CHINA-PAKISTAN-ECONOMIC-CORRIDOR (CPEC) AND ISLAMIC FINANCE
A Unmissable opportunity for Sukuk issuance
The China-Pakistan Economic corridor (CPEC), also known as One-Belt-One-Road (OBOR) is being referred to as the game-changer. About year and a half ago, I researched it and wrote about it in ‘Greater Kashmir’. The way things have unfurled in CPEC hitherto makes me reiterate even more confidently what I predicted then. This project covers 60 countries and 27 of them are Muslim nations. It reduces the distance of Western China to Europe by 5000kms, which roughly translates to 45 shipping days. Those who know international business can gauge the significance of 45 days. The $54 billion dollar investment is being spent to come up with the new roads, renovate and broaden old ones, build ports, airports, power plants, wind parks, solar farms, pipelines and optical fiber lines. This amount has to be partly financed by the Pakistani banks. Islamic banks hold the share of 14% as compared to 9% some years ago, in Pakistan’s banking industry. However, its growth rate is more than double in comparison to the conventional banking in the country. In fact, Islamic banks enjoy above 50% market when it comes to the home and car loan finance. There are 22 Islamic banks in Pakistan and on top of that 17 conventional banks have Islamic branches.
What actually makes CPEC an opportunity for Islamic banks is that the Federal Finance Minister Ishaq Dar has promised that the country has resolved to prioritize Islamic finance over the conventional one, as far as infrastructure building and long-term finance needs are concerned. Besides, the government intends to transfer somewhere between 20% and 40% of its debt financing to Islamic sources from the conventional ones. The Islamic banks will offer bonds, which are called Sukuk in Islamic parlance for all the phases of CPEC. Apart from religious obligation, it’s imperative to include Islamic banks in it to attract possible gulf investment and that fact as mentioned above that out of 60 countries covered by the CPEC, 27 are Muslim. As far as others are concerned, they would either like it too or at the worst won’t mind it. This project is all set to create 700,000 direct jobs by the year 2030 and create spill-over effect on many industries like cement and other raw material and add 2.5% to the country’s GDP, which is huge
With a chance to finance a part of such a huge project, not only will it be a shot in the arm for the Islamic finance industry in Pakistan but it will positively impact the industry at the global level since CPEC is truly international in nature. Let alone Pakistan’s general economic growth and amelioration in unemployment and illiteracy, it has come as a gift for Islamic banking and finance to prove its mettle to the world, after it did so when it survived the 2008 sub-prime mortgage crisis and when conventional banks were busy filing for bankruptcy; Lehman brothers for an example. The Institute of Business Administration, Karachi organized a conference on this topic in January 2017. The title was ‘Unlocking Islamic Finance potential in CPEC, beyond’, in which the Presidents of various Islamic banks, the academicians, concerned government officials and economists spoke. It is an encouraging step since it shows that the industry has already spotted the opportunity and is gearing up to capitalize on it.
The interesting part is that the share of investment, which has to come from abroad, is also inclined to use Islamic banking since they too consider it a better option for long-term finance. Apart from the Chinese state loans, the money has to come from Asian Development Bank and Asian Infrastructure Investment Bank (which is backed by the Chinese) and these two banks have said that they are seriously considering to use Shariah-compliant finance for funding the infrastructure.
Mehboob Makhdoomi is a Harvardian & an MBA from Pennsylvania University (IUP) -the United States with a Research degree from Cardiff University, United Kingdom.