Research Analyst
Aug 13 - 19, 2012

Islamic banking is consistent with the principles of Sharia law and its practical application through the development of Islamic economics. Sharia prohibits the fixed or floating payment or acceptance of specific interest (Riba) for loans of money. Investing in businesses that provide goods or services considered contrary to Islamic principles is also Haraam (Sinful). Although these principles have been applied in varying degrees by historical Islamic economies due to a lack of Islamic practice, only in the late 20th century were a number of Islamic banks formed to apply these principles to private or semi-private commercial institutions within the Muslim community.


(JAN 12 - MAR- 12)
Punjab 31 3 401 44.3
Sindh 13 12 302 33.4
Khyber Pakhtoonkwa 17 4 99 10.9
Baluchistan 9 0 43 4.8
Gilgit Baltistan 1 0 1 0.1
FATA 2 0 2 0.2
Federal Capital 1 0 46 5.1
AJK 2 0 11 1.2
G. Total 76 19 905 100.0

In Pakistan, the Islamic banking Industry (IBI) started its tenth year with expansion of many braches in different cities of the country. BY the end of first quarter FY12 IBI network comprised of 905 branches in 76 cities indicating addition of 19 new branches; the industry has plans to open total 172 full fledged branches and 26 sub branches in the ongoing year.

The industry assets base grew marginally to reach Rs. 644 in the quarter ending March 2012. Almost all asset types except due from financial institutions have shown negative growth resulting in a significant drop in quarterly growth rate of assets to less than half a per cent compared to 12.8 per cent in the last quarter. However, this slow down in assets growth during the first quarter is largely in line with the trend in the first quarter when demand is generally low due to the nature of business cycle of many industries.

Component wise analysis of asset portfolio depicts that year-on-year (YoY) growth of two main components; financing and investments, together dropped from 40.3 per cent in quarter ending Dec 2011 to 30.3 per cent by end of the quarter ending in March 2012. Among financing and investment, financing retrenched by 2.8 per cent during the quarter compared to 12.8 per cent growth in the last quarter while over the same period investment growth rate decelerated to 6.8 per cent from 16 per cent.

Although, financing of IBI was amounted to almost Rs. 206 billion with Murabaha having highest share (40.1 per cent) was followed by Diminishing Musharaka (DM) (35.1 per cent) and Ijara (10.7 per cent) during the same period. By end March 2012 the share of DM witnessed a rise from 32 per cent to above 35 per cent by end Dec 2011. During the same period share of products like Salam and Istisna have also witnessed a rise however these two products still constitute relatively small share in overall financing portfolio.

In terms of Industry wise concentration, no significant change is observed during the first quarter of FY12. However, interestingly the share of sugar industry in overall financing of IBI increased from 3.3 per cent by Dec 2011 to above 5 per cent by March 2012. Client type wise financing showed negative growth in all categories during the period under review except consumer and staff financing that depicted a positive growth of 2.5 and 2.2 per cent respectively. However, it is pertinent to note that financing of IBI still shows concentration in corporate sector that constitutes almost 74 per cent of the financing portfolio followed by consumer finance (14.6 per cent). Low share of SME and agri-financing is depicting potential areas to be exploited particularly SME which is being ignored by the overall banking industry as well.

Furthermore, Investment base of the industry reached to almost Rs. 293 billion with Federal Government Securities (FGS) having the largest share (66.7 per cent). During the period under review investment grew by almost 7 per cent mainly driven by FGS that has shown YoY growth of 66 per cent and quarterly growth of 9.1 per cent. Fully paid up ordinary shares though have shown quarterly growth of above 40 per cent, however it constitutes hardly 1 per cent of Investment portfolio of the industry.

The deposits and liabilities of the industry grew marginally (0.2 per cent) during the quarter as compared to 13.8 per cent growth recorded during last quarter. This decline in the growth rate was led by a significant drop in deposits growth rate which fell to less than 2 per cent from 12 per cent in the last quarter. By the end of March 2012, the deposits reached to Rs. 530 billion after an increase of Rs. 9 billion during the quarter, however, no significant change was observed in terms of shares among different categories of deposits; customer deposits are significantly higher than financial institutions' deposits and share of foreign currency deposits in overall deposits is as low as 4 per cent. However among different categories of customers' deposits saving and current (non-remunerative) constitute 67 per cent share while for financial institutions' deposits remunerative accounts constitute 98 per cent.

The IBI's earnings remained strong during the quarter with annualized ROA and ROE of 1.6 per cent and 17.8 per cent respectively, which are higher than that of the overall banking industry. It is worth mentioning that the mark-up income declined during the period under review while non-mark up income increased from 17.6 per cent to over 20 per cent which may be attributed to significant surge in NPFs during the quarter. The Operating Expense to Gross Income increased to 62 per cent during the quarter from 60 per cent in the last quarter which is significantly higher than the industry average of 53 per cent.