Why some Pakistani banks do not offer credit cards?

Plan in progress to find way to offer Shariah-compliant credit cards in the country

KARACHI: Almost no one can deny the importance of owning credit cards. People really need these cards mostly during international travelling and while staying at hotels. They give people limited liberty to buy things even when their entire salaries are finished and the month in progress is yet to end. But, would you believe there are still banks in Pakistan that do not offer this plastic money.

The five full-fledged Islamic banks and a number of conventional banks under their Shariah-compliant operations do not offer credit cards as of yet in the country.

They do not offer personal loans and credit cards due to the absence of underlying assets such as cars, home and raw material in the two products.

The entire philosophy of Islamic banking revolves around underlying assets. They do not lend money to earn interest income. But they share the required portion of the equity to buy the assets in partnership with businesses and individuals. This allows them to take a share in profit to be earned against the assets by the businesses instead of earning interest income against lending the money, which is the model of conventional banks around the globe.

Despite tough economic reforms in Pakistan, banks’ profit soars

The banks may take hold of the underlying assets in case the businesses fail to return the share of equity to banks. “How would they (Islamic banks) recover the money under the personal loans and credit cards in the event of losses in the absence of the underlying assets?” Bank Alfalah Islamic Group Head Dr Muhammad Imran questioned during his conversation with The Express Tribune.

All the stakeholders including the apex regulator the State Bank of Pakistan (SBP) have, however, put their heads together to find a way out to design and offer Shariah-compliant credit cards in Pakistan.

“The credit cards being offered by Islamic banks in the Middle East are based upon Tawarruq which mean a silver foil (layer),” he said.

“Islamic banks are working on a structure of the product in Pakistan...that may allow them to launch the credit cards as well,” Imran said.

The entire Islamic banking industry is considering offering credit cards in the country. They are waiting for issuance of guidelines by the central bank.

“Bank Alfalah Islamic is also part of the evolution,” he said.

Credit cards remain a lucrative business for conventional banks. The number of credit cards increased by over 9% to 1.58 million during the fiscal year ended June 30, 2019. They came to around 3.76% of the total number of plastic cards including ATM, debit and pre-paid cards at 42.23 million in the year, the SBP reported in its last annual report on the payment system for FY19.

People paid Rs217 billion through credit cards out of the total financial transactions worth Rs6.76 trillion through different plastic cards during the year.

The five full-fledged Islamic banks aggressively need products to invest the ample deposits in their hands since an existing regulation has barred them from lending the excessive liquidity to industries, agriculturists and others in the private-sector.

They have around Rs600 billion in surpluses, but cannot use it to finance the private sector since their financing limit to the private sector has hit the allowed limit provided in relation to the capital adequacy ratio (CAR), an official at a full-fledged Islamic bank said the other day.

There is, however, no such excessive liquidity issue at Shariah-compliant branches and windows being operated by the conventional banks as they apply different accounting rules, he said.

“We have shared equity worth around Rs80 billion to buy assets along with businesses...against total deposits of Rs112 billion (as on September 30, 2019). Its means our advance to deposit ratio (loans) stands at around 70-75%, which is one of the highest in the industry (in Pakistan),” Dr Imran said.

“This shows our contribution remains high in the real economy. Oil and gas, textile, cement and iron and steel remain our four big partners in owning the assets,” he said.

Energy Sukuk-II soon

The government has recently communicated to Islamic banks to get ready to provide Rs200 billion in the name of the second energy Sukuk (a Shariah-compliant bond) which is on hold for the past several months. The Sukuk would partially address circular debt issue in the energy sector.

“The Ministry of Finance has contacted us. We (a consortium of Islamic financial institutions) will float the Sukuk as soon as the government extends the required guarantee,” Imran said.

Earlier, the International Monetary Fund (IMF) had barred the government from extending the required guarantee after it fully utilised the available limit under the latest IMF loan programme worth $6 billion.

The banks’ lending to the cash-strapped government in shape of investment in the sovereign debt securities (Sukuk) has, however, gradually dropped to very low over a period of time. On the contrary, such investment by conventional bank in Treasury-bills (T-bills) and Pakistan Investment Bonds (PIBs) has remained aggressively on the rise since July 2019 when Pakistan stopped borrowing from the central bank under the latest loan agreement with the IMF.

The reduction of investment in Sukuk and full consumption of the available limits to buy assets by many of the Shariah-compliant banks have left them in hot water. This situation created excess liquidity with many of them.

Financial inclusion: incentives for banks will do the trick

Banks welcome Chinese firms

Imran said Chinese are to relocate several industries from their homeland to Special Economic Zones (EPZs) being set up in Pakistan under the China-Pakistan Economic Corridor (CPEC). “They may stimulate long-term economic growth.”

The revival in export remained the missing link in achieving sustainable economic growth in Pakistan. “China may export such production from here. This would also help banks grow here,” he said. He said Islamic banks were also designing products to provide liquidity to commodity traders at the futures commodities exchange the Pakistan Mercantile Exchange.

He said that information communication technology (ICT) has changed the business landscape in banks in Pakistan. This has increased the spread of banking facilities to the people in remote areas. “Digital has been a game-changer for us basically,” he added.

Published in The Express Tribune, February 6^th, 2020.

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