The domestic Islamic Banking Industry (IBI) is in a nascent stage compared to the rest of the world; but, if we run through those twelve years, IBI has put its best foot forward with each year proving to be better than the preceding year.
As per the third quarterly Islamic Banking Bulletin recently released by the SBP, the IBI has witnessed an impressive growth of 19 percent year on year in its branch network over the year. Not only did the existing players enhance their footprints in the Shariah-compliant banking, a new player, Bank of Punjab also got its foot in the door this year by launching 5 branches since March 2013. As of September 2013, Islamic banking network stands at 1,161 branches which include 759 branches (and sub-branches) of Islamic banks and 402 Islamic branches of conventional banks.
While the table clearly boasts where the IBI stands in terms of growth and market share as per the Islamic Banking Bulletin, we take a step ahead to determine how did the two industry players (full-fledged Islamic Banks and Islamic banking division, i.e. conventional banks offering Islamic banking) perform.
While its unsurprising that the Islamic Banks (IB) hold a lion-share of 64 percent in the IBIs total assets, with Islamic assets of Islamic Banking Divisions (IBDs) clocking in at Rs331 billion, the asset-mix of the two players will definitely raise a few eyebrows.
IBs having a share of 65 percent in the IBIs deposit-base have parked 55 percent of their funds in investments, whereas its private sector financing stands at 42 percent of their total deposits. In terms of share, IBs contribute only 30 percent to the IBIs total advances, the rest being provided by the IBDs.
Now, the brainteaser is how come the IBDs are representing 70 percent of the industrys advances when their deposits are just 35 percent of the IBIs total deposits? Crude number crunching shows that Islamic advances of the conventional banks are almost double their Islamic deposits (ADR: 186%) which raises a question mark on their source of funds.
Another interesting observation is that IBDs are more efficient in recovering their loans with their infection ratio clocking in at just 1 percent of their advances. Conversely, full-fledged Islamic banks have an infection ratio of 8 percent and contribute 82 percent to the total IBIs non-performing loans (NPLs) of Rs19.7 billion. This might be the reason why Islamic banks have better provisioning of their NPLs (72 percent) than conventional banks (58 percent).
Among the individual Islamic banks, Albaraka bank has the highest infection ratio of 20 percent while BankIslami has the lowest infection ratio of 3 percent. BankIslami also deserves recognition for having the highest ADR of 79 percent among the other Shariah-compliant players.
When it comes to coping with the NPLs, Meezan Bank appears to be the most pro-active with the bad-debt provisioning of around 119 percent while Dubai Islamic bank has the lowest provisioning covering only 44 percent of its NPLs.
Delving into the details of the Islamic financing, the IBI has significantly increased commodity financing which account for 11.3 percent of the total financing as of September 2013 vis-à-vis 7.4 percent in the similar period of last year. The industry has also started agriculture financing this year, although it currently has a skimpy proportion of 0.1 percent. Corporate sector and consumer financing have moved down a tad but still maintain their position of IBIs favourite sectors.
With the growing competition in the Islamic banking industry, the Islamic banks must rethink their asset deployment strategy, which is currently more inclined towards Investments, in order to remain profitable. SME and agriculture sectors which are untapped thus far could be the potential avenues to hit.
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ISLAMIC BANKING INDUSTRY
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Rs (mn) Sep-13 YoY Industry
Growth Share
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Advances 711,000 25% 9.1%
Total Assets 926,000 25% 9.5%
Deposits 775,000 23% 10.1%
Investments 445,479 19% 9.7%
Non-performing Loans 19,700 4% 3.2%
Branches (No.) 1,161 19%
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Key Ratios Sep-13 Jun-13 Sep-12
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IDR 57% 57% 60%
ADR 92% 91% 91%
ROA 0.9% 0.8% 1.2%
ROE 11.6% 11.1% 14.3%
Infection Ratio 3% 3% 3%
Coverage Ratio 70% 66% 63%
CASA 63% 63% 59%
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Source: SBP, BR Calulations
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