Moody’s says Robust growth in Pakistan’s Islamic banking a credit positive

International credit rating agency Moody’s has termed the impressive growth in Pakistan's Islamic banking assets as credit positive for banks.

On Wednesday, the State Bank of Pakistan (SBP), released its quarterly Islamic Banking Bulletin for December 2020, which showed that Shariah-compliant banking assets grew 30 percent in 2020.

“The growth is credit positive for Pakistani banks because it attracts customers from the previously unbanked population, which creates new business opportunities and boosts banks' financial performance,” said Moody’s in a statement.

Pakistan’s Islamic banking assets grew to Rs 4.3 trillion as of year-end 2020, comprising 17pc of total banking system assets. Meanwhile, Islamic deposits have had witnessed a 22pc annual compound growth rate since June 2013.

Furthermore, Islamic financing also grew faster than conventional loans and were Rs 1.9 trillion, or 23pc of Pakistani banks' total loans at year-end 2020. The profitability of Islamic operations has also been stronger, with return on assets for Islamic banking institutions was 2.4pc at year-end 2020, versus the system average ROAA of 1.8pc, and Islamic nonperforming financing (NPF) was 3.2pc, lower than the system weighted average of 9.2pc at year-end 2020.

Moody’s was of the view that the Islamic banking growth will benefit Pakistan's banking sector “because attracting previously unbanked customers facilitates deposit and loan growth while reducing funding costs because of the banks' access to a large pool of non-remunerated deposits.”

Moody’s expect Shariah-compliant banking to continue growing in Pakistan by targeting customers who prefer Islamic products or are voluntarily excluded or underserved because of their religious belief.

“We believe that all rated banks will benefit from the increase in Islamic banking penetration, especially Habib Bank Ltd. (HBL, B3 stable, caa11), which, at year-end 2020, had a 7.5% market share of Pakistan's Islamic banking assets and MCB Bank Limited (B3 stable, b3) which had a 3.3% market share, the largest shares among their rated peers,” stated Moody’s.