June 29 - July 5, 2009

The State Bank of Pakistan (SBP) has been playing a key role in providing an enabling environment and a level playing field to the Islamic banking industry through the provision of a facilitative regulatory and supervisory framework. Its Shariah compliance mechanism is the most comprehensive available in the world. Pakistan is the only country, which has issued Guidelines on Islamic agriculture and microfinance.

Similarly, SBP is the first central bank to have initiated Shariah compliance inspection. As a result, the industry has experienced robust growth. SBP's recent achievement of becoming the second best central bank in promoting Islamic banking is a reflection of this effort.

Over the next five years, the central bank aims at focusing strategy for development of Islamic banking industry and plans rolling out various international prudential standards developed by IFSB. The central bank has been capitalizing on IFSB's expertise through holding workshops. Banks in Pakistan have already adopted Basel-II and adaptation of IFSB standards would enable Islamic banking institutions to perform on an equal footing with the conventional industry. This will help in achieving the ultimate objective of financial stability and soundness at the national level and smooth integration with the international financial infrastructure.

Over the years, there has been a healthy growth of Islamic banking in the country. The financing and investment portfolio of local Islamic banks reached Rs185 billion at end December 2008, compared with Rs137.6 billion in December 2007. Market share of Islamic banks in the overall banking increased to 5% at end December 2008, compared with 4% at end December 2007.

Similarly, branch network of Islamic banks has crossed 500 branches in December 2008, compared with 289 branches in December 2007 whereas total assets of Islamic banking has reached Rs271.1 billion in December 2008 compared with Rs205.2 billion in December 2007.

Islamic banking remained resilient during the October-December 2008 quarter despite some negative shocks witnessed by the banking sector especially in October 2008. More specifically, the conventional banking industry remained surrounded by rumors at the start of October 2008 that culminated in pressure on rupee deposits with the conventional banks.

The QoQ growth in assets, deposits, financing and investment, and number of branches has been strong. Number of branches of Islamic banking institutions crossed 500, which is indeed impressive. This growth is a continuation of growth momentum since CY02. In specific terms, Islamic banking grew at a yearly average of 37%. Despite the increase in size, the continuation of growth rate is commendable.

The rapid growth in Islamic banking is reflected in growing share of Islamic banking in assets, deposits and financing of banking industry. The respective share of Islamic banking assets and deposits are 4.9% and 4.8% of the banking sector respectively. The numbers may look modest but given the smaller timeframe and other countries experiences, the achievement is really significant.

Islamic banking assets grew at QoQ 10%. The assets mix has shown some interesting changes. The lower growth of financing contrast with substantial increase in balance with other banks and due from financial institutions category shows a greater degree of risk aversion. Moreover, there is a shift towards investments as well. These trends are not surprising as the conventional banks are showing similar trends in the aftermath of global financial crises.

The financing and investment mix have changed in favor of investments. The increased Investments show the increase in investment avenues arising from issuance of GoP Ijara Sukuk, while slowdown in the financing is a reflection of general risk aversion by banks.

The breakup of financing activities remained almost same as that of previous quarter with a concentration of financing activities in trade/sale based modes. The participatory modes remained sidelined with combined share of less than 2% in the overall financing. Specifically, Murabaha (40.6%) Diminishing Musharaka (30.5%) and Ijarah (20.5%) remained leading financing modes. The share of other modes, namely Mudaraba (0.2%), Musharaka (1.7%), Salam (1.8%) and Istisna (2.9%) remained dismal.

The deposits' growth during the quarter remained strong at 18%. This seems impressive as the conventional banks' deposits grew only at less than 2%. The deposits breakdown shows that bulk of the deposits are mobilized in fixed and saving accounts, which cumulatively account for around 65% of total deposits. This is increasing by around 18% besides healthy growth in financial institutions' deposits.

The Islamic banking windows at the end of the quarter were 46. The deposit mobilized by these windows stood at Rs4.4 billion. The share of deposits of windows increased substantially, despite the fact that conventional banks faced slowdown in deposits.

The earning and profitability ratios remained almost unchanged as from the previous quarter. The markup income remained the major contributor to the profitability with non-markup income contributor just a fraction. On the expense side, the markup and non-markup expenses were almost at the same level as well. The ROA and ROE of Islamic banks have showed marginal decline.

The asset quality of the Islamic banking institutions also remained almost intact compared to the previous quarter. There were slight slippages in NPFs to financing, NPFs to net financing, and provisioning to NPFs ratios. Nonetheless, the net NPF to capital ratio improved marginally.

Murabaha 40.6%
Diminishing Musharaka 30.5%
Ijarah 20.5%
Istisna 2.9%
Salam 1.8%
Others 1.8%
Musharaka 1.7%
Mudaraba 0.2%