Bankers’ job is to sit in their offices and count or calculate, with very limited external business activity, that usually comprises the collection of more deposits. It does not entail financing and structuring deals and is not even included in their job description.
But this pattern has not always been the case in Pakistan. Banking becomes boring only when government wants to borrow available liquidity from the sector, leaving little or nothing for private sector borrowers – a phenomenon called ‘crowding out’ in economics.
The current and previous PPP-led governments have borrowed heavily from the domestic banking sector, making a bankers’ life easy but uninspired.
If only the government left banks with the required liquidity, they would consider innovative financial products to get an increasing number of people and businesses involved in banking and finance. The products, though, should not be culturally alien, but rather based on some local traditions or phenomena well understood by the people.
Committee-based savings accounts and Salam-based investment accounts can be considered as such innovative products.
Committee – ROSCA-type arrangements has different types, but in its simplest form, it comprises a regular collection of funds from a select group of people who benefit from the collected sums on a rotational basis.
It is essentially an informal interest-free savings programme popular among housewives, taxi drivers, daily wagers and even among owners of small and medium size enterprises (SMEs).
The Salam, on the other hand, is a forward sale contract whereby seller of a commodity receives price upfront to deliver the commodity at a later stage. This sale contract has been used for farm financing in Islamic history and is currently being used by some Islamic banks around the world.
Now, how would a committee-based savings account work?
Just like an informal committee, the bank can offer a “committee account” to certain qualified customers. For example, this account could be offered to government sector employees only, who are considered more credit worthy and have a more certain income flow than the self-employed and those working in the private sector. One benefit of the bank organising such a committee would be the expected large number of people participating in the programme. For example, if the bank attracts 15,000 customers into this programme with each saving Rs1,000 on a monthly basis, the common pool will have Rs15 million every month. If the participating account holders are eligible to be considered (through a draw system) for interest-free cash, only six months after their joining, the bank will have at least Rs90 million in the reserve at any given point in time. The bank may charge certain percentage of the collections as its administration fee. If, for example, the bank charges two percent of the collected sum as administration fee, it will earn Rs300,000 in monthly income from the programme.
The reserve amount can be invested in some safe instruments to ensure that the programme remains in money in the long run.
The above plain-vanilla committee account is simple yet it may generate a lot of sticky money for a bank that decides to offer such an account.
A Salam-based investment account on the other hand would help in reducing financial exclusion in small town and rural areas. It might also be a popular product among overseas Pakistanis who are looking for interesting investment opportunities in their country of origin.
The Salam-based investment account may successfully be used in areas where commodity trading is part of the local culture.
For example, in the towns and districts of Sialkot, Narowal, Gujranwala, Sheikhupura, Gujrat and Mandi Bahauddin (the so-called Rice Bowl of Pakistan), a very significant proportion of farming and non-farming families are involved in trading of rice and wheat. A Salam-based investment account will allow a bank to sell certain amounts of a commodity (e.g., wheat) to its participating customers for an agreed price that must be paid in advance.
The bank’s liability is to deliver such a commodity on a future date (say after six months). On the back of this Salam transaction with its customers, the bank may also enter into Salam-based transactions with farmers to buy wheat for an agreed price that the bank must pay in advance to receive delivery after certain time period (e.g., four months). This will allow the bank to restrict its exposure to the commodity by way of ensuring its delivery and locking its price.
On the date of the delivery to the customer, the bank can either deliver the commodity (not likely to be preferred by the customer) or sell it on behalf of the customer in the market and debit the customer’s account with the price money. The customer is expected to benefit from the upward movements in the price of the commodity during this period. The bank should be allowed to charge a fee for offering its services to sell the Salam commodity on behalf of the customer.
Products like committee-based savings accounts and Salam-based investment accounts are linked to real economic activities and are completely interest free. The banks will not be deemed just managing the money but also will be involved in business and other real economic activities. On a macro level, such products will also help in financial inclusion, as a number of faith-driven families and businesses will get engaged with the banks.