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Islamic banks fail to boost market share - LahoreEstate - 10-19-2009 08:40 AM
KARACHI: Islamic banking despite all its effort could hardly increase its share in the traditional banking system and remained far behind the conventional banks.
The State Bank in its banking system quarterly review, released on Friday, said the share of Islamic banking has marginally increased by 30 basis points to 5.1 per cent in the quarter ending June 30, 2009.
Likewise, the growth in outreach of Islamic banking continued, though at a slower pace. Branch network grew by 1.7 per cent to 528 branches (551 branches by end September 2009) compared to 521 branches at the end of March 2009.
Analysis of the sources of funds depicts that deposits continued as a dominant source for the system. Deposits grew at an impressive rate of 15.5 per cent (2.3 per cent March 2009). As a result, their share in overall funding structure improved to 76.1 per cent from 74.1 per cent in March 2009. Most of this increase came from increase in deposits of the Islamic banks.
Financing, the major end use of funds, regained some momentum in the quarter after observing a decline in March 2009; it increased by three per cent as growth in financing was slower than growth in other liquid assets viz. placements and banks balances, the share of financing in overall composition of assets declined to 44.8 per cent (48.9 per cent in March 2009).
Investments also registered steady growth, showing an increase of 9.3 per cent. However, like financing, its share in overall asset structure declined to 17.1 per cent (17.6 per cent in March 2009).
‘While Islamic banks are pursuing cautious approach to financing, lack of investment avenues are forcing them to keep their funds in low-earning and liquid avenues,’ said the SBP quarterly report adding that cash balances and placement increased by 45 per cent while their share in other assets increased by 5.3 percentage points to 28.6 per cent.
As growth in deposits overweighed the increase in financing, financing to deposits ratio (FDR) further decreased to 58.9 per cent (66 per cent in March 2009).
The financing risk which rose sharply during last quarter, further inched up though at slower pace.
The non-performing finances (NPFs) increased by 15.4 per cent to Rs7.3 billion (Rs6.3 billion in March 2009). However, IBIs set aside significant loan loss provisions to cover deterioration in asset quality provisions increased by 25 per cent.
Accordingly, NPFs coverage ratio, which was continuously declining for the last four quarters, improved to 54.4 per cent (50.6 per cent in March 2009) and the impairment ratio i.e. Net NPF to capital remained at the last quarter‘s level.
The increase in NPFs translated into increase in NPFs to financing ratio by 50 bps to 5.0 per cent; while on account of higher provisioning net-NPFs to financing observed only a marginal increase of 10bps.
Though the Islamic banks have majority share of the market in terms of assets and different components of balance sheet, the earning performance showed opposite different trend. The profitability of the IBBs has been gradually improved with every passing quarter; their share in profitability increased from 76 per cent in September 2008 to 121 per cent in June 2009.
The IBBs profitability for the first half of 2009 has actually offset the overall losses posted by the Islamic banks. Main reason behind better earning performance of IBBs remains in the synergies provided by the infrastructure of their parent commercial banks. IBBs have opportunities to market and sell Islamic banking products through specialised Islamic banking windows set-up in conventional branches.
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