Islamic Inter-Bank Market in Pakistan

State and need of an State and need of an

Islamic InterIslamic Inter--Bank Market in PakistanBank Market in Pakistan

Syed Tariq HusainPresident & CEO, Emirates Global Islamic Bank Ltd.President & CEO, Emirates Global Islamic Bank Ltd.Islamic Financial Markets Conference – KarachiJanuary 2007

Emirates Global Islamic Bank Ltd.

OutlineOutlineOutlineOutline1 The backdrop – industry growth1. The backdrop industry growth2. Current scenario - Islamic IB Market in Pakistan3 Wh i d I l i IB k3. What constitutes a good Islamic IB market4. Potential Products5. Cross-border inter-bank market6 Structure of an Islamic inter-bank market6. Structure of an Islamic inter bank market7. Implementation


Islamic Banking market shareIslamic Banking market share AssetsAssetsIslamic Banking market share Islamic Banking market share -- AssetsAssets

40004500

9.0%

2500300035004000

2.6%3.1%

5.0%

R B

150020002500 IB

Conv0.7%

2.0%

PK

R

0500

1000

02003 2004 2005 2006 2007 2008


Islamic banking expected CAGR is 100%+Islamic banking expected CAGR is 100%+

The backdrop The backdrop –– Islamic Banking in Islamic Banking in pp ggPakistan Pakistan

20062006Total Banking industry deposits $ 48 B(Historical growth rate 16% p a )

20102010Total Banking industry deposits $ 78 B(Projected growth rate 13% p a )(Historical growth rate 16% p.a.)

Islamic banking deposits $ 1 B (Historical growth 122% p.a.)Total Islamic banking branches 110

(Projected growth rate 13% p.a.)Islamic banking deposits $ 12 B (Projected growth 81% p.a.)Total Islamic banking branches 440Total Islamic banking branches 110 Total Islamic banking branches 440

2010 : Islamic Banking Deposit market share

% share $ B20062006

I l i B ki k t h 2% % share $ B

Pessimistic 10% 8Average 15% 12

Islamic Banking market share 2%


Average 15% 12Optimistic 20% 16

Islamic InterIslamic Inter--bank market in Pakistan bank market in Pakistan ––Current scenarioCurrent scenario• Islamic banks managing reserve requirements by high

cash reserves and low liquidity reserveq y• Absence of level playing field with conventional

banks, ,– unavailability Shariah compliant securities– no lender of last resort

• Quantum requirement of Islamic inter-bank market estimated at US$ 1- 1.5 billion

• Number of players on the increase (2 in 2001 to 16 in 2006)


Islamic InterIslamic Inter--bank market in Pakistan bank market in Pakistan ––Current scenarioCurrent scenario• Listed issues of WAPDA Sukuk (Rs.8B) & Al Zamin

Modaraba Trust Certificates• Floatation of the 1st Pakistan Soveriegn Sukuk in the

International Market in 2005International Market in 2005• Privately placed Sukuks of Sitara Chemicals & Al

Wateen Telecom during 2006Wateen Telecom during 2006• Around US$ 150 M – US$ 200 M Sukuks in the

i lipipeline


C tit t f d I t b k M k tC tit t f d I t b k M k tConstituents of a good Interbank MarketConstituents of a good Interbank Market

FEATURES IMPLEMENTATIONWide Range of securities • Government paper

• Corporate paperLarge number of players • Islamic institutions

• Conventional institutions• Foreign players

Efficient Principal Dealership

Promote Liquidity thru active trading and 2 way pricing

Efficient Settlement System (transparency)

An SGLA system (Security transfer against cash transfer)


Potential productsPotential productsPotential productsPotential productsS k k f i i d d b• Sukuks of various tenors, issued or guaranteed by Federal Government

• Musharaka certificates (work-in-progress at SBP)Musharaka certificates (work-in-progress at SBP)• Commodity Murabaha – short term fixed income product

(allows for interaction between Islamic and conventional (banks)

• Equity (Shares) not ideal for use in an inter-bank market• Islamic benchmark rate should be developed (although

KIBOR can be used initially)• Islamic rating needs to be developed• Islamic rating needs to be developed


CrossCross border Marketborder MarketCrossCross--border Market border Market Where Pakistani Banks can invest in international Shariah

compliant securities and vice versaT b fit f f t k k i i th GCC k t• To benefit from frequent sukuk issues in the GCC market (International Islamic Sukuk issues over US$ 8B)

• Will result in 2 way capital flow (in USD and EUR)Will result in 2 way capital flow (in USD and EUR)• However Net inflows from (capital exporting) GCC countries

will far exceed outflows into foreign issueswill far exceed outflows into foreign issues• Foreign currency exposures would be controlled through

regulatory / risk limitsg y


Str ct re of Islamic interStr ct re of Islamic inter bank marketbank marketStructure of Islamic interStructure of Islamic inter--bank marketbank market

• Islamic banks should be given prime dealer roles to avoid crowding out by stronger conventional banks

• Islamic banks should take the lead in market making to create an actively traded secondary markety y

• This market will not be limited to Islamic players, conventional banks will also actively participate ifconventional banks will also actively participate if risk/return features are attractive


ImplementationImplementationImplementationImplementation• Islamic banks must securitize exposures to enhance

the quantum and quality of the inter-bank market• This will compel obligors to adopt good corporate

governance and seek ratings, (this will improve the g g ( pquality of the overall banking market)

• Islamic industry grouping needed to encourageIslamic industry grouping needed to encourage issuance of Shariah compliant government securities

• Need for a robust Islamic regulatory framework• Need for a robust Islamic regulatory framework


Islamic Inter-Bank Market in Pakistan

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