PERFORMANCE OF ISLAMIC BANKS IN PAKISTAN

MARIAM NASIR
Manager Research, PAGE

Feb 18 - 24, 2008

Islamic banking refers to a system of banking or banking activity that is consistent with Islamic law principles and guided by Islamic economics. In particular, Islamic law prohibits usury, the collection and payment of interest, also commonly called riba in Islamic discourse. In addition, Islamic law prohibits investing in businesses that are considered unlawful.

Over the last thirty years, Islamic banking has emerged as a viable and efficient model of financial intermediation. The global Islamic banking industry has witnessed unprecedented growth of 10-15% a year across the board. The landscape of Pakistan's banking industry has changed altogether since the financial sector reforms 1991 onwards. Also, in the 1990s, several new licenses for operating a commercial bank were issued to local entrepreneurial groups. Islamic banking services in Pakistan have recorded a noteworthy progress. In 2002 the first Islamic banking license was issued to Meezan Bank by the State Bank of Pakistan. Societe Generale", a French commercial bank, operations in Pakistan was acquired by Meezan Bank. As on December 31, 2007 there were six full fledged licensed Islamic banks having 185 branches. In addition, 12 commercial banks are offering Islamic banking services through 103 branches.

ISLAMIC BANKING PERFORMANCE

(RS BN)

DEC-03

DEC-04

DEC-05

DEC-06

JUN-07

SEP-07

Total Assets

13

44

72

118

159

178

Deposits

8

30

50

83

108

124

Financing and Investment

10

30

48

72

90

114

Full Fledge Islamic Banks

1

2

2

4

6

6

Total Number of Branches

17

48

70

150

231

289

Source: SBP

Currently, Pakistan is seeing a renewed interest by foreign banks for setting up their operations here. The takeover wave with Standard Chartered, ABN AMRO, Temasek, and SAMBA is something which really has not been seen in Pakistan's banking sector before. Recently, the State Bank of Pakistan has granted license to Barclays Bank Plc, UK, to start banking operations in Pakistan. Noor Financial Investment Company of Kuwait acquired 19% of Meezan Bank from Shamil Bank of Bahrain for Rs32/share, taking its total stake to 35% which is equivalent to 132mn shares. In November 2007, Ithmaar Bank, which owned 60% of Shamil Bank, announced to purchase all the remaining issued and fully paid-up shares through a share swap. This gave former a controlling stake in Pakistan-based Faysal Bank Limited.

FINANCIAL ANALYSIS OF ISLAMIC BANKING IN PAKISTAN

The Balance Sheet size of the Islamic Banking industry increased during the past quarter by 12%. The total assets portfolio in the Islamic Banking sector expanded to Rs177bn in September 2007 from Rs.159bn in June 2007. Islamic Banking sector's equity increased by 3% to Rs26bn as of September 2007 from Rs25bn at the end of June 2007. Financings constituted 49.7% of the total assets and stood at Rs88.3bn in September 2007 as compared to Rs.78.8bn at the end of June 2007, showing an increase of 12%. There was an increase in "Balances with other banks". Balances held by Islamic Banking Institutions at the other Banks increased by 20% to Rs22bn from Rs18.5bn.

Deposits increased by 15 % to Rs124.4bn as at the end of September 2007 from Rs108bn at end June 2007. Deposits by customers have increased by 16 %. Deposits by financial institutions have increased by 5 %. Fixed Deposits by customers constitute 38 % of the total deposits depicting customer's preference towards long term fixed deposits.

The overall financial position of the Islamic Banking Industry remained positive. Earning and Profitability Ratios remained good in this quarter as well. The asset quality ratios reflect that the quality of financing of the Islamic Banking Institutions is very strong. NPFs to financing are just 0.9 % which depicts that a minimal part of financing is going bad, which is adequately covered through provisions.

RECENT SBP DIRECTIVES

* State Bank of Pakistan directed all Islamic banking institutions to update weight ages and profit-sharing ratios on their websites by December 6, 2007. Banks use weightages and profit-sharing ratios to calculate distribution of profit as per Shariah laws covering IBIs. The SBP observed that only a few IBIs were regularly updating their weightages and profit-sharing ratios on the websites, before the beginning of the period concerned, which the central bank termed a disappointing situation. Taking a strict notice of this slackness on the part of IBIs, the SBP directed IBIs to make sure that relevant weightages and ratios are updated before start of the period concerned. SBP said that weightages & profit sharing ratios must be made available to all constituents before beginning of the period concerned besides of making it available on website SBP also directed all banks to prominently display the statement of weightages & profit sharing ratios in their Islamic banking branches. In addition, SBP pointed out that the statement declaring weightages & profit sharing ratios must at the minimum contain date of declaration, period for which they remain effective, all categories/pools & bank's equity share and their weight age, types, sizes, tiers of accounts and actual rates paid during the preceding period.

* State Bank of Pakistan has directed all those banks having Islamic banking branches to submit details of products to be offered on Islamic banking window before the start of each Islamic banking window operation. The circular stated that there was now a growing trend among banks to open Islamic banking windows and in order to strengthen the regulatory framework and maintain information about window operations, the SBP advised the banks to submit details of systems and controls put in place in compliance with IBD Circular No 02 of 2004. The SBP also asked for details of commission/ fee arrangement with the authorized branch and training of human resources in Islamic banking.

OUTLOOK

Islamic banking industry in Pakistan is set to grow. Every conventional and Islamic bank is moving towards opening branches and increasing its reach. This phenomenon is not present only in Pakistan but in the whole world.