November 8, 2002	Friday	Ramazan 2,1423

KARACHI, Nov 7: The banking system saw less withdrawals from the bank deposits before 1st Ramazan this year compared to the previous year when people were not fully aware of the procedure for getting exemption from Zakat deduction.

“This year the system may have seen two-and-a-half billion to three billion rupees withdrawals,” estimated a top banker close to the State Bank.

He said this is for the second time that banks did not deduct Zakat from the balances held in the bank accounts on their own. Under a Supreme Court verdict the banks had stopped mandatory deduction of Zakat from the bank accounts in last Ramazan but as people were not fully aware of the procedure the deduction had taken place in many cases. “This year the level of awareness was high. So most of the people got their bank accounts exempted from mandatory deduction of Zakat,” said a senior official of a local bank. He said people are supposed to file an affidavit for this purpose one month before Ramazan, adding that this year most of the account holders did this, whereas in last Ramazan many of them had failed to comply with this condition.

Before the Supreme Court verdict on the mandatory deduction of Zakat people belonging to the Shia sect of Islam had the freedom to advise their bankers not to deduct Zakat from their accounts. The depositors belonging to other sects, including Sunnis that are in majority in Pakistan, had to pay mandatory Zakat on their bank accounts that had a minimum balance known as Nisab — i.e. the money on which payment of Zakat is a must.

“At that time Rs12-15 billion used to flow out of the system on the eve of Ramazan, though the bulk of it would flow in back to the system after a couple of weeks,” recalled a banker close to the SBP. “This year the withdrawals may have been much smaller.”

Banks deduct Zakat on 1st of Ramazan and those who fail to get exemption from it for any reason take out money from their saving and current accounts a few days before the start of Ramazan. This causes a liquidity crisis in the banking system but only to the extent of cash withdrawals. “Because money withdrawn through pay orders or bank drafts eventually remains well within the system,” explains a banker.

Bankers said pre-Ramazan withdrawals had only a little impact on the ongoing cash crisis in the banking system. “The banks are short of cash mainly because they have put more money in reserves for reserve averaging ahead of November 9 holiday on account of Iqbal day,” said treasurer of a local bank.

Banks made overnight borrowing of Rs38.4 billion from the SBP discount window in the first three days of this week primarily to be able to maintain the prescribed limit of cash reserves next week. Banks are supposed to keep mandatory cash reserves with the SBP equal to five per cent of their total deposits on a weekly basis but they are free to let the reserves fall to four per cent on any given day.

Officials of big state-run and private banks say banks are experiencing some liquidity shortage also because the private sector credit has started picking up though belatedly through cotton financing.