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Pakistan Urging Persian Gulf Loans for Farmers: Islamic Finance

Pakistan’s central bank, seeking to double Islamic banking assets in three years, is urging lenders from the Persian Gulf to open branches in rural areas.

Albaraka Banking Group, the largest publicly traded Islamic bank in Bahrain, is increasing branches to 80 from 30, Kaleem Iqbal, a senior executive vice president at the local unit, said in a Sept. 21 interview in Islamabad. Meezan Bank, controlled by Kuwait’s Noor Financial Investment Co., is opening 25 outlets this year, said Amir Ali, head of investment banking in Karachi.

Gulf banks are looking outside of the region for expansion after lending that complies with Shariah law slumped 46 percent to $3.3 billion in Europe, the Middle East and Africa this year, compared with $6 billion in the same period of 2009, according to data compiled by Bloomberg. Pakistan has six Islamic banks with 668 branches and plans to approve two more as it seeks to boost lending to rural communities, Saleem Ullah, director of Islamic banking at the Karachi-based central bank, said in an e-mail on Sept. 16.

“The State Bank of Pakistan’s policy encouraging banks to open branches in rural areas makes it easier to get new licenses,” Ali said yesterday in an interview. “We may end up opening 225 more branches in the next four years and the majority of those will be in smaller towns.”

Sukuk Issuance

Albaraka plans to spend $200 million on acquisitions and is looking at buying assets in Indonesia and Malaysia, Chief Executive Officer Adnan Ahmed Yousif said yesterday. The Manama- based bank also plans to sell $200 million of Islamic bonds, or sukuk, by the end of 2010 and appointed Standard Chartered Plc as a manager for the sale, Yousif said at a conference in Dubai.

“We prefer to either start an Islamic bank or acquire an Islamic bank,” he said.

Qatar Islamic Bank plans to sell its first dollar sukuk and will start meeting investors in the Middle East, Asia and Europe from tomorrow, according to a statement from the Gulf state’s biggest Shariah-compliant lender.

Global sales of sukuk have dropped this year as debt restructuring in the Persian Gulf, falling property prices and doubts about the strength of the global recovery damped demand for issuance. Planned fourth-quarter sales of $5.5 billion will help relieve the shortage of supply, data compiled by Bloomberg show.

Islamic bond sales declined 24 percent to $10.7 billion so far this year, compared with $14 billion in the same period a year ago, according to data compiled by Bloomberg.

Access to Credit

The spread between the average yield for emerging-market sukuk and the London interbank offered rate widened one basis point to 376 yesterday, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index. The yield difference has narrowed 91 basis points from 467 at the end of last year.

Shariah-compliant bonds returned 10.8 percent this year, according to the HSBC/NASDAQ Dubai US Dollar Sukuk Index, while debt in developing markets gained 13 percent, JPMorgan Chase & Co.’s EMBI Global Diversified Index shows.

The yield on Malaysia’s 3.928 percent Islamic note due June 2015 fell two basis points to 2.63 percent today, according to prices from Royal Bank of Scotland Group Plc. The yield on the Dubai Department of Finance’s 6.396 percent sukuk maturing in November 2014 was unchanged at 6.37 percent, RBS prices show.

Pakistan’s central bank estimated in a December 2008 report that of the country’s 6.6 million farmers, only 2 million had access to credit. Policy makers plan to increase Islamic financing to 12 percent of the total by the end of 2012, from 6 percent, to cater to Muslims, who account for 97 percent of the nation’s 170 million population, Ullah said.

‘Urban Clients’

“Islamic banks are providing 80 percent of their services to urban clients,” said Iqbal at Al Baraka Islamic Bank. “Islamic banks can provide best products to the farmers, who will be more attracted to Islamic services because people in villages are generally more inclined toward the religion.”

Pakistan plans to sell sukuk maturing in a year or less in the domestic market by the end of this month, Syed Wasimuddin, a spokesman for the State Bank of Pakistan, said in an e-mailed statement on Sept. 8.

Islamic banking assets in Pakistan reached 411 billion rupees ($4.8 billion) as of June, or 6 percent of the total, Wasimuddin said. That compares with 303.3 billion ringgit ($98 billion) in Malaysia, accounting for 19.6 percent of the total, the central bank said in March. The Southeast Asian nation is the world’s biggest market for sukuk.

‘Comparative Advantage’

A shortage of investment options and services offered to limited clients is hampering growth in Islamic banking in Pakistan, according to Dawood Islamic Bank Ltd., which is 35 percent owned by Bahrain’s Unicorn Investment Bank.

“Islamic banks have no short-term products to deploy their liquidity,” Pervez Said, chief executive officer of Dawood Islamic, said in a Sept. 14 interview from Karachi. “It is natural for us to go to non-traditional sectors like microfinance and agriculture.”

Agriculture in Pakistan accounted for a quarter of the nation’s $150 billion economy in the fiscal year that ended on June 30, 2010, government data in May showed. The nation was hit by the worst floods since independence in 1947 last month, destroying crops worth $1 billion.

“The central bank is encouraging Islamic banking institutions to tap non-traditional sectors like agriculture, where they have a comparative advantage over their conventional counterparts,” said Ullah.

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