The Islamic Banking Institutions (IBIs) have posted remarkable growth as compared to conventional banking and maintained their profitability with growth in assets and deposits during the third quarter ended September 30, 2009.
According to Quarterly Performance Review of the Banking System of the State Bank of Pakistan (SBP) share of Islamic Banking in assets of banking industry has also registered increase, reaching 5.3 percent in September 2009 as compared to 4.9 percent in December 2008. The report said that growth in assets of IBIs remained higher than that of the conventional banks, thus increasing the share of IBIs in the system.
The balance sheet composition with slight changes remained more or less stable during the quarter. On the asset side, significant increase was observed in investments and interbank lending, while financing portfolio contracted, the report said.
Total assets of IBIs mounted to Rs 323 billion by the end of third quarter compared to Rs 312 billion in June this year, depicting an increase of Rs 11 billion. Deposits of the Islamic banking increased despite a decline in deposit base of the banking system. Overall deposits of Islamic banking industry increased by Rs 6.6 billion to Rs 244.8 billion in September from Rs 238.2 billion in June this year.
Analysis of use of funds shows a consistent increase in investments of IBIs. During the quarter under review, investments registered a healthy growth of 21 percent to Rs 64.7 billion. Most of the increase in investments resulted from 4th auction of Government of Pakistan Ijara Sukuk of Rs 14.4 billion in September 2009, the report added.
The report said periodic issues of Ijara Sukuk have contributed towards the resolution of key issue ie lack of alternative avenues for Islamic banks. So far GoP Ijara Sukuk of Rs 42.2 billion have been issued, which now represent 65 percent share in investments of the Islamic banks.
The year to date profits of IBIs remained higher than the results of corresponding period of last year, though there was significant increase in provisioning for Non-Performing Funds (NPFs). However, Islamic banks saw a marginal decline in ROA due to shift in the mix of earning asset towards low-return assets.
Islamic banking industry has earned Rs 1.7 billion before tax profit in September 2009 as compared to Rs 1.5 billion same period of last fiscal year, the report said. Incidentally, major part of IBIs profitability is coming from IBBs of conventional banks and a couple of Islamic banks. Islamic banks, therefore, need to improve on their operational efficiency for keeping their competitiveness in the industry in terms of both market share and profitability. In line with general trend, financing of Islamic banks declined by 4.7 percent in September 09 and its share in overall assets decreased to 41 percent.
The composition of financing shows a substantial increase in share of Ijara and a moderate increase in Istasna. Other modes of financing declined over the quarter, with considerable decline in Modaraba and Salam. The financing portfolio of IBIs is concentrated in corporate and consumer with smaller shares of SMEs and commodity finance, while financing to agriculture is almost negligible, it added.
The report said that there is a strong potential for the IBIs to expand into SME and agriculture sector and keeping in view the potential and demand for agri finance and to promote Islamic financing in this area, the SBP has issued ''Guidelines on Islamic Finance for Agriculture''.
The liquidity position of IBIs improved over the quarter under review, as the decline in financing and increase in deposit base led to further lowering in Financing to Deposits ratio (FDR). However, the report said that increasing financing risk continues to pose challenge to IBIs and increase in NPFs coupled with drop in financing led to deterioration in asset quality indicators.
The NPFs of individuals are generally adequately secured through collaterals, low infection ratio for textile sector vis-à-vis conventional banks reflects upon the better risk management of IBIs, the report added. Sector-wise analysis shows that textile, chemical and individuals have the major share in financing. However, infection ratio is quite high for cement, electronics and individuals.