GROWING MARKET SHARES OF ISLAMIC BANKING

S.KAMAL HAYDER KAZMI,
Research Analyst
, PAGE
May 11 - 17, 2009

Islamic banking has shown a tremendous growth and is thriving rapidly owing to the expectations of the people and peculiar nature of Shari'ah-compliant transactions. The SBP is planning to evolve a specific regulatory framework in order to raise the market share of Islamic banking to 12% by 2012. This measure would not only enhance the spectrum of Islamic banking but also strengthen Shari'ah compliance mechanism.

ISLAMIC BANKING
DESCRIPTION JUNE 2008 SEPT 2008 %GROWTH QOQ
Total Assets 235 251 7%
Deposits 169 171 1%
Financing. & Invest. 166 182 10%
No. of Branches 326 367 13%
Source: SBP

It is pertinent to note that the market share of Islamic banking in Pakistan was mere 0.5% in 2003 when there was only one Islamic bank. Currently, the share of Islamic banking institutions' assets, deposits, and financing & investment increased to 4.6%, 4.2% and 4.4% respectively. The Islamic banks have also continued their efforts to extend the outreach of Islamic banking services. Specifically, the number of branches reached 367 from 326 in the last quarter. . During Jul-Sep 2008, the Islamic banking industry revealed continuing upsurge in assets, deposits, and financing.

BREAKING UP OF FINANCING (RS in mn)
DESCRIPTION 8-JUN SEPT 2008 % CHANGE
Murabaha 50,659 59,067 17%
Ijarah 28,604 30,656 7%
Musharaka 1,737 2,421 39%
Mudarbah 394 453 15%
Diminishing Musharaka 39,141 43,434 11%
Salam 1,820 2,104 16%
Istisna 3,483 3,566 2%
Qarz-e-Hasna - - 0%
Others 7,371 2,535 -66%
Total 133,208 144,236 8%
Amount of non performing financing 2,772 3,122 13%
Provision against NPFs 1,723 2,057 19%
Net NPF 1,049 1,065 2%
Source: SBP

The Islamic banking industry remained resilient despite recent liquidity pressures. On the global level, the financial crises deepened and resulted in heavy losses to financial sector giants of the developed world. Nonetheless, anecdotal evidence suggests that Islamic finance industry showed tremendous resilience and the investors' interest remained largely intact.

DEPOSITS

Amazingly, deposits of Islamic banking sector rose despite the problems in the conventional banking sector. The deposits of Islamic banking institutions (IBIs) as on September 30, 2008 stood at Rs 171.3 billion, reflecting Quarter on Quarter (QoQ) increase of 1%. The shares of savings, fixed, and current accounts of customers' deposits were 31%, 39%, and 22% respectively. Due to combined efforts of the State Bank as well as the industry, the demand for Islamic banking services in the country is increasing.

FULL FLEDGE ISLAMIC BANKING BRANCH NETWORK
NAME OF BANK BRANCHES (AS OF DEC 31, 2008)
AlBaraka Islamic Bank 30
BankIslami Pakistan Ltd 70
Dawood Islamic Bank Ltd 15
Dubai Islamic Bank Pakistan Ltd 23
Emirates Global Islamic Bank Ltd 40
Meezan Bank Ltd 131

Source: SBP

INVESTMENTS

Investment position of IBIs as on September 30, 2008 stood at Rs 40.3 billion, which showed a QoQ increase of 15%. The increase in investments reflects the new investment especially in Ijarah Sukuk valuing Rs 6.5 billion that were issued by the government in September 2008. It was a remarkable achievement for Islamic banking industry of Pakistan. This step has helped in minimizing the liquidity management issues of IBIs, as these Sukuk are Statutory Liquidity Requirement (SLR) eligible.

ISLAMIC FINANCING

Islamic Banking Industry depicted financing (net of provisions) of Rs. 142.2 billion at the end of September 2008, reflecting a QoQ increase of 8%. There is hardly any change in the mode wise financing mix during the quarter. In specific terms, share of Murabaha, Ijarah, and Diminishing Musharaka (DM) remained largely unchanged at 41%, 21%, and 30% respectively.

TOTAL ASSETS

Total assets of IBIs stood at Rs. 251 billion, showing an impressive QoQ increase of 7%. Within assets, investments, operating fixed assets and financing were the major contributors to total assets growth. The growth of investments, operating fixed assets and financing was 15%, 10%, and 8%. The other assets also grew at a rapid rate of 25%. The increase in fixed assets may reflect the increasing number of branches of IBIs showing extension in outreach.

EARNING AND PROFITABILITY

Mark-up income rose during the quarter by around 2 percentage points (pp). The ratio of net Mark-up income to total assets remained largely stagnant at 3.9%. Net NBFs to net financing has improved marginally by one pp. While net NPFs to total assets and net NPFs to total capital remained unchanged at 0.4% and 3.3% respectively.

CONCLUSION

Undoubtedly, the strategy for introduction of Islamic banking in Pakistan has worked well. Achieving a market share of 4.5% in about 5 years amidst cutthroat competition posed by conventional banking sector is a remarkable accomplishment in comparison with comparable countries. Interest free banking has appeared as the most powerful method of banking in Pakistan. Day by day, many conventional banks in Pakistan are diversifying to Shari'ah-compliant banking operation.