Islamic finance works on the premise of Shariah and provides an alternate to conventional banking. Not only Muslims, but Non-Muslins are also inclined towards Islamic banking, which is shown in growth around the world. The assets of banks and financial institutions practicing Islamic finance have now reached an impressive $1.3 trillion mark. There are 375 banks and financial institutions dedicated to Islamic finance while another 110 conventional banks and financial institutions offer Islamic finance windows. The globally listed and traded Islamic Sukuk market has expanded rapidly in the last 7 years to reach nearly $500 billion mark.
With respect to Pakistan, assets of the Islamic banking industry grew by 2.5 percent to reach Rs926 billion by end September 2013 from Rs903 billion in the previous quarter. In terms of market share, Islamic banking assets in overall banking industry increased to 9.5 percent in September 2013 from 9.0 percent in the previous quarter, reflecting relatively better growth in assets of Islamic banking industry compared to assets of overall banking industry. This increase in assets of Islamic banking industry was contributed by investments and financing, the two major contributors of assets. Investments increased to Rs445 billion by end September 2013 from Rs439 billion by the end of previous quarter while financing of the Islamic banking industry also increased to reach Rs266 billion from Rs261 billion during the same period.
If we compare two previous quarters, the growth in investments has slowed down since March 2013 mainly due to non issuance of any new GoP Ijara Sukuk that has generally been the key investment option for Islamic banking industry. During the review quarter, all components of investments, except TFCs, Debentures, Bonds, and PTCs, registered growth. In terms of contribution towards investment, federal government securities remained the highest contributor having more than 71 percent share in overall investments followed by the category of ‘other investments’ with share of more than 21 percent
Financing by Islamic banking industry witnessed growth of 1.8 percent during the quarter under review to reach Rs280 billion by end September 2013. This quarterly growth of 1.8 percent is, however, lower compared to growth of 10.4 percent in the quarter ending June 2013. This is in line with the seasonal pattern witnessed during the third quarter of calendar year in which a drop in financing is generally witnessed mainly due to retirement of financing by the client industries due to the nature of their business cycle. Murabaha is 40% of all financing; Diminishing Musharka is 33% of total share, whereas Ijara is 8.6% of the total share when it comes to advances.
Financing extended by Islamic banks remained mainly concentrated in the textile sector, though the share of textile financing in overall financing registered decrease during the quarter ending September 2013. This decline in share of textile financing is in line with the usual trend witnessed by the sector during third quarter of calendar year mainly due to nature of industry’s business cycle. Among other sectors, automobile and transportation equipment, production and transmission of energy and individuals witnessed an increase in their shares in overall financing during the quarter under review. Corporate sector advances are 65.5 percent of all advances whereas commodity financing is 13.7 percent of the industry. When considering asset quality, Non-Performing loans to financing is 14.3%.
Share of Islamic banking industry deposits in overall banking industry reached double figures for the first time as it increased from 9.9 percent in June 2013 to 10.1 percent by the end of quarter under review. In absolute terms, deposits reached Rs775 billion by end September 2013 depicting a quarterly growth of 0.6 percent. This growth was mainly contributed by customers’ deposits that grew by 0.8 percent during the review quarter. On the other hand financial institutions deposits declined by 4.0 percent during the same period, however given that financial institutions deposits have a relatively low share i.e 5 percent of the overall deposits still increased during the quarter under review.
Profitability of the Islamic banking industry increased during the quarter to reach above Rs6.8 billion by end September 2013 from Rs4.3 billion by end June CY13, though still lower compared to Rs7.7 billion profit in September 2012. Among other indicators of earnings and profitability, ROE and Return ROA both increased during the quarter under review and reached 0.9 percent and 11.6 percent respectively from 0.8 percent and 11.1 percent in the last quarter. Non-Markup Income to Total Income of Islamic banking industry was 21.0 percent also registered increase during the quarter. ROA, ROE and Non-Markup Income to Total Income of Islamic banking industry are however; lower than the overall banking industry. On the other hand, Net Markup Income to Total Income i.e. 79.0 percent declined during the quarter ending September 2013 and continued to stay above overall banking industry average.
In line with general trend Operating Expense to Gross Income of Islamic banking industry remained higher than overall banking industry, which can be attributed to the expansionary phase of Islamic banking industry.
In early 2000 it was estimated that by year 2010, share of Islamic financial institutions will be more than 15 percent. Through the sector is growing, it seems another three years before the sector could reach this milestone. Conventional banks are giving stiff competition to Islamic financial institutions, which is not expected to subside. When it comes to financing or advances, Islamic banks tend to offer higher pricing than conventional banks, which become a deterrent. Islamic institutions claim that due to a Shariah board and incremental expenses with monitoring and documentation, Islamic banks cannot offer lower pricing hence people must choose Islamic banking not for the rate but the belief that financing is Riba-free. The business, however, will grow in the foreseeable future since the overall industry and the population is on a rise to keep demand of high banking.