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Financial analysis of Islamic Banking in Pakistan

Researchers reported that Islamic banking is now approximately 30-years old. In 1963, Islamic banking was started in Egypt; most of the biography corroborates but most of the countries within the Globe agreed and developed Islamic banking in their countries during 70s and 80s. Among all classes of the society wealth or income should be equally divided Islam believes and wealth shouldn’t stick with the rich only. In the World, being one of the most developing Muslim nations, State Bank of Pakistan (SBP) has been encouraging and getting the infrastructure for the development of Islamic Banking System in Pakistan. The Islamic banking however is still comparatively in the infancy stage in the country as against to the further organized commercial banking sector. To complete regulatory requirements of SBP in the country various leading conventional banks have organized Islamic banking windows parallel to the commercial banking system. There is much other governance in the Islamic banking industry to be put in place to promote the trust and self-assurance to strengthen the risk management by the Shariah principles and framework. Islamic banking products like Murabaha and Mudarabah have drawn substantial attention from Pakistani religious people. Worldwide, Mudarabah and Murabaha products are among the fastest growing Islamic finance instruments.

Islamic Financing Mix (% Share)
Mode 18-Sep 19-Jun 19-Sep
Murabaha 12.8 13.5 13
Ijarah 6.6 6.1 6.1
Musharaka 21.5 20 20
Diminishing Musharaka 33.4 33.6 35
Salam 2.3 2.6 2.3
Istisna 7.6 8.9 8.7
Others 15.8 15.3 14.9
Total 100 100 100
Asset and liability structure

Statistics revealed by the State Bank of Pakistan that assets of Islamic banking industry rose by Rs. 3 billion during the quarter July to September, 2019 and were registered at Rs. 2,995 billion as against to Rs. 2,992 billion in the last quarter. Market share of Islamic banking industry’s assets in overall banking industry’s assets was also registered at 13.8 percent by end September, 2019. The share of financing and investments (net) in total assets of Islamic banking industry reached at 51.6 percent and 19.9 percent, respectively by end September, 2019.

Investments

Moreover, SBP also showed that Investments (net) of Islamic banking industry were registered at Rs. 595 billion by end September, 2019 as against to Rs. 606 billion in the last quarter. During the period under review, investments (net) of IBs fell by almost Rs. 13 billion while that of IBBs rose by Rs. 2 billion. It is also recorded that lack of Shariah compliant investment avenues can be one of the main causes for fall in investments of the Islamic banking industry in Pakistan during the period under review.

Asset quality

Statistics also revealed that asset quality parameters of Islamic banking industry including non-performing finances (NPFs) to financing (gross) and net NPFs to net financing rose slightly and were registered at 3.1 percent and 0.9 percent, respectively by end September, 2019. However, these ratios were still lower than those of the overall banking industry averages.

 

Liabilities

Deposits of Islamic banking industry were registered at Rs. 2,407 billion by end September, 2019. Market share of Islamic banking industry’s deposits in overall banking industry’s deposits rose to 16.1 percent by end September, 2019 as against to 15.9 percent in the last quarter. Statistics also showed that the category wise breakup of deposits reveals that fixed deposits grew by 11.3 percent (Rs. 55 billion) while current (non-remunerative), saving and current (remunerative) deposits fell by 5.7 percent, 2.9 percent and 22.2 percent, respectively by end September, 2019. Statistics also analyzed that breakup of deposits among IBs and IBBs reveals that deposits of full-fledged Islamic banks fell by Rs. 4 billion during the period under review and were registered at Rs. 1,451 billion by end September, 2019. Similarly, deposits of IBBs fell by Rs. 3 billion and were registered at Rs. 956 billion by end September, 2019. The share of IBs and IBBs in overall deposits of Islamic banking industry reached at 60.3 percent and 39.7 percent, respectively during the period under review.

Liquidity

SBP’s analysis also showed that liquid assets to total assets and liquid assets to total deposits of Islamic banking industry declined as against to last quarter and reached at 19.5 percent and 24.3 percent, respectively by end September, 2019.

Profitability

Furthermore, profit before tax of Islamic banking industry was registered at Rs. 46 billion by end September, 2019. Profitability ratios like return on assets (ROA) and return on equity (ROE) before tax were also registered at 2.1 percent and 33.2 percent, respectively by end September, 2019. During the period under review, operating expense to gross income ratio was posted at 52.5 percent as against to 52.6 percent in the previous quarter.

Conclusion

In Pakistan, no doubt the Islamic banking is on its way to success and researchers record in the studies that the numbers of customers are growing day by day at approximately all Islamic banks. It is also said that there are also so various commercial banks that are offering products and services of Islamic banking. On the other hand, Islamic banks are providing products and services in Pakistan under Islamic law as well as under the supervision of concerned authorities and even are supported by the government of Pakistan.

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