Islamic Banking Industry fetching rapid growth in the country
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27/04/11  FAISALABAD. Islamic banking industry has sustained growth momentum despite tenuous economic conditions prevailing in the country which were further exacerbated due to the recent floods in most parts of the country. The relatively lower growth in financing and investments is indicative of the difficulties being faced by IBIs in exploring new financing and investment avenues to deploy the growing deposits. The Islamic banking assets, deposits and financing continued exhibiting strong growth during the quarter ended on September 2010 with total assets increasing to Rs 424 billion in Sept 2010 from Rs. 411 billion as at the beginning of the quarter; the year on Year (YoY) growth in the assets was 31 per cent.

Similarly, deposits and financing and investments grew by 38.2 per cent and 17.7 per cent respectively and reached Rs 338 billion and Rs 233 billion as at the close of the quarter. According to the State Bank of Pakistan statistics, the overall share of Islamic banking industry in the country’s banking system also improved to 6.4 per cent in Sept 2010 from 6.1 per cent as at the beginning of the quarter. While the relatively cautious approach of IBIs in assets’ acquisition has enabled the IBIs to maintain relatively better quality of financing portfolio, it has slowed down the pace of asset buildup; the share of IBIs financing and investments is 4.6 per cent compared to that of 6.7 per cent of deposits.

The widening gap in the growth rates of deposits and financing has been instrumental in pileup of huge liquidity surpluses in the industry. While the recent issue of GOP Ijarah Sukuk of around Rs 52 billion coupled with another tranche of Rs. 40-50 billion in December, 2010 would temporarily address the surplus liquidity issue, the IBIs will have to diversify their financing and investment avenues to find a long-term solution. The growing liquidity surpluses in Islamic banks however is a universal problem, as IBIs in almost all the jurisdictions are facing difficulties in deploying the growing deposit base. Perhaps, the solution lies in diversification of product mix and tapping non-traditional areas like SME, Agriculture and Microfinance, in a gradual manner.

The profitability of IBIs in Pakistan-based on Return on Assets and Return on Equity (ROA, ROE) etc is lower than the industry average. The tax adjusted ROE and ROA for IBIs as of September 2010 are 0.6 per cent and 5.3 per cent compared to the industry figures of 1 per cent and 9.9 per cent, respectively. The declining profitability can be attributed to difficult economic conditions that have adversely affected the assets quality of banks including IBIs as reflected by significantly increased NPF ratio. Furthermore, the extensive branch expansion during last couple of years has also contributed in decline profitability ratios as the branched so opened are gradually achieving the break even.

During the quarter ending September 2010, the nonperforming financing has shown 51 per cent growth on YoY basis while the QoQ growth rate is 27 per cent. It shows that the assets quality of IBIs is under strain. The nonperforming financing reached to Rs 13.51 billion from Rs.10.65 billion as at the beginning of the quarter. The increased level of NPF is attributable to the difficult economic conditions in the country, which were further compounded by the recent heavy floods. The Capital to Total Assets ratio of Islamic banking industry is 10.3 per cent as compared to industry which is 9.9 per cent, while Capital-net of NPFs to Total Assets ratio of Islamic banking industry is 8.7 per cent while the industry figure is 7.8 per cent. The reason for IBIs having a sound capital base can be the fact that their target market comprises of blue chips firms which ensures sound collateral but also carries comparatively lower level of return.


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