Role of Islamic Banks in Energy Finance in Pakistan

By Salman Ahmed Shaikh

Abstract

Energy crisis in Pakistan has worsened in recent years leading to loss of output, increased incidence of manufacturing unemployment, cost push inflation, capital flight, low manufacturing capacity utilization and loss of export markets. The contributing factors to the crisis include inefficient energy mix, price distortions and low investment in alternate energy. The short term measure by the government to absorb loss from price distortions created by an inefficient energy mix has resulted in ballooning fiscal deficit. One important piece of solution lies in increased availability of financing for energy infrastructure. In this paper, we analyze the role of Islamic banks in fulfilling this need. Islamic banking in Pakistan has exhibited exceptional success in terms of assets growth. Within 10 years, the niche market now comprises almost 10% of the overall banking sector. However, questions are still raised about its differential economic merit and contribution to the economy. Energy financing presents a vital opportunity for Islamic banks to show their importance and contribution through financing energy infrastructure. We argue in this paper that Islamic banks will themselves benefit from increased financing to energy sector since it will help them i) narrow their banking spreads, ii) increase financing to deposit ratio and iii) reduce operational inefficiencies. Economy wide effects of resolution of energy crisis will help in increasing investment, productivity, fiscal space and export competitiveness. It will also help in reducing crowding out of private sector credit, capital flight and deindustrialization.