Wednesday 28 March 2018

Making Pakistan hub of Islamic Finance by 2025


On the inaugural day of conference Dr. Miftah Ismail Adviser to the Prime Minister on Finance and Economic Affairs said the Ministry of Finance would soon set up a separate division for the promotion of Islamic banking in Pakistan. He was the Chief Guest at a two-day World Islamic Finance Forum (WIFF-2018). The international forum was organized by Institute of Business Administration’s Centre for Excellence in Islamic Finance IBA-CIEF in collaboration with key partners. The theme was “Expanding the Footprint of Islamic Finance: Innovation, Fintech and Regulations.”
In his visionary note, Shaikh Muhammad Taqi Usmani Chairman, Shariah Board of Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) said the people of Pakistan origin were holding key positions in Islamic banking industry around the world, making contribution in developing regulatory framework and above all developing products that would meet the emerging needs of trade and industry. He urged the government to take concrete steps for making the economy Riba (interest) free. He also pointed out that Islamic financial institutions have ample liquidity and the government should work for creating new avenues for its deployment in remunerative options. He suggested that the ruling party should also include in its election manifesto that Riba would be eradicated totally from economy at the earliest.
Chairman AAOIFI Board of Trustees, Bahrain Shaikh Ebrahim Bin Khalifa Al Khalifa said it was heartening to note that Pakistan was striving to become another hub of Islamic finance. The country has all the basic ingredients — a population of 200 million predominantly Muslims, a robust banking and finance sector, vibrant agriculture, industrial and services sectors.
On the occasion were present the top officials of the apex regulators – State Bank of Pakistan (SBP) and Securities & Exchange Commission of Pakistan, Deputy Governors of the central bank, Jameel Ahmad and Shamsul Hasan talked about the central bank’s initiatives for the to promote Islamic banking in the country. The progress made over the last decade has been encouraging that has facilitated in achieving the target. They were also of the view that making Pakistan hub of Islamic finance would not be difficult.
Irfan Siddiqui, President Meezan Bank requested the federal government to set a target to acquire at least 25 per cent of the local funding through Islamic banking as Islamic financial institutions have ample liquidity and limited avenues for investment.
In his key note address, Dr. Ishrat Husain, Chairman, IBA-CIEF talked about the progress made by Islamic banking in Pakistan. He was of the view that the progress made during last one decade was enormous but new products need to be introduced to provide fresh impetus for growth.
IBA-CEIF Director, Ahmed Ali Siddiqui, welcoming the delegates, said the Centre had emerged as a regional platform for excellence in Islamic finance. He said focus areas of CEIF included development of Islamic finance professionals and new human resources talent pool through industry linkages and international collaborations.
Two of the closed-door meetings deserve special mention, though details discussed were not made public. In the first session players and regulators discussed details that could help in making capital market and mutual funds Shariah compliant. The issue of financial inclusion and outreach were the two important themes to be discussed at length. The second session was between Sharaih scholars and regulators for evolving regulatory frame work that can help in developing products to meet the needs of different income strata and those having different risk appetite.
Yet another initiative was presentation of research papers discussing contemporary issues. One of the sessions deserves a specific mention where lending to farmers was discussed. At present bulk of the loans are extended to farmers against passbook or the landownership document. This process mostly benefits the feudal lords. In this discussion the issue of warehouse receipt financing was also debated. However, it was evident that unless modern warehouses and collateral management companies are established warehouse receipt financing may not be possible. Authors of selected papers were awarded cash prizes.
The takeaways of the concluding remarks of Dr. Ishrat Husain were: 1) creation of Shariah Board at Ministry of Finance, 2) borrowing for infrastructure development projects through flotation of Rupee and Dollar denominated Sukuks, 3) focus on the development of Fintechs for extending outreach of banks and ensure financial inclusion and 4) development of alternative delivery channels.
     


Saturday 24 March 2018

Energy Crisis in Pakistan: Fact or Fiction


If one looks at the history of power sector in Pakistan, a few points are clear. These include: 1) a myth that the country has been persistently suffering due to the shortage of energy products, 2) the successive power policies have been have been introduced to serve the interest of local and overseas investors, 3) blatant theft of electricity and gas has been going on with the connivance of employees of utility companies, 4) regulatory authorities have failed in protecting the interest of consumers and remained subservient to the incumbent governments.
Energy shortage
Pakistan is blessed with an enormous potential of hydel power generation. According to the experts Mighty River Indus along has the potential to generate more than 40,000MW electricity per annum. Another 10,000MW electricity per annum can be generated from smaller hydel plants (run of the river type facilities which does not require construction of dams/reservoirs. In addition to that 50,000MW electricity can be produced annually from Thar coal. However, at present total hydel generation is around 8,000MW, which goes down when water level drops in dams. Thermal power plants (mostly owned and operated by the private) have the lion’s share in the total generation. The share of coal and nuclear power plants in the total electricity generated has remained minuscule. Though, a lot is being talked about changing the energy mix and curtailing use of gas for power generation, a little success has been achieved.
Serving vested Interest
Major hydel power generation facilities, i.e. Warsak, Mangla, Tarbella and Ghazi Brotha are located in the northen parts of the country and cater to the needs to KPK and upper Punjab. Karachi is hub of trading and industrial hub and it is totally dependent on thermal power generation. The city has 10% of the total population of the country but gets nothing from low cost electricity generated from hydel power plants. To be precise, K-Electric supplies electricity to some parts of Sindh and Baluchistan. If transmission of hydel electricity to Karachi is difficult or uneconomical, quota allocation of gas to K-electric should be doubled. Karachi is surviving on self generated electricity, the city has a latent demand of 5,000MW, whereas K-Electric is capable of meeting only half of this demand. One can still recall that in the early nineties E-Electric used to export electricity to Punjab. HUBCO was constructed to primarily meet Karachi’s demand, but it was ‘hijacked’ by WAPDA for meeting Punjab’s demand.
Blatant Theft
Blatant theft of electricity and gas been been going on for ages with the connivance of utilities. On top of all some of the parts of Pakistan are provided free of cost electricity. One may recall that at one time the average T&D losses of electric utilities were as high as 40%. Lately, gas UFG, which mostly comprise of theft hover a little less than 10%. On top of this, utility companies carry the load of billions of rupees of receivables, the probability of recovery is very low. According to some analysts, if K-Elecric pays off its outstanding dues, SSGC will be able to pay off almost all the payable amount to E&P companies. Containing theft or recovering outstanding dues does not require any rocket science, but a firm commitment. However, utilities fail completely helpless because of the pressure of political and linguistic groups. It is also necessary to put on record that utilities don’t provide connections, taking refuge behind non-availability of electricity/gas, but are prompt in providing ‘temporary connections, which are often without meters. Analysts term this ‘offical kunda’.
Regulatory Authorities
The Government of Pakistan (GoP) initiated the process of liberalization, deregulation and privatization. Under this policy, the private sector was encouraged to establish industries, which remained the exclusive domain of the state for decades and it was also offered the stake in state owned enterprises along with management control. Prior to that the World Bank has refused to lend more money to WAPDA and the shift in policy gave birth to HUBCO and other IPPs. 
IMF Recipe
Many analysts have the consensus that the International Monetary Fund (IMF) is the lender of last resort, but its recipes are not aimed at enabling any country to ‘stand on its own feet.’ Often the country is trapped in a vicious cycle of borrowing. However, the advantage is that if the country succeeds in developing its own home grown plan and meeting the condition imposed by the IMF, it may overcome the balance of payment crisis. 
Pakistan has a long history of remaining under the IMF support program. In one of the latest country report, the Fund has once again highlighted the need to introduce structural reforms for the power sector. These weaknesses identified are: 1) the persistence of circular debt, 2) DISCOs still operating under the state control, 3) high T&D losses, 4) failure to follow corporate governance and 5) lack of the mechanism for passing on input cost adjustments to end consumers.
Emphasizing US$55 billion in planned investments as a part of CPEC, the Fund anticipates improved economic activity made up of 19 Chinese sponsored power sector investments (US$17.7 billion) and non-CPEC energy projects (US$25.4 billion). Mode of financing for energy projects has been bifurcated into: 1) direct borrowing and investment from Chinese financial institutions, and 2) financing of projects by private domestic sponsors as well as government backed borrowing from multilateral lenders.
A detailed analysis of the power sector shows: 1) the country has enormous resources to produce low cost electricity, 2) if pilferage is contained cash flow of DISCOs will improve and 3) circular debt issue will be resolved. Appropriately managed conventional sources of power generation can help in meeting the electricity demand and there may not be an urgent need to invest in alternative sources of power generation.