September 9, 2003	Tuesday	Rajab 11, 1424

KARACHI, Sept 8: Pakistan plans to launch its first debt instrument in the coming months that conforms with Islamic banking practices to develop a parallel market that financial institutions are trying to set up for Sharia-compliant investments.

A three-year rupee government certificate for five billion rupees is expected to be launched by the central bank modelled on a similar instrument launched recently in Bahrain, which has laid the groundwork for these investments.

Irfan Siddiqui, president of Meezan Bank Ltd, an Islamic retail bank, who is advising the central bank on the launch, said the bond is likely to be floated within the next six months.

Islamic banks may only make returns on their investments by using a system of profit-and-loss sharing approved under Sharia - the body of religious law governing Islam. Unlike Western banking practices, they may not charge interest on loans.

The potential for Islamic banking in Pakistan is huge, but it has been slow to take off. Around 20pc of the total Rs1.7 trillion bank deposits in the country are in non-interest bearing accounts as many Pakistanis believe saving accounts are forbidden by Islam.

The planned bond is a further attempt by the central bank to forge a regulatory framework that will enable Islamic banks to operate alongside the western-style banks.

Known as lease certificates in Bahrain, these instruments are the main form of money-market borrowing in the Gulf state, the banking capital of the Middle East. These bonds have to be backed by a fixed underlying asset, such as real estate.

“Bahrain started these debt instruments two years ago. Today 60pc of the government of Bahrain’s total borrowing is through this system,” said Meezan’s Siddiqui.

For Pakistan’s Islamic banks, such instruments would be a legitimate means of mopping up excess liquidity - which currently pose a serious problem for Sharia-compliant banks who can’t invest in treasury bills or government bonds that are deemed un-Islamic.

The move comes a year after Pakistani banks won a reprieve from the country’s highest Islamic court which overturned an earlier ruling that would have forced them to abolish interest-based loans in 2002. Islamic political parties have long been campaigning for ending interest-based banking in Pakistan.

“If they’d allowed the implementation of the earlier judgment, our entire financial system would have come to a standstill,” said Mohammad Sohail, research head at Investcap Securities.

The court said more research was needed on the financial systems of other Muslim countries before the banking system could be made compliant to Sharia.

Sudden implementation of Sharia banking practices would have hit hard Pakistan’s thriving stock market, which has risen 62pc so far this year, and a debt market that the government is trying to broaden and deepen along purely market-oriented lines.

Even so, authorities are keen to develop a parallel system of Islamic banking to help maintain a market-determined system amid pressure from powerful quarters for Sharia.

A full-fledged Islamic retail bank, Meezan Bank, started a year ago and last week Muslim Commercial Bank, the country’s third biggest bank in terms of assets opened its first branch to deal with Islamic banking products.

Three more banks, Habib Bank A.G. Zurich, owned by a Pakistani industrial group registered in Switzerland, Bank Al-Falah and the country’s second biggest Habib Bank Ltd, are also in the process of starting separate branches to deal with Islamic products.

The central bank also plans to shortly open a department dedicated to dealing with Islamic banking and establish a Sharia board to advise on these types of financial instruments.

The biggest move to convert traditional banking into an Islamic financial system is under way in the NWFP.

A coalition of anti-American Islamic parties gained control of NWFP after provincial elections last October on popular opposition to the US led war in Afghanistan. The coalition wants to convert the entire banking system of NWFP into an Islamic one.

“Our manifesto calls for converting the entire banking system into an Islamic financial system, but we have adopted a very gradual approach,” said Sirajul Haq, Finance Minister of NWFP.

Some large business groups in Karachi and Lahore are also looking for an avenue to do business in Sharia-compliant products.

“Many members of our family had been pushing me to start Islamic banking at the bank,” said S.M. Muneer, a leading Karachi-based industrial tycoon and co-sponsor of Muslim Commercial Bank.—Dow Jones Newswires