Islamic banking assets have grown by 33 percent since 2010 - twice as fast as the conventional banking assets and in the wake of widespread developments ongoing in the Islamic banking industry (IBI), the gap between the conventional banking and its ethical spin - Islamic banking is narrowing substantially, with every passing moment.
The third quarterly Islamic banking bulletin released by State Bank of Pakistan indicates that the IBI is gaining its foothold in Pakistan. With a handsome network size of 977 branches nation-wide as of 3QCY12, IBI accounts for 8.1 percent of the entire banking industry assets and 9.3 percent of the industrys deposits. In comparison, the IBI represented 7.3 percent and eight percent of the total banking industry assets and deposits respectively, in 2011.
Much in line with the conventional banking moves, the assets of IBI were predominantly inclined towards investments which grew by a staggering 58.1 percent YoY, in September 2012, while financing, the other important component of the industrys asset mix, stayed in the lurch, growing by mere 11 percent YoY.
The upsurge in IBI investments was essentially driven by the phenomenon of the industry parking its funds in the Federal government securities. As of 3QCY12, the share of GoP securities in IBI overall investments enlarged to 71 percent.
Delving into the details of IBI financing mix, the major chunk remains concentrated in individual financing (16.2 percent), followed by textile (15 percent), energy production and transmission (11.9 percent) and Chemical and Pharmaceuticals (7.8 percent). While in terms of financing mode, Murabaha financing stole the spotlight accounting for 38.6 percent of the share, followed by Diminishing Musharaka (37.1 percent) and Ijarah (10.5 percent).
Talking about the asset quality, NPFs of IBI grew by 19.7 percent YoY in September 2012, resulting in increased provisions translating into a coverage ratio of 63.7 percent, up from 62.3 percent in September 2011. Albeit, infection ratio also soared from 8.8 percent to nine percent in 3QCY12, yet lower when compared to the industry average of 15.5 percent.
On the liabilities side, deposits grew by 35.4 percent YoY in 3QCY12, with mainstream growth coming on the heels of saving deposits, followed by fixed deposits and non-remunerative current accounts. Currency-wise, local currency deposits dominated, grabbing 95.6 percent share.
Liquidity status of IBI also portrays a dazzling picture as both the important liquidity indictors - Liquid Assets/Total Assets and Liquid Assets/ Deposits charted an increase YoY to tally 46 percent and 54.4 percent in 3QCY12, however still strive to match the industry average. The main issues faced by IBI in managing its liquidity is the lack of developed Islamic money market and the shortage of highly tradable investment instruments with limited risk and predictable returns.
Profitability of IBI reached Rs7.7 billion in 3QCY12, conversely ROA and ROE plunged owing to high NPLs and operating expenses. Operating Expense to Gross Income of Islamic banking industry is higher than overall banking industry which can be attributed to the expansionary phase of Islamic banking industry.
Going forward, Islamic banking, locally and internationally, is envisaged to ride a bullish highway with Agricultural and SME sector presenting a golden opportunity to the IBI in Pakistan to diversify its portfolio and expand its reach.
Globally, with conventional banking grappling against the global financial crisis since 2008, IBI is gaining impetus in many parts of the world by adding stability to financial and economic backdrop with its conservative and ultra ethical demeanor. The major challenge that it faces is on the front of asset deployment and pleads the central banks to provide an enabling infrastructure along with
regulations to allow IBI to enlarge their array of products.
(Business Recorder / 20 Feb 2013)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com