Agriculture Share in Pakistan’s Economy:

The Agriculture sector continues to play a central role in Pakistan’s economy. It is the second largest sector, accounting for over 21 percent of GDP, and remains by far the largest employer, absorbing 45 percent of the country’s total labor force. Nearly 62 percent of the country’s population resides in rural areas, and is directly or indirectly linked with agriculture for their livelihood. The Agriculture sector’s strong linkages with the rest of the economy are also vital to understand. While on the one hand, the sector is a primary supplier of raw materials to downstream industry, contributing substantially to Pakistan’s exports, on the other, it is a large market for industrial products such as fertilizer, pesticides, tractors and agricultural implements.

Role of Exchanges in development of Agriculture Sector:

InU.S. investors have beentrading in the commodity marketsfor more than 150 years, and there’s even evidence that commodity trading began more than a 1,000 years ago in Japan. The purpose of exchanges is to provide a centralized marketplace where commodity producers can sell their commodities to those who want to use them for manufacturing or consumption. The beauty of a commodity exchange is that even a farmercan lock a price for his crops months before they’re even harvested. This process increases business survival among farmers, and the exchanges always make sure there’s a buyer for every seller, provided their prices meet.

Commodity exchanges certainly make the economy much more efficientand allowgrowers to find the bestrates for their commodities. It not only benefitsthe farmers in getting best pricesbut also bring the trade within the documented economyresultantly enhancing the financial inclusion of the masses and making it easier for them to access finance which may provide them the opportunity to introduce new technology in production which can increase overall yield.

Global Commodity Exchanges and Islamic Finance Institutions:

Institutions:Keeping in view the importance of commodity exchanges for the development of country’s economic situation and value addition in the product pallet of Islamic financial institutions across the globe, major commodity exchanges such as London Metal Exchange (LME), Bursa Malaysia and Dubai Multi Commodities Center (DMCC) have taken steps of phenomenal expansion to support IFIs globally in which multi million dollars trade of IFIs is a regular feature.Despite having many Shariah issues, these exchanges are providing breather to global Islamic finance industry as an effective tool for managing liquidity in a Shariah compliant manner through trading of various commodities.

In our country, Pakistan Mercantile Exchange (PMEX) has been established which has an average daily trade volume of PKR 5 billion per day.It is a 21 hours trading platform an unprecedented feature amongst regional exchanges and a widespread broker network present in 18 cities nationwide. The exchange is aggressively focusing on the market development with special emphasis on agricultural products.

After exhaustion of almost all the avenues of excess liquidity placement for Islamic banks and efforts of almost 5 years of conceptualization product designing, liaising & collaborating with various entities like Pakistan Bankers Association (PBA), multiple Banks and their respective Shariah Boards, Shariah Advisors, multiple Oil Marketing Companies, etc. and presenting & seeking requisite approvals from SECP and the State Bank of Pakistan (SBP), PMEX along with the Shariah Advisor had come up with the solution/product of new and improved commodity murabaha.This product enables Islamic banks to deploy their liquidity with other banks, corporate entities or individuals in an efficient, transparent, convenient and Shariah compliant manner.The Commodity Murabaha transactions in the initial phase are being executed using High Speed Diesel (HSD) as the underlying commodity, after full fledge launch and considerable growth and maturity, theplanisto add agricultural and other commodities as the underlying commodity. The benefit of this product is not just confined to the Islamic Finance Industry, harnessing its true potential can benefit growth in multiple industries particularly the Agricultural sector of Pakistan.Full ledge launch of this product will not only allow the local IFIs to invest the funds but will also attract international investorsas the case with other international exchanges. The producthas successfully completed its pilot phase; howeveris now on halt and awaiting formal approval from relevant authorities.

Commodity Murabaha transactions will enable sellers to bring their products to the exchange and make them available to the buyers around the globe. It will resultantly enhance the quality of the products, improve the pricing, trade will be conducted under documented economy, enable financial inclusion and will provide opportunity to the Islamic finance sector to indulge in Shariah compliant trading of commodities and place their excess liquidity which is a now dire need of the industry.

Keeping in view the above circumstances, challenges, expected benefitsand importance of this platform in growth and development of country’s economy, it is highly recommended that this commodity exchange platform is fully supported by government agencies and regulators to facilitate the growth of Pakistan’s economy.

Note: Detailed process flow of the transaction is annexed.

Annexure: Detailed Processflow of PMEX Commodity Murabaha:

PMEX Shari’ah Compliant Trading Process Flow (High Speed Diesel – HSD)

  • All market participants will open an account with PMEX through a PMEX registered broker resulting in creation of Cash and Inventory ledger accounts of all market participants.

    2. PMEX will assign trading limits to each participant.

    3. PMEX will update the daily HSD market price/ distributor price into PMEX Murabaha Market (ETS) before start of trading.

    4. All trades at PMEX ETS will be executed on the price mentioned above i.e. Single Price Market or any other as approved by Shariah Advisor of PMEX

    5. OMC will update HSD inventory in ETS available for Murabaha in the following manner:
    i. Tank location and unique identification number of tank
    ii. Total inventory in each tank
    iii. Inventory available for sale in each tank

    6. PMEX and OMC system will be integrated by providing online access of its live inventory position to PMEX so that total quantity of HSD available in the tank is known at the time of each sale or at any point in time to determine the Musha (share) of each buyer. In case the OMC system isn’t integrated then either of the following options shall be followed:
    i. OMC will take measurement of total quantity of its tanks when inflow or outflow is stopped from tanks. (Banks may prepare Murabaha documents beforehand. Murabaha then can be immediately executed as soon as the total quantity of the underlying tank(s) is confirmed. From the time of measurement, Murabaha can be executed as long as there is no further inflow or outflow in the respective tank).
    ii. OMC will provide a dedicated tank for Murabaha and once HSD is made available for Murabaha or sold to Bank A, OMC shall not consume / sell the same inventory until OMC gets this inventory as agent for onward sale.

    7. Upon inventory update in the PMEX system, the system calculates tradable lots and OMC places sell orders in the system.

    8. Primary Bank A will buy specific percentage of HSD equivalent to Murabaha amount from OMC through the ETS with the option of sale return unless the HSD has not been sold by Bank A.

    9. At this stage PMEX will transfer the ownership of HSD from the OMC to the Primary Bank A. The inventory ledger of the Primary Bank A with the clearinghouse/repository will reflect Bank’s ownership in terms of total quantity and share of Bank A in the total quantity.

    10. On behalf of the owner (OMC / Bank) of HSD, PMEX will generate ETS a certificate confirming the ownership and delivery to the certificate holder. The bank may take a printout which will serve the purpose of ownership receipt as well as entitlement for physical delivery. All market participants must recognize the ETS certificate which entitles its holder to take physical delivery of HSD from its respective storage location.

    11. Bank A will make advance payment to the Clearinghouse before placing the offer to purchase. The trading fee of PMEX, OMC charges for the storage of HSD or any other fee, if applicable, will be billed separately to Bank A.

    12. The ownership & constructive possession will be in the name of Bank A while physical possession of the HSD will remain with OMC.

    13. At this stage Primary Bank A will have the right: a. To take physical delivery from OMC, either directly or through its agent, in their HSD Tankers from designated tanks by showing PMEX ETS Certificate. or b. Bank A may sell this HSD to any market participant other than OMC itself either directly or indirectly (through Agency). However, OMC being an agent of its distributors may purchase HSD.

    14. Distributor to appoint OMC as agent and agreement for the same will be reviewed from Shariah Advisor.

    15. Primary Bank A may sell this HSD to the Client Bank B on Murabaha basis, outside the PMEX. Bank A shall inform transaction details to PMEX to update its system and records. PMEX will then transfer the ownership of the HSD in the name of Bank B in the inventory ledger of the clearinghouse. PMEX will generate ETS certificate.

    16. The deferred payment (from Client Bank B to Primary Bank A) and its related terms and conditions i.e. sale price, maturity date, etc. (the “Murabaha Contract”) will be out of the PMEX regulatory ambit and both the banks will be solely responsible for such terms and conditions without any liability and responsibility of PMEX.

    17. The constructive possession will now be in the name of Bank B while physical possession of the HSD will remain with OMC.

    18. At this stage Bank B will have the following rights:
    a. To take physical delivery from OMC, either directly or through its agent, in their HSD Tankers from designated tanks by showing PMEX ETS Certificate. Or
    b. Bank B may sell this HSD to any market participant other than Bank A or OMC itself either directly or indirectly (through Agency). However, OMC being an agent of its distributors may also purchase HSD.

    19. If Client Bank B sells HSD in PMEX market, PMEX will transfer funds to the Client Bank B on behalf of purchaser.

    20. At this stage new Buyer, will have the right: a. To take physical delivery from OMC, either directly or through its agent, in their HSD Tankers from designated tanks by showing PMEX ETS Certificate. or b. New buyer may sell this HSD to any market participant other than its Seller or OMC itself either directly or indirectly (through Agency). However, OMC being an agent of its distributors may also purchase HSD.

    21. OMC acting as an agent of its distributors is allowed to purchase this inventory for its distributors who either have made advance payment to the OMC or will make payment after an agreed credit term. In case of credit purchases, OMC will be responsible for the creditworthiness (guarantee) of its distributors.

    22. OMC shall maintain record of all purchases made on behalf of its distributors through PMEX ETS which will be randomly audited by PMEX Shariah Advisor.

    23. This will complete the whole Murabaha transaction.

    24. PMEX will ensure that there is no mechanism on PMEX counter or over the counter to net off / square off the position of original supplier at day end except market mechanism as approved by Sharia Advisor.

    25. Market participant who holds the HSD inventory at the day end may quote the HSD as available for sale on the next day. However, in case of expected price change on the next day, the Market participant will be required to take the physical possession of HSD from OMC as such HSD will not be allowed for trading through ETS.

    26. The minimum quantity of HSD for the transaction will be the one that can be delivered by the OMC.

    27. All buyers have right to return the HSD in case of deception if sale has been concluded before discovery of deception.

    28. If the Shariah Compliant trading platform gets disrupted due to regulatory requirements, the exchange reserves the right to cancel and reverse any PMEX Shariah Compliant Trading Contracts between participants which will be immediately referred to Shariah Advisor for his ratification / guidance.

Written by: Dr. Muhammad Imran Usmani

DISCLAIMER: Copyrights are reserved by Usmani and Co.