NPF ratio of Islamic Banking remains well below overall banking industry: SBP

Despite the coronavirus pandemic, the Non-performing ratio of the Islamic Banking Industry (IBI) remained considerably lower at 3.2 percent than the overall banking industry ratio of 9.2 percent.

According to the State Bank of Pakistan’s (SBP) Islamic Banking Bulletin for the quarter ended December 2020, the asset quality indicator IBI i.e., ‘nonperforming finances (NPFs) to financing (gross)’ decreased from 3.7 percent by end of September 2020 to 3.2 by end December 2020. Similarly, ‘Net NPFs to net financing’ also decreased from 0.9 percent by to 0.6 percent, due to a decrease in NPFs during the quarter under review.

During the quarter under review (October-December 2020), the asset base of Islamic Banking Industry (IBI) grew by 12.1 percent (Rs. 461 billion) and reached Rs. 4,269 billion. Similarly, the deposits of the Islamic banking industry depicted a quarterly growth of 11.7 percent (Rs. 355 billion) and were recorded at Rs. 3,389 billion.

‘Assets’ of IBI witnessed YoY growth of 30 percent, which is the highest growth in asset base since December 2012, whereas ‘deposits’ also registered YoY growth of 27.8 percent, the highest growth since December 2015. The growth witnessed in the Islamic banking industry shows a promising transition to the new decade even amidst COVID-19 pandemic, stated the SBP bulletin.

In terms of market share, IBI achieved a significant mark of 17.0 percent and 18.3 percent in assets and deposits respectively, of overall banking industry by end December 2020. Moreover, profit before tax of IBI stood at Rs. 88.4 billion at the end of the December 2020.

The category-wise breakup of deposits showed that all categories of deposits witnessed growth on a quarterly basis with the exception of FI non-remunerative deposits. Current deposits grew sharply by 17.3 percent (Rs. 175 billion), fixed deposits increased by 11.8 percent (Rs. 71.7 billion), and saving deposits increased by 7.7 percent (Rs 89.5 billion).

The ratios of ‘capital to total assets’ and ‘capital minus net NPAs to total assets’ of IBI were recorded at 6.1 percent and 5.7 percent, respectively by the end of December 2020.

Meanwhile, profit before tax of IBI was recorded at Rs. 88.4 billion at the quarter end December 2020. While, earnings ratios like ‘return on assets (ROA)’ and ‘return on equity (ROE)’ (before tax) stood at 2.4 percent and 36.4 percent, respectively. During the period under review, ‘operating expense to gross income’ of IBI was recorded at 47.5 percent.

SBP stated that it is amongst the few regulators who have introduced a comprehensive legal, regulatory, and Shariah governance framework for the Islamic banking industry in the country.

During the last few years, significant efforts have been made by SBP for the growth of Islamic banking in the country. Some of the major steps include strengthening of the Shariah governance framework, ensuring availability of Shariah-compliant refinance facilities, detailed guidelines to facilitate the industry during COVID-19 for rescheduling/restructuring of financing facilities according to Shariah principles, standardization of Islamic banking practices in line with best international practices, issuance of instructions for enhancing the scope of Islamic banking windows operations and issuance of guidelines for conversion of a conventional bank into an Islamic bank.

SBP has also played a key role in the development of the Shariah structure for Naya Pakistan Certificate, i.e. Islamic Naya Pakistan Certificate (INPC). INPCs are available through the Roshan Digital Account for investment to the overseas Pakistanis and those resident Pakistanis who have declared assets abroad.

Moreover, extensive efforts have also been made in close collaboration and coordination with the stakeholders for capacity building and awareness creation about Islamic banking across the country.