KARACHI – Despite a poor macroeconomic environment and heightened credit risk, Islamic banking in the country continued to go from strength to strength during July-September 2010.
Though showing some decline in overall performance indicators, Islamic banks are expected to be facilitated in managing their asset-liabilities by the post quarter tender for Government of Pakistan Ijarah Sukuk (GIS) amounting to Rs 80 billion.
This was revealed by the State Bank of Pakistan (SBP) in its Quarterly Performance Review issued on Monday.
The central bank indicated that during the quarter the share of Islamic banking increased by another 30 bps to 6.4 percent as there was 3.2 percent growth in its assets compared to a decline in asset base of the conventional banks.
The Islamic banking branch network also grew by 5.4 percent; most of the rise is attributable to the Islamic banking divisions of conventional banks with annual growth standing at 27.8 percent, the central bank noted.
It said that the balance sheet analysis of Islamic banking showed an improvement in most of the key components except financing, adding that investments remained subdued during the quarter under review, as there was no issuance of Islamic instruments. “As result, cash and bank balances increase their share in total assets by three quarters of a percentage point,” it added.
It was also highlighted that other assets continued to increase in September 2010 (15.2 percent) while some institutions reported advance payments for acquisition of Ijara assets in other assets in lieu of advances.
The funding structure was also boosted during the quarter under review as deposits marginally increased by 2.5 percent, it said adding the year-on-year growth of deposits, however, was an impressive 38.1 percent.
“The break-up of financing shows that apart from Istisna and diminishing Musharka, all major components of Islamic financing declined over the quarter.” The segment-wise analysis portrayed decline across all segments except the corporate sector.
“The decline of Rs 3.3 billion in mortgage loans was an important reason for the decline of consumer finance.”
Sector-wise, the SBP said the production and transmission of energy and chemical and pharmaceuticals increased by Rs 2 billion and Rs 1 billion, respectively. The liquidity position of Islamic banking remained stable in September 2010 as the sector exhibited some improvement in overall liquidity indicators. Marginal growth in deposits coupled with decrease in financing, led to decline in financing to deposit ratio during the quarter under review.
Furthermore, the SBP underlined that the Islamic banks’ asset quality has deteriorated due to increase in the non-performing finances (NPFs) that went up by 27.3 percent to Rs 13.5 billion by end of September 2010.
“Category-wise analysis of NPFs indicates increase in substandard and loss categories.
A substantial increase in fresh NPFs resulted in smaller increase in provisions; net NPFs increased by Rs 1.8 billion.” Accordingly, deterioration was observed in infection ratios with the net NPFs to financing ratio inching up to 4.1 percent and impairment ratio to 14.3 percent while provisions coverage ratio declining over the quarter. “Nevertheless, Islamic Banks show lower infection as compared with conventional banks,” the State Bank said adding “Islamic banking remained profitable despite increased credit risk.
” Though the quarter exhibited an increase in net mark up and non-mark up income; their growth remained muted in comparison to the corresponding quarter of last year, the bank inferred.
Additionally, year to date provision expense almost doubled in Sept 10 quarter resulting in a decline in most of the earnings ratios with ROA declining by 20 basis points to 0.6 percent.
“One factor that might have been affecting the performance of Islamic banking during the last few quarters is the first ever merger of two Islamic banks in Pakistan that completed in October 2010,” the SBP deduced.
The overall earnings of the Islamic banking, however, remained misbalanced as the Islamic banking branches contributed all the profits, while aggregate earnings of Islamic Banks (IBs) remained in the red zone.
