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A Review of Islamic Commercial and Social Finance in Pakistan

Dr Salman Ahmed Shaikh
By Dr Salman Ahmed Shaikh
5 years ago
A Review of Islamic Commercial and Social Finance in Pakistan

Islam, Islamic banking, Murabaha, Sukuk, Waqf, Receivables


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  1. 26 Journal of Islamic Banking and Finance July – Sept 2018 A Review of Islamic Commercial and Social Finance in Pakistan By Dr. Salman Ahmed Shaikh* Dr. Mohd Adib Ismail, Prof. Dr. Abdul Ghafar Ismail, Dr. Shahida Shahimi and Dr. Muhammad Hakimi Abstract This paper gives an overview of Islamic finance in Organization of Islamic Cooperation (OIC) member country of Pakistan. This paper is divided into 5 subsections. Section 1 gives a brief overview of Islamic banking which enjoys a central place in the umbrella of Islamic financial services globally as well as in Pakistan. Section 2 looks at the progress and performance of Islamic capital markets in Pakistan, especially Shari’ah compliant equities and Sukuk. Section 3 provides a brief account of Islamic asset management sector in Pakistan. Section 4 explores the footprint of Islamic microfinance sector and Section 5 gives an account of the contribution of third sector redistributive institutions like Zakāt and Waqf in Pakistan. Keywords Islamic Banking, Islamic Finance, Islamic Capital Markets, Islamic Microfinance, Zakāt, Waqf 1. Islamic Banking in Pakistan Financial institutions aim to facilitate intertemporal finance between savers and investors by providing efficient delegated monitoring and portfolio management services (Diamond 1984). Financial institutions enable the consumers to access their potential lifetime resources when they are not readily available in different stages of their life. Financial institutions like banks and microfinance institutions provide credit services so that people can access funds in the present period. People can use their current endowments or future stream of expected incomes as collateral to access credit facilities in the present (Kahf, 1996). * Authors: Dr. Salman Ahmed Shaikh, Dr. Mohd Adib Ismail, Prof. Dr. Abdul Ghafar Ismail, Dr. Shahida Shahimiand Dr. Muhammad Hakimi, School of Economics, National University of Malaysia.
  2. A Review of Islamic Commercial Finance Pakistan Journal of Islamic Bankingand andSocial Finance July –inSept 2018 27 Islam allows financing and investments, but without the element of interest. Islam aims for circulation of wealth and pursuit of the productive enterprise for earning a livelihood. On the other hand, providing a fixed return to money capital leads to continuous accumulation and concentration of wealth among the wealthy capitalists. Islamic finance makes it necessary that money capital cannot get stipulated returns unless it participates in the productive enterprise by undertaking the risk. This enables circulation of capital, full employment of resources and avoids the ills of the concentration of wealth, economic stagnation, unemployment and simultaneous existence of unused resources and unmet needs. Islamic teachings discourage idleness of capital by disallowing any stipulated increase to the lending of money capital and by levying Zakāt on idle capital. This ensures capital circulation in the real economy so that the financial intermediation contributes to socio-economic development by having a direct and compulsory link with the real sector of the economy. Globally, Islamic banking first appeared as social finance in the 1960s. Mit Ghamr Islamic Savings Bank was started in Egypt by El-Naggar in 1963. Around the same time, Pilgrims Fund Corporation or Tabung Haji started operations in Malaysia in 1963 to enable Muslims to save for meeting expenses of Hajj pilgrimage (Chachi, 2005). However, modern commercially incorporated Islamic commercial banking began in 1979 with the establishment of Dubai Islamic bank. Since then, Islamic financial institutions had been established in many OIC regions including Middle East, South Asia, East Asia and Northern Africa. According to Global Islamic Finance Report (2017), global Islamic finance assets reached $2.2 trillion in 2016. As much as 75% of the global Islamic financial assets are held by Islamic banks and conventional banks with Islamic banking windows. Among the individual countries, the market shares of Islamic banking in national banking remains at 51.2% in Saudi Arabia, 45.2% in Kuwait, 29.3% in Bahrain, 25.8% in Qatar, 21.6% in UAE, 25% in Malaysia and 11.7% in Pakistan. Ever since the establishment of Pakistan in 1947, there was a great zeal to introduce Islamic institutions in the socio-economic milieu of the country. Nonetheless, political turmoil in the early years did not allow adequate progress in institutional building. Afterwards, given the increased focus in the1970s around the Muslim world to develop an Islamic financial system for Muslims, the positive effects were also felt in Pakistan. On the regulatory front, the 1973 constitution of Pakistan in Section 38(f) stated that Ribā should be eliminated as early as possible. On the theoretical front, the Pakistan Council of Islamic Ideology in its 1980 report on the elimination of interest from the Pakistan economy clearly defined Ribā and suggested that steps should be taken to replace Ribā based banking with an Islamic alternative. The report stated: The term Ribā encompasses interest in all its manifestations irrespective of whether it relates to loans for consumption purposes or for productive purposes, whether the loans are of a personal nature or of a
  3. 28 Journal of Islamic Banking and Finance July – Sept 2018 commercial type, whether the borrower is a government, a private individual or a concern, and whether the rate of interest is low or high. Later on, the Historic Judgment on Interest in 1991 by the Supreme Court of Pakistan settled the debate both in academics as well as in legal sphere. Now, Islamic banking in Pakistan is an established industry with 11.7% and 13.3% market share in total banking assets and deposits respectively as at December 31, 2016. By year-end 2016, the total Islamic banking assets in Pakistan stood at Rs. 1.85 trillion ($17.65 billion) while total Islamic banking deposits stood at Rs. 1.57 trillion ($15 billion). With increased participation of conventional banks in Islamic banking industry, the branch network has swelled to 2,322 branches by year-end 2016. 2. Islamic Capital Market in Pakistan 2.1 Equity Market in Pakistan The capital market in Pakistan, in general, has provided remarkable returns as compared to the low-risk regular income investments. Most of the people with investment motive and having adequate risk appetite prefer capital market investments in secondary market due to higher expected return and greater liquidity. Figure 1 gives a snapshot of how the broad market index (KSE-100) has moved during 1997-2016. It can be seen that the growth had been consistent with a break during 2008-10. The twin peak is observed since the stock market fell substantially in response to the global financial crisis which also had an impact on the domestic capital market. Figure 1: KSE 100 Index Daily Values (Adjusted Closing) for 1997-2015 Source: Karachi Stock Exchange Figure 2 shows the index values of KMI-30 during 2009-2016. From plotting the KSE 100 index values for comparison, it is evident that KMI-30 index has steadily increased. The Compound Annual Growth Rate (CAGR) for theKMI-30 index has remained at 29.01% during 2019-2016.
  4. A Review of Islamic Commercial andFinance Social Finance in Pakistan Journal of Islamic Banking and July – Sept 2018 29 Figure 2: KSE-100 and KMI 30 Index for 2009-2016 Source: Karachi Stock Exchange On the other hand, there had only been 24 new long term corporate debt instruments issued during 2011-16. There are many reasons why the corporate bond market did not develop in Pakistan as per expectations. The national savings scheme instruments issued by the government of Pakistan offer very attractive yields and they are default free. Some national saving scheme instruments are also tax-free and hence aftertax yield on such instruments are even higher as compared to the corporate bonds with no such tax exemptions. Moreover, the corporate sector itself has lost confidence and interest for long term big investments in the country ever since the episode of nationalization in the 1970s. Afterwards, indirect taxation and removal of import barriers had also made corporate investments more challenging in the 1980s and 1990s. Then, the rise of industrializing countries on the external front together with energy and security crisis on the domestic front had resulted in even more challenging times for formal corporate sector businesses, especially in the manufacturing sector. 2.2 Sukuk Market in Pakistan For Muslim investors looking for regular long term income, Sukuk investments are a Shari’ah compliant alternative to corporate and treasury bonds. Sukuk is a certificate that represents ownership in underlying real asset(s). Islamic law does not permit interest and hence conventional coupon paying bonds are impermissible as per Islamic law. However, Islamic law allows sale and lease of real assets and the resulting income in the form of profit on the sale or rental income stream on the lease of assets. Holders of Sukuk share in the lease or profit income generated from the ownership of real assets that the Sukuk certificate represents. Coming to the Sukuk market, it is found that there is small, but appreciable progress in short time. In Pakistan, more than 100 Sukuk had been issued so far by the public sector companies, private sector companies and by Government of Pakistan (GOP). Innovative structures have also appeared in recent years. For instance, Meezan Bank arranged the country’s first airtime-based Sukuk. These
  5. 30 Journal of Islamic Banking and Finance July – Sept 2018 Sukuk use intangible assets such as minutes of mobile telephone use as the underlying asset. The structure of these Sukuk is based on Ijarah and sub-Ijarah of services. Assets are airtime (minutes) represented by prepaid calling cards and identified by the serial number of each card. 3. Islamic Mutual Funds Islamic mutual funds like their conventional counterparts provide portfolio management services to risk averse and risk neutral investors. Islamic mutual funds have to follow Shari’ah compliance criteria in their portfolio selection and revision. Furthermore, they also have to purify their non-compliant portion of income from the total earnings to make their income Shari’ah compliant. In Pakistan, Karachi Stock Exchange (KSE) and Al-Meezan Investment Management Limited launched first Islamic Index (KMI-30) in 2008 which tracks 30 most liquid and active Shari’ah compliant stocks. The screening methodology approved by the Shari’ah advisors of Al-Meezan Investment Management Limited is explained below. A. Business of the investee company First and foremost, the business of the investee company should be Shari’ah compliant. Accordingly, investments in common stocks of conventional banks, insurance companies, leasing companies and companies dealing in liquor, drugs and ammunition are not permissible and hence stocks of these companies cannot be included in the portfolio. Once the qualitative screening on the nature of the business is passed, then the screening is done on quantitative indictors related to business processes, such as the use of interest based leverage, investments and share of the non-compliant portion of income. B. Ceiling on interest based debt The Shari’ah screening criteria stipulate that interest based debt must be less than 37% of the consolidated total assets of the investee company. Interest based debt includes borrowing through the issuance of corporate bonds, debentures, Term Finance Certificates (TFCs) and commercial paper. It also includes interest based conventional banking products, such as interest based loans, capital lease and hire purchase agreements. C. Ceiling on interest based investments The Shari’ah screening criteria specify that non-Shari’ah compliant investments must be less than 33% of the consolidated total assets of the investee company. NonShari’ah compliant investments include investments in conventional mutual funds, conventional money market instruments, corporate bonds, Pakistan Investment Bonds (PIBs), Federal Investment Bonds (FIBs), Certificate of Investments (CoIs), Certificate of Deposits (CoDs), Term Finance Certificates (TFCs), national savings schemes and interest based derivatives. Furthermore, investments in the common stocks of companies that are termed non-compliant due to a violation of any of these principles are also termed as impermissible.
  6. A Review of Islamic Commercial Finance in Pakistan Journal of Islamic Banking and Social Finance July – Sept 2018 D. 31 Cap on Shari’ah non-Compliant income The Shari’ah screening criteria also require that Shari’ah non-compliant income must be less than 5% of the consolidated total revenue of the investee company. Total revenue is defined as: (1) Non-compliant income includes interest income from financial investments and overdue receivables. Non-compliant income also includes income from immoral activities such as gambling, nightclubs, prostitution, casino, tobacco and liquor, for instance. Dividend income from above mentioned businesses or from companies which have been declared as non-compliant due to non-compliance with any of these criteria for Shari’ah compliance is regarded as Shari’ah non-compliant income. E. Minimum requirement of illiquid assets The Shari’ah screening criteria further stipulate that illiquid assets must be at least 25% of the consolidated total assets of the investee company. Illiquid assets are defined as: (2) Liquid assets include cash, prepayments, advances and trade receivables. Illiquid assets include inventory and all fixed tangible assets, such as plant, equipment, machinery and furniture. In the context of these principles, all assets having some intrinsic value and which can be traded above or below par value are illiquid assets. These exclude things like currency which does not have an intrinsic value of its own and it also excludes debt which cannot be traded/re-assigned above or below principal value. F. Minimum price of share as per Shari’ah As per the prescribed rules, the value of the company is worth at least the amount of liquid assets it has. Minimum market price per share is given by net liquid assets per share, which is calculated as: (3) In equation (2.3), TA represents total assets, IA represents illiquid assets, CL represents current liabilities and LTL represents long term liabilities. Besides these screening principles, the rules of sale in Islamic jurisprudence also have to be observed which negate the use of short selling, sale of rights, options, warrants, futures sale and forward sale, for instance. In order to provide a contrast in the screening methodology applied in Pakistan as compared to globally, a summary of the quantitative screens followed in three major indices globally is provided in Table 1. Table 1: Screening Criteria of Global Indices
  7. Journal of Islamic Banking and Finance July – Sept 2018 32 Quantitative Screens Leverage Liquidity Revenue Dividend Purification S&P Debt to Market Equity (12 Month Average) must be less than 33 %. Accounts Receivables to Market Equity (12 Month average) must be less than 49 %. (Cash + Interest Bearing Securities) to Market Equity (12 Month average) must be less than 33%. Non-permissible income other than interest income to revenue must be less than 5%. Dividends * (NonPermissible revenue divided by total revenue). FTSE Dow Jones Debt must be less than 33% of total assets. Debt to Market Equity (24 Month Average) must be less than 33%. Cash and interest bearing investments must be less than 33% of the total assets. Cash and interest bearing securities divided by market equity (24 Month Average) must be less than 33%. Accounts receivable and cash must be less than 50% of the total assets. Accounts receivables divided by market equity (24 Month Average) must be less than 33%. Income from noncompliant activities including interest income should not exceed 5% of total revenue of the company. - Dividends * (NonPermissible revenue divided by total revenue). Dividends * (NonPermissible revenue divided by total revenue). Next, some developments and indicators related to the Islamic asset management sector in Pakistan are presented. As of June 2016, there are 201 mutual funds in Pakistan, out of which 82 are Islamic funds and 119 are conventional funds. Table 2 reports total AUM in Islamic mutual funds in each category of funds. It can be seen that most funds are invested in equity (42.68%) and income funds (18.85%). CAGR for Islamic equity funds during 2011-16 had stayed at 57.09%, while the CAGR for Islamic income funds had been clocked at 7.29% during the same period. Table 2: Assets under Management in Islamic Funds (in million Rs.) Category 2011 2012 2013 2014 2015 2016 Equity 7,027 8,104 15,349 23,363 51,167 67,215 Income 20,888 29,944 36,414 36,783 21,028 29,692 Fund of Funds - - 699 927 3,269 23,679 Asset Allocation 1,264 1,120 870 1,116 4,784 10,818 Fund of Funds - CPPI - - - 11,533 20,671 9,168 Money Market 6,353 7,762 7,088 5,189 13,483 5,920 Balanced 2,289 2,334 2,538 6,955 3,493 4,822 Aggressive Income 725 688 1,178 2,253 2,157 3,209 Capital Protected 724 443 1,304 2,972 3,015 1,771
  8. A Review of Islamic Commercial andFinance Social Finance in Pakistan Journal of Islamic Banking and July – Sept 2018 33 Index Tracker - 289 901 1,176 1,159 881 Commodities - - - - - 321 Total 39,270 50,684 66,341 92,267 124,226 157,496 Source: Mutual Funds Association of Pakistan Table 3 presents the market share distribution of Islamic and conventional funds in each category of funds. Islamic funds have 33.40% market share as compared to 66.60% market share of conventional mutual funds as at December 31, 2016. In Balanced, Fund of Funds and Index Tracker categories, Islamic funds have a greater market share as compared to conventional mutual funds. Table 3: Market Share in Mutual Funds Industry – 2016 Category Conventional Islamic Aggressive Fixed Income 81.41% 18.59% Asset Allocation 50.06% 49.94% Balanced 48.21% 51.79% Capital Protected 61.85% 38.15% Commodities 53.34% 46.66% Equity 65.88% 34.12% Fund of Funds 6.84% 93.16% Fund of Funds - CPPI 16.44% 83.56% Income 76.75% 23.25% Index Tracker 33.91% 66.09% Money Market 89.35% 10.65% Total 66.60% 33.40% Source: Mutual Funds Association of Pakistan 4. Islamic Microfinance in Pakistan Muslim countries represent a quarter of the global population, but they are generally poorer than non-Muslims as their share in global poverty pool is almost twice as much as their share in the global population. Conventional microfinance involves interest which is prohibited in Islam just like in all monotheist religions. Voluntary exclusion due to the religious prohibition of interest is also another reason why conventional microfinance reach is low, especially in OIC countries. Islamic microfinance is an alternative for people who wish to obtain relief in their income and liquidity constraints to smooth consumption of their own and their family members. In OIC countries, most poor people are in Nigeria, followed by Bangladesh, Pakistan and Indonesia. In all these 4 OIC member states, the poor population exceeds 20 million. Bangladesh has the highest outreach in microfinance. Along with Bangladesh, Pakistan, Nigeria and Indonesia are the other OIC countries where the microfinance
  9. 34 Journal of Islamic Banking and Finance July – Sept 2018 client base exceeds 1 million. Nevertheless, apart from Bangladesh, the outreach gap is more than 90% in Pakistan, Nigeria and Indonesia. Obaidullah (2008) explains that there are two broad categories of Islamic microfinance models that are globally used, i.e. charity based not-for-profit models and market based commercial models. The former model uses Qard-e-Hasan, Waqf and Zakāt funds for providing non-compensatory loans or non-repayable grants. Market based commercial models provide micro-credit using Murabaha, micro-leasing using Ijarah and micro-equity or a composite model of microfinance which is a hybrid of these models. Qard-e-Hasan based financing ensures that there is no additional stipulated increase paid over the principal amount. Thus, it enables the borrower to benefit from the loan and repay the same amount of money. This increases the chances of taking benefit of the loan and enabling socio-economic mobility rather than getting trapped in interest based compounded debt. This form of financing also protects the lender since the principal amount of money has to be repaid. Thus, while Qard-e-Hasan provides ease in repayment burden for the borrower, it also protects the lender from moral hazard. Qarde-Hasan is a useful instrument to enable the poor client to survive and graduate to a nonpoor status by providing funds which can be utilized for personal consumption needs as well as for purchasing the raw materials, tools and business inventory for productive enterprise. The theoretical edge of Islamic microfinance has been studied by several Muslim economists. According to Ahmed (2002), Islamic Microfinance Institutions (IMFIs) appear to have performed better than Grameen Bank. Ahmed (2002) expects IMFIs to benefit from the social capital derived from Islamic values and principles. Ahmed (2002) reasons that IMFIs can reduce high monitoring costs substantially since Islamic modes of financing involve a real transaction. The moral hazard problem arising from the use of funds for purposes other than those intended substantially reduces in Islamic contracts. Komi and Croson (2013) find significantly higher compliance rates for the Islamiccompliant contracts (profit-sharing and joint venture) than for the traditional contract (interest-based). Ashraf et al. (2014) in an empirical study provide evidence that low religious orientation corresponds to higher levels of risk and default. Citing another ethical benefit of Islamic microfinance due to its risk sharing and asset backed nature, Samad (2014) argues that if Islamic microfinance is offered in India, the mass suicides committed especially by the Indian farmers can be contained to a great extent. However, in terms of realizing the theoretical and structural potential, a sizable progress is yet to be seen. In Pakistan, Naveed and Ali (2012) estimate that 58.7 million people in Pakistan are living in multidimensional poverty with 46% of the rural population and 18% of the urban population falling below the poverty line. Table 4 gives facts about the microfinance sector in Pakistan.
  10. A Review of Islamic Commercial Finance Pakistan Journal of Islamic Banking and and Social Finance July – in Sept 2018 35 Table 4: Stylized Facts about Microfinance in Pakistan Key Indicators 2010 2011 2012 2013 2014 2015 2016 Number of Borrowers (million) 1.6 1.7 2.0 2.4 2.8 3.8 4.6 Gross Loan Portfolio (bln Rs.) 20.2 24.8 33.1 46.6 61.1 92.9 136.9 Active Women Borrowers 0.8 0.9 1.3 1.4 1.6 2.1 2.5 Branches 1,405 1,550 1,460 1,606 1,747 2,960 3,220 Source: Pakistan Microfinance Network The number of people benefitting from microfinance is only as much as 4.6 million. According to Pakistan Microfinance Network, the share of Islamic microfinance segment in active borrowers and gross loan portfolio stands at 15% and 7% respectively in 2016. Table 5 presents the outreach statistics from the four provinces of Pakistan. It is disturbing to note that the penetration ratio is lowest in two of the most impoverished provinces of Pakistan, namely Balochistan and KPK. Table 5: Microfinance Outreach – Province wise Key Indicators - Province wise Sindh Punjab Offices – Fixed 651 2,284 Offices – Mobile 26 14 Active Borrowers 904,892 3,449,902 Potential Microfinance Market 2,400,000 12,600,000 Penetration Rate (%) 37.7% 27.4% Source: Pakistan Microfinance Network Balochistan 17 2 5,577 500,000 1.1% KPK 107 97,239 500,000 1.9% One would expect Islamic finance to have a greater focus on social finance given the general level of higher incidence of poverty in OIC countries where Islamic finance has a relatively significant penetration. In addition to that, the philosophy and theoretical basis of Islamic finance is rooted in the socio-ethical framework of Islam. Nevertheless, Islamic finance has not been able to translate that potential and promise into practice substantially as yet. 4.1 Islamic Microfinance Institutions and Operations Currently, there is no Islamic microfinance bank in Pakistan at the moment. Some of the more prominent organizations operating to provide Islamic micro financial services include Akhuwat, Wasil Foundation, Kashf Foundation, Naymet Trust, Muslim Aid Pakistan, Islamic Relief Pakistan, Kawish Welfare Trust and Esaar Foundation. One of the recent success stories has been the Qard-e-Hasan model of Akhuwat. This institution with humble setup and uncomplicated procedures had disbursed Rs. 38 billion ($362 million) worth of loans by March 2017 without interest with 99% recovery rate. Out of the total beneficiaries of 1.85 million clients, 42% had been female clients. Kashf Foundation is another organization with a sizable outreach with 237,573 clients served with a staff of 2,210 as at end-December 2016. The microcredit loan
  11. 36 Journal of Islamic Banking and Finance July – Sept 2018 portfolio stands at Rs. 5.9 billion ($57 million) as at December 31, 2016. Kashf had a healthy Rs. 564 million ($5.4 million) income in the fourth quarter of 2016. Kashf is the largest provider of micro-insurance in Pakistan with over 25.7% of the market share. Wasil is another microfinance institution which provides loans using Islamic modes of financing which enable it to generate profits on sale and lease of assets. In the reported statistics for 2010, the gross loan portfolio stood at Rs. 210 million ($2.1 million) with a 91% recovery rate. Wasil provides a range of business development services delivered through the platform of Micro Enterprises Support Services and Advocacy Cell (MESSAC). The programs include vision and skills enhancement sessions, value addition to products and processes and redesigning service outlets and branding. Naymet Trust provides loans using Qard-e-Hasan and Murabaha with respective shares of 60% and 40% of each in the financing portfolio in 2016. The total assets of the trust as at June 30, 2016 stood at Rs. 22.3 million ($213,000). Total credit portfolio was recorded at Rs. 11.3 million ($107,619) with Murabaha portfolio of Rs. 4.6 million ($44,000) and Qard-e-Hasan portfolio of Rs. 6.7 million ($64,077). Islamic Relief is an example of an incorporated microfinance institution in Pakistan operating since 1992 with a presence in all four provinces of Pakistan, especially in the northern areas of Pakistan. Their microcredit portfolio stood at Rs. 38 million ($0.36 million) as at December 31, 2014. The institution has helped some 11 million families over its 25 year journey in Pakistan with various programs including rehabilitation of internally displaced persons, disaster risk reduction, climate change adaptation, water and sanitation, food security and health programs. In the next and last section of the paper, a brief review of the use and contribution of Islamic redistributive institutions are provided to show that how much vibrant these institutions are in complementing the purchasing power of poor people in meeting the basic needs in Pakistan. 5. Role of Redistributive Institutions Besides the financial institutions, Islamic redistributive institutions also have ample potential to achieve resource redistribution at the household level. There are various institutions in the Islamic framework that can play an effective role in income and wealth redistribution. Effective use of these redistributive institutions can help in the fulfilment of basic needs for all members of the society, especially the underprivileged poor people who face net endowment deficiency (Zarqa 1988). The two most prominent such nonmarket based redistributive institutions include Zakāt and Waqf. 5.1 Institution of Zakāt in Pakistan In Islam, Zakāt is a religious obligation to pay a part of wealth and production to the specified heads (Al-Qur’an, Chapter Tauba 9: 60). The specified heads of Zakāt ensure the welfare of poor, needy and weaker segments of society as well as provide collective funds for public welfare and socio-political protection. In its economic effects, Zakāt is an important institution in an Islamic framework for poverty alleviation and economic welfare.
  12. A Review of Islamic Commercial andFinance Social Finance in Pakistan Journal of Islamic Banking and July – Sept 2018 37 In the early empirical literature on welfare potential of Infāq (charity) to alleviate poverty in Pakistan, Malik et al. (1994) use micro data to establish that Infāq (charity) does have a significant impact on reducing poverty gap. In a recent empirical study for OIC countries, Shirazi and Amin (2009) estimate the resources required for poverty elimination under $1.25 a day and $2.00 a day respectively. Their estimates for Pakistan suggest that Pakistan needs 1% of GDP for poverty elimination under $1.25 a day and needs 6.77% of GDP for poverty elimination under $2.00 a day. Earlier estimates by Kahf (1989) contend that Zakāt to GDP ratio between 1.6% to 4.4% would be needed to deal with poverty gap in Pakistan. In a more recent study, Azam et al. (2014) in an empirical study for Pakistan establish that Zakāt significantly enhances the welfare of households. Akram and Afzal (2014) in an empirical study for Pakistan argue that Zakāt disbursement among the poor, needy, destitute, orphans and widows has played a significant role in poverty alleviation. Their results show that there is an inverse relationship between poverty and Zakāt disbursement both in the short run and in the long run. Nevertheless, Zakāt collection at the federal and province level is very low in Pakistan as can be seen in Figure 3. In year 2015, Rs. 5.74 billion (US$ 54 million) Zakāt was received by the central public Zakāt agency. One potential reason why Zakāt collection is low at the central level in Pakistan is that there is a big and growing trust deficit between the central government and the people. Due to the limited availability of Zakāt funds collected by Zakāt and Ushr department, the scale of providing assistance to the poor is very low. The most vibrant Zakāt and Ushr department is in Punjab province, but even that is also catering to a very limited section of poor people. For instance, through Sustainable Economic Empowerment Program (SEEP), annually 30,000 young people are imparted technical and vocational training. In addition to that, scholarships to some 2,000 students are provided annually by Punjab’s Zakāt and Ushr department. However, these programs do not sufficiently fill the gap in the country amidst 25 million out of school children between the ages of 6 and 15. The total Zakāt budget for 2016/17 for Punjab was Rs. 4.15 billion ($40 million). In addition to that, the total Zakāt budget for 2016/17 for Sindh was Rs. 249 million ($2.4 million). Figure 3: Zakāt Receipts (in mln Rs.)
  13. 38 Journal of Islamic Banking and Finance July – Sept 2018 Source: Federal Board of Revenue Most people usually prefer to pay their Zakāt and Sadqāt individually to the poor people or to the organizations working for the welfare of poor people. According to Pakistan Center for Philanthropy, the total estimated charitable giving in Pakistan stands at Rs. 300 billion ($2.8 billion) in 2015. In the provincial studies, the amount contributed in the year 2013 stood at Rs. 67.9 billion ($0.65 billion) in Sindh (Pakistan Center for Philanthropy, 2013). Additionally, the amount contributed in the year 2010 stood at Rs. 103.69 billion ($1 billion) in Punjab (Pakistan Center for Philanthropy, 2010). A recent estimate by Pakistan Peace Initiative (2017) contends that people in Pakistan pay around Rs. 554 billion ($5.31 billion) in charity every year. 5.2 Institution of Waqf in Pakistan In the institution of Islamic Waqf, an owner donates and dedicates an asset (movable or immovable) for societal benefit. The beneficiaries enjoy its usufruct and/or income. Waqf is usually perpetual, but can be temporary and partial. In the contemporary application of Waqf, it can be established either by dedicating real estate, furniture or fixtures, other movable assets and liquid forms of money and wealth like cash and shares. In Muslim history, Awqaf provided public utilities (roads, water and sewage), educational institutions and hospitals. Kuran (2001) admits that Waqf as an institution long served as a major instrument for delivering public goods in a decentralized manner. Even in contemporary times, Awqaf can also directly affect entitlements by providing education (scholarships) and health (service and medicines) for the poor. Waqf can help in capacity building and wealth creation through building human, physical and financial capital. In Pakistan, Waqf is mostly used in establishing mosques, maintaining shrines and in some cases, Muslim graveyards. In the province of Punjab, Awqaf Department maintains 1 hospital and 14 dispensaries. An amount of Rs. 28 million ($270,000) per annum is spent on health care at Data Darbar Hospital, Lahore as well as in 14 Dispensaries where poor and needy patients are treated freely. In addition to that, Sindh Government owns 31 Waqf properties in the Sindh province. In Pakistan, Corporate Waqf is uncommon, except for Hamdard Laboratories. The main reason for the dormant Waqf sector in Pakistan owes to the negative effects of nationalization of public property during the 1970s (Malik 1990). Conclusion & Recommendations Islamic finance in Pakistan is penetrating steadily in different financial sectors of Pakistan. The market share of Islamic banking is 11.7% in the overall banking assets and the market share of Islamic mutual funds is 33.40% of the overall mutual fund industry. At least 78 Sukuk had been issued to date and Government of Pakistan also meets its fiscal needs by issuing Sukuk. Nonetheless, Islamic microfinance is yet to realize its true potential and there is a significant need for micro-financial services so that Islamic finance could facilitate consumption smoothing for net endowment deficient poor people in Pakistan. Islamic redistributive institutions have potential, but their use and focus in policymaking is limited. Lack of trust between public and government has resulted in
  14. A Review Journal of Islamic of Islamic Commercial Banking and Social Finance Finance July – Sept in Pakistan 2018 39 very limited mobilization of Zakāt funds through the official government agencies in Pakistan. In addition to that, nationalization in the1970s and non-standardization of rules has resulted in lower interest in the institution of Waqf. In the light of this overview, we present following recommendations for the promotion of Islamic finance in Pakistan.  Islamic banks must facilitate easy opening of bank accounts for students, housewives, self-employed technicians, small entrepreneurs and tutors to increase their outreach among the general masses. Sustained growth in branchless banking is required to allow more outreach and to avoid the scale disadvantage in underprivileged areas.  Given the fact that Islamic banks mobilize around 34% of their total deposits from customers in the form of Qard, it is important to emphasize that they shall provide at least 20% of their non-remunerative deposits as Qard to the small farmers. This initiative will enable them to showcase their contribution to social development and impact the lives of underprivileged people more directly.  Since agriculture provides employment to more than one-third of the people in the labor force, Islamic banks need to put their focus on this critical sector and raise their financing share in agriculture.  The government should give tax incentives for corporations to go towards Sukuk issuance for meeting their long termfinance needs. Issuance of more Sukuk will assist the portfolio managers to achieve effective diversification.  There is considerable need for enhancing the scale of Islamic redistributive institutions and creating synergies. There is a strong basis of complementarity if these institutions are integrated with each other to provide financial as well as support services in the area of human capital development and developing institutions for covering general needs of the masses.
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