender of last resort facility is in the process of being reviewed at the State Bank of Pakistan while for increasing the capacity of Takaful companies, the Securities and Exchange Companies of Pakistan (SECP) has allowed conventional insurance companies to open their Shariah-compliant windows recently.”

This will not only help increase the outreach of Takaful industry, but competition will also enhance efficiency in this market, the report added.

“The SECP allowed conventional insurance companies to open their Shariah-compliant windows recently,” said the report.

However, the report also pointed towards some difficulties the Islamic banking is facing. The report said the industry has not been able to bring expenses at a level comparable to conventional banking industry as indicated by operating expense to gross income ratio.

The operative expenses to gross income of the Islamic banks in December 2014 were 66 per cent while the same for the entire banking industry were 53.3pc exhibiting a wide difference.

The bulletin said that this can be associated with the expansionary phase of the industry.

The spread between financing and deposit rate is also very high compared to the entire banking industry. This spread for Islamic banking in December 2014 was 7.5pc compared to 5.4pc of the banking industry.

Similarly personnel expense to operating expense is rising though lower than that of overall banking industry average, said the report.

The SBP report focused critically over the issue of non-performing financing (NPF) of Islamic Bank and said the NPF of the Islamic banking industry increased during the last quarter (Oct-Dec) of CY14 to reach Rs19.8bn; “all categories of non-performing financing witnessed increase during the review quarter.”

Increase in non-performing financing also resulted in an increase in provisions against financing during the review quarter (Oct-Dec) resulting in an increase in provisions to NPFs which reached 83.9pc during the quarter ending December 2014, higher than the industry average of 79.8pc. Non-performing assets (NPA) of Islamic banking industry also increased during the Oct- Dec 2014 to reach 22.6bn from 21.1bn in the previous quarter.

“The increase in absolute amounts of NPFs, NPAs and provisions of the Islamic banking industry can be attributed to growing size of industry as other asset quality indicators, including NPFs to financing ratio, Net NPAs to capital and Net NPFs to net financing, all declined compared to previous quarter and remained lower than overall industry ratios, reflective of relatively better asset quality of Islamic Banking Institutions (IBI).”

Published in Dawn, April 1st, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play