Expat financing scheme to boost Pakistan’s retail banking sector

Islamabad is tapping the country’s 8.6 million expats to finance housing and vehicle loans, and to bolster savings accounts.

Karachi: Pakistan’s retail banking sector is tapping into demand for Islamic consumer finance from religious-minded Pakistani expatriates via a government-backed digital accounts facility.

The initiative also enables expats to acquire property and motor vehicles in their home country while based outside its borders.

In September 2020 the State Bank of Pakistan (SBP) allowed the 8.6 million non-resident Pakistanis (NRPs) to open bank accounts in Pakistan exclusively through a digital and online process. Known as a Roshan Digital Account (RDA), (English: Bright Digital Account), these accounts fully integrate the Pakistani diaspora with their homeland’s banking and payment system by providing access to fund transfers, bills and fee payments and e-commerce, the central bank said.

Presently, there are 13 Pakistani banks providing digital account services to NRPs, including fully-fledged Islamic banks such as the Meezan Bank and Dubai Islamic Bank Pakistan and the Islamic banking divisions of conventional banks. The system can accommodate both conventional and Sharia-compliant accounts.

Since the initiative launched, 345,570 digital accounts have been opened by expat Pakistanis depositing $3.44 billion into their homeland’s banks, according to the SBP. The data is not split into Islamic and conventional accounts.

Azhar Aslam, head of Islamic banking at Standard Chartered Bank Pakistan Ltd, the oldest and largest foreign bank in the country (its parent is UK-based), said overseas Pakistanis can open these accounts in either Pakistan rupees (PKR) or foreign currency denominations. Another service allows for expats to invest, via the government-issued Naya Pakistan Certificates (New Pakistan Certificates or NPCs), in US dollars, British pounds, euros and rupees at attractive rates and in conventional and Sharia-compliant modes.

Pakistani expats are using the vehicle to invest in real estate, the stock market and bank savings and term-deposit accounts. Moreover, funds in these accounts are fully repatriable to the NRPs’ countries of residence, Aslam said.

In August 2021 the expanded SBP facility allowed NRPs to use digital systems to buy a property or build or renovate a house in Pakistan through their investment or bank financing accessing Islamic and conventional borrowing systems. This financing is also available under the government mark-up subsidy scheme originally reserved for Pakistan-based borrowers to access low interest financing.

The central bank has authorised Pakistan-based family members to use the expat’s account for car financing should they qualify. This will also be via Islamic and conventional borrowing.

Aslam predicts these ex-pat facilities will grow Islamic banking, saying it “is only set to grow as confidence in the sector increases and consumers continue to search, including overseas Pakistanis, for products and services that are Sharia-compliant.”

The SBP has not yet released statistics on how much money has been borrowed for housing and automotive financing through these facilities.

“Thanks to strong government support, buoyant consumer demand and a thriving banking system, Islamic finance is perfectly positioned to spearhead the growth of Pakistan’s retail banking and reap the economic and social benefits,” he said.

Islamic banks are currently offering both lien and non-lien based financing to RDA holders. In terms of the former, the bank can exercise a lien on the RDA or NPC investment holding funds, should payment problems emerge. Under lien-based financing terms, lower fees and interest rates (in conventional systems) apply and Aslam confirmed both fixed and variable-rate financing facilities are offered.

Lien-based financing demands a minimum PKR 500,000 ($2,830) be allowed for buying, building or renovating a house with no maximum limit. The same applies for buying and building a house via non-lien financing, but non-lien renovations are capped at PKR 10 million ($56,700).

Expats can buy up to three cars on the mark-up subsidies rates touching 7%.

Examples of Islamic financing facilitated by these expat systems include how Standard Chartered Bank Pakistan now only offers home and auto finance under Islamic systems. Naveed Malik, head of consumer banking at Dubai Islamic Bank Pakistan Ltd (DIBPL), said Islamic banks are offering financing to expats through the Islamic Ijara cum Musharika basis where customers put up equity alongside the bank’s financing.

“As the customer uses the asset, they provide rental to use the same which initially is high … as more share of the asset is transferred to the customer, the rent goes down. Our bank is targeting the whole NRP [expat] diaspora with a focus on salaried individuals as verification of income is easier,” Malik said.

DIBPL offers Islamic financing to expats with RDAs buying homes, land and construction and renovation services. Car financing is provided for new or imported cars, while the bank has developed digital signature serves to facilitate such borrowing.

The Pakistan Banks’ Association (PBA) welcomes these developments, saying they allowed expats to securely access investment opportunities using formal channels. They recognised the importance of expat remittances to the Pakistan economy that rose to an all-time high of $29.4 billion in the fiscal year to June 30, 2021. These inflows stood at $23.1 billion a year earlier, said the SBP.

In a statement, the PBA said the initiatives enable expats to take advantage of the ongoing housing boom and predict the central bank will launch more expat facilities in coming years to further boost Islamic banking.

“So far, we have (had) a good response from Pakistani expats in obtaining car financing … The process from getting a loan to having a car is quick and smooth,” said an official at the ministry of overseas Pakistanis and human resource development.

However, he said there had been a slower response to the housing scheme. A note from leading Pakistan-based property sales portal Zameen.com indicates this hinges on the lingering doubts about the validity and reliability of property financing.

Historically, the Pakistan real estate sector has a poor reputation as developers did not deliver on high-profile projects. Zameen.com believes these concerns can be allayed if, supported by the new expat financing systems, the SBP and commercial banking partners undertake due diligence on real estate projects.

Mujtaba Qamar, a senior Islamic retail banker in the United Arab Emirates, said more marketing to Pakistani expats was needed to persuade them these systems offered more services than facilitating the payment of remittances.

He recommended staging webinars to publicise home and car finance, effectively enabling developers and car dealers to present borrowing opportunities. End-to-end financing guarantees must be offered to expats “to support investments and wide range of product offering” and suggested RDAs – Islamic and conventional – be extended to commercial business investments.

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