The performance of the Islamic banking appears encouraging because of enhanced capital position and improved asset quality. A State Bank quarterly performance review of the banking sector for June 2007 notes that increased operational expenses (which are quite symptomatic for a developing sector) need to be contained in order to improve the profitability of the sector.
The State Bank report prepared by surveillance wing has commended improvement in balance sheet, financing decline in non-performing loan and capital growth of 20.6 percent.
The balance sheet of Islamic Banking Institutions (IBIs) grew by 17.25 percent over the quarter and stood at Rs 159 billion. The trend is similar to the one in conventional banking. However, the growth IBIs balance sheet is commendable when compared with 11.2 percent growth in the balance sheet of the overall banking system. Islamic banking system now forms around three percent of the banking system.
The review of the balance sheet reveals that the deposits remained predominant source of financing, which formed around 68 percent of total sources of funds. Together with borrowings, they formed around 77 percent, while 15.8 percent was contributed by the shareholders in the form of capital and other funds.
On the asset side, financing remained the largest asset with 49.5 percent followed by cash, bank balances and placement 33.4 percent and investments 7.2 percent.
Improvement in financing to deposits ratio was witnessed as it declined to 72.8 percent in Jun-07 from 75.2 percent in March-2007. The improvement in asset quality was also reflected in the declining non-performing financing (NPF) to financing ratio as it dropped from 1.1 percent in March-2007 to 0.1 percent in Jun-07. The net NPF to net financing also declined during the quarter under review as the quantum of NPF declined from Rs 808 million to Rs 790 million besides increased provisioning.
The capital of the IBIs grew by 20.6 percent during the quarter under review. The capital adequacy remained around the level of 21.8 percent of risk-weighted assets, providing comfort to the institutions and affording them the opportunity to expand their operations.
The break-up of deposits reflects that during Jun-07 quarter, the shares of fixed deposits declined from 38.4 percent to 37.0 percent, Savings deposits and non remunerative current account increased from 26.6 percent and 20.1 percent to 29 percent and 22 percent, respectively. Deposits from financial institutions declined too from 13.9 percent in March-2007 to 11 in Jun-07.
The composition of financing reflects predominance of Murabaha, which increased to around 45 percent of total financing from 41 percent in March-2007. Ijarah and diminishing Musharaka also increased their collective share from 47.1 from 50.1 percent in Jun-07. These three business lines form around 95 percent of the mode of financing for the Islamic banking operations.
As a corollary to increase in operating expenses to gross income to 72.2 percent in Jun-07, ROA (annualised) has remained at the 0.9 percent. Net mark up income to total assets showed an annualised increase of 7.6 percent from March-2007, whereas non mark up income to total assets increased to five percent from March-2007. Operating expenses have shown an increase of 14.1 percent during the quarter. Despite this, after tax profit increased by 12.3 percent (annualised) during the quarter.