Growth of Islamic banks surpasses conventional banks

[Lahore_Real_Estate]

By Mushfiq Ahmad

KARACHI: Assets of Islamic banks grew by 13.3 percent in Oct-Dec 2009 quarter, a growth rate sharply higher than seven percent rise in assets of conventional banks in the same quarter, according to the performance review of the banking system released by the State Bank.

The healthy growth in assets helped expand the share of Islamic banking institutions in the industry as a whole. Islamic banking operations remain profitable and steady in Dec-09 quarter.

The Islamic banking network increased by 18.2 percent (YoY growth 26.4 percent).

The balance sheet composition of Islamic banks remained stable during the quarter, according to the review. In line with the historical quarterly trend, most components saw improvement during Dec-09. On the asset side, significant increase took place in Financing and Investments.

Financing had declined during the previous three quarters, but 14.7 percent growth during Dec-09 not only offset the decline, but also increased financing by 6.1 percent year-on-year.

Investments, on the other hand, increased by 11.6 percent, coming mainly from PIA Sukkuk of Rs 6.8 billion and WAPDA Sukkuk of Rs 8 billion. The investments saw year-on-year increase of 71 percent mainly due to various Sukkuk issued during the year, which is a healthy development for the IBIs, said the review.

Deposits continued to be the mainstay in the funding structure of IBIs. The fund base of Islamic banking saw a healthy growth due to across-the-board increase in all categories of deposit.

Financing observed a substantial change in the composition due to significant increase in Murabaha and Istisna modes during Dec-09. Among the core modes of financing, Mudarbah increased its share marginally while Musharaka declined in absolute and percentage terms. Murabaha and Istisna also contributed to increase in financing on a year-on-year basis.

The segment analysis shows an increase in concentration of corporate financing portfolio, largely coming from the growth in Murabaha financing. Interestingly, the consumer finance of IBIs saw a rise despite a decrease in overall consumer financing of the banking industry. Increases in Diminishing Musharaka facilitated that increase while decline in Ijarah seeded to have dampened the growth in consumer financing.

There was a little increase in SME financing, but it still remained one of the neglected areas of Islamic banking in absolute terms. IBIs may develop products for channelisation of their funds to their unexplored opportunities and bring in more diversification to their portfolio, according to the State Bank.

The Financing to Deposit ratio, which had been on the decrease over the last four quarters, marginally improved during the quarter under review. Given a healthy increase in Deposits over the year, the FDR of 56.2 percent is still on the lower side. However, it has improved the liquidity profile of IBIs.

Increasing NPFs remains the key challenge faced by IBIs, although the rate of the increase in infected portfolio subsided during Dec-09. That coupled with healthy growth in financing led to 20 bps decrease in NPFs to Financing ratio to 6.3 percent. Category-wise analysis shows continuous increase in NPFs in Loss category, which now constitutes almost half of the NPFs.

A sector wise analysis shows that Textile, Others and Individuals had major share in financing. However, infection ratio is quite high in Automobile & Transportation Equipment and Textile sectors.

Islamic banks saw a marginal decline in return on assets primarily due to shift in the mix of earning assets towards low return assets. Further, IBB’s profitability keeps netting off the profitability of Islamic banks, according to the review.