KARACHI: Private sector being the major economic player has so far been reluctant to participate with full potential as its borrowings from banks halved year-on-year in the first quarter of the current fiscal year.

The latest data of the State Bank of Pakistan (SBP) showed that the net bank advances to the private sector plunged to Rs84 billion during July-September from Rs176.5bn in the same quarter of last year.

The conventional banks’ lending to the private sector was a record Rs971.6bn in the entire FY22 which helped the country to achieve close to 6pc economic growth rate. The current fiscal year looks more attractive for conventional banks as their lending more than doubled to Rs199.9bn in 1QFY23 from Rs94.8bn in the same quarter last year.

The high lending by the conventional banks looks against the World Bank’s prediction of up to 2pc economic growth for FY23 while it is also against the fear of high default risk due to the very high-interest rate of 15pc. Banks charge more than the policy rate, which makes borrowing costlier and risky for the private sector.

However, the Islamic bank branches of conventional banks’ were still facing net debt retirement of Rs134.3bn during the 1QFY23 against net lending of Rs54.7bn last year. This net debt retirement of the Islamic mode of financing by conventional banks also impacted the lending by full-fledged Islamic banks.

The private sector borrowings from Islamic banks declined to Rs18.5bn against Rs26.9bn in the same period last year.

The Islamic banks lent Rs239bn to the private sector in FY22 against Rs162bn in FY21.

Islamic banks made record profits during FY22, but bankers believe that the high interest rate of 15pc has increased default risks amid a slowing economy.

A recent SBP report said the assets of the Islamic banking industry (IBI) witnessed an all-time high quarterly increase of Rs836bn during April-June FY22 to reach Rs6.781 trillion. The growth in assets emanated from net investments and financing, which exhibited a quarterly rise of Rs470bn and Rs269bn, respectively.

The market share of financing of IBI in advances of the overall banking industry increased to 27.2pc from 24pc.

Published in Dawn, October 16th, 2022