Trade Finance by Islamic Banks and Exchange Rates: A Study of Pakistan's Exports between 2010-2022

Article Information

Title: Trade Finance by Islamic Banks and Exchange Rates: A Study of Pakistan's Exports between 2010-2022

Authors: Umair Khan, Muhammad Muzammil

Journal: South Asian Review of Business and Administrative Studies (SABAS)

HEC Recognition History

Category	From	To
Y	2024-10-01	2025-12-31
Y	2023-07-01	2024-09-30
Y	2022-07-01	2023-06-30

Publisher: Islamia University, Bahawalpur

Country: Pakistan

Year: 2023

Volume: 5

Issue: 2

Language: English

DOI: 10.52461/sabas.v5i2.2679

Keywords: letter of credit financingislamic banksexchange rate pakistani exporteconomicstrade finance

Abstract

This study examines the factors that can affect the Exports of Pakistan, by paying particular attention to letter of credit financing by Islamic banks in Pakistan and exchange rate. Sample data of Islamic listed Banks is selected from last twelve years i.e. 2010 to 2022 with 975 observations. Study measures export performance using exports figures of Pakistan as the proxy for export performance while external factors namely letter of credit financing by Islamic banks and exchange rate used as an influencing factor. Applying panel data analysis, the results provide positive association Pakistan’s export with Islamic banks' letter of credit financing and exchange rate, indicating that easy availability of trade financing and favorable exchange rate can help increase Pakistan’s exports. The findings can aid policy managers, banking professionals, particularly those hoping to boost exports and foreign exchange through them. The study may also benefit managers seeking to broaden their knowledge of the key elements influencing export performance.

Disclaimer: The following sections are produced through an intensive multi-stage analytical pipeline developed by DefinePK, utilizing advanced natural-language processing, domain-specific knowledge models, and automated cross-referencing systems. Despite the rigor and computational effort involved, the generated summary may still contain inaccuracies or incomplete interpretations. Users are strongly advised to verify all critical information against the original paper and its authoritative sources.

Research Objective

To examine the factors affecting Pakistan's exports, specifically the impact of letter of credit financing by Islamic banks and exchange rates.

Methodology

Quantitative research using panel data analysis. Data was collected from financial statements of Islamic banks operating in Pakistan and the State Bank of Pakistan database for the period 2010-2022, with 975 observations. The study employed a general estimation model using panel regression analysis, with Pakistan's exports as the dependent variable and letter of credit financing and exchange rates as independent variables. A Hausman test was used to determine the appropriate model (fixed effects model was chosen).

Methodology Flowchart

                        graph TD
    A["Data Collection Islamic Banks' Financials, SBP Data 2010-2022"] --> B["Data Preprocessing & Cleaning"]
    B --> C["Hausman Test for Model Selection"]
    C --> D["Fixed Effects Model Estimation"]
    D --> E["Panel Regression Analysis"]
    E --> F["Correlation Analysis"]
    F --> G["Result Interpretation"]
    G --> H["Conclusion & Policy Recommendations"]

Discussion

The findings suggest that both a favorable exchange rate and increased availability of trade financing through Islamic banks' letters of credit can significantly boost Pakistan's exports. The study's results are consistent with previous research indicating the importance of exchange rates and trade finance in influencing export performance. The depreciation of the Pakistani Rupee (PKR) makes exports more attractive to foreign buyers, leading to increased export volumes. Similarly, accessible and affordable letter of credit financing enables businesses to engage more effectively in international trade.

Key Findings

- A statistically significant positive correlation exists between the exchange rate and Pakistani exports. A 1% increase in the exchange rate may result in a 0.66% increase in exports.
- A statistically significant positive correlation exists between letter of credit financing by Islamic banks and Pakistan's exports. A 1% increase in letter of credit financing may result in a 0.255% increase in exports.
- Letter of credit financing has a greater impact on export growth than exchange rates.

Conclusion

The exchange rate and letter of credit financing by Islamic banks are significant positive determinants of Pakistan's export growth. Policy managers should focus on promoting policies that support a favorable exchange rate and enhance the availability and utilization of Islamic trade finance instruments to boost the country's exports and foreign exchange earnings.

Fact Check

- The study period is from 2010 to 2022. (Confirmed in abstract and methodology)
- The study used 975 observations. (Confirmed in abstract)
- A 1% increase in the exchange rate may result in a 0.66% increase in Pakistani exports. (Confirmed in econometric model analysis and discussion)

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