Business

State Bank launched long-term Islamic financing facility

The State Bank of Pakistan (SBP) on Wednesday launched the much-awaited Islamic Long- Term Financing Facility (ILTFF) based on Modaraba for exporters with a maximum limit of Rs1.5 billion.
The central bank currently provides the Long Term Financing Facility (LTFF) through conventional banks for import of machinery.After five years of decline, exports registered a growth of 10.5 per cent during the first half of this fiscal year as policymakers started searching more tools to boost exports.The SBP since 2008 has been offering LTFF for both imported and locally manufactured plant and machinery through commercial banks and development finance institutions (DFIs).
It is believed that despite over 10pc growth in exports, huge investment is required to update the technology and plants to compete in the international market. However, the import of plant and machinery are not dominant in the long list of imports.
During the first half of the current fiscal year, the import of machinery constituted only 19pc — of these, telecom imports stood at 43pc, followed by petroleum 26.7pc, transport 24.9pc and power generating machinery 26pc. The SBP said cheap financing was available since 2008 but such facility could not be availed through Islamic banking institutions in the absence of a Sharia-compliant alternative.
The ILTFF will allow exporters an opportunity to avail long-term refinance facility of SBP for purchase of imported and locally manufactured new plant and machinery from eligible Islamic banking institutions. “The facility will be available to the export-oriented projects if their annual export is at least equivalent to $5 million or 50pc of their sales constitute exports, whichever is lower,” said the State Bank.The period of financing under the ILTFF will not exceed more than ten years including a grace period of maximum two years while maximum limit for obtaining financing under this facility by a prospective customer will be Rs1.5 billion, said the SBP.
The participating Islamic banking institutions will undertake due diligence process in accordance with their respective financing policies before sanctioning the facility subject to the respective prudential regulations prescribed by State Bank for each type of customer.
Islamic banking institutions may participate in the scheme by submitting an application to the concerned department of the SBP. Under the scheme, Islamic banking branches of conventional banks may also apply to SBP for allocation of limit subject to a maximum of 20pc of the limit under LTFF for utilisation under ILTFF.The State Bank’s move would support both the Islamic banking as well as exporters who achieved a positive growth after five years.
Growth in exports during the first half of FY18 was 93pc due to higher prices of products in the international market while products supplies were increased by just 7pc. This indicates that the export industry needs more effort to improve this while the new scheme under ILTFF could help make the industry more competitive