Pak Islamic banks' investment up, but financing down

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Pak Islamic banks investment up, but financing down
A market in Rawalpindi. Leather garments and shoes are among the upbeat sectors in Pakistan right now.

Good news, though: Performance of key industrial, productive sectors quite upbeat

By M. Aftab/Analysis

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Published: Sun 19 Jul 2015, 12:00 AM

Last updated: Mon 20 Jul 2015, 8:35 AM

Islamic banking institutions in Pakistan saw their investment, deposits and market share rise while their financing to industry and the domestic sector slightly down in the first quarter of 2015.
The quarter saw this trend, which is in line with the normal scene each year during the period. Islamic banks' investment, chiefly in government securities, rose by Rs11.5 billion during the quarter.
But the Islamic banking division of the State Bank of Pakistan, or SBP, the central bank, also reported that overall financing by Islamic banks to the industry and the private sector was down by Rs4.3 billion. At the end of March, financing had reached a peak of Rs417.8 billion but the quarter had seen a negative growth. "The reason for a slow or a negative growth in the first quarter of each calendar is the fact that borrowers usually repay and retire the amount due to them, and is repayable in outstanding credits held by most of the industrial units, due to their business cycle," the SBP says.
But the good news is that the performance of the key industrial and productive sectors is quite upbeat; their share in overall financing rose in the quarter. These upbeat sectors include chemicals; pharmaceuticals; sugar; leather garments and shoes; and production, generation and transmission of energy. Islamic banking institutions also reported a slight decline in the financing-to-deposit ratio. It was down from 38.2 per cent to 35.6 per cent during the quarter, compared to the previous one.
What products or instruments did Islamic banking institutions use in the first quarter? The analysis by the SBP points out that Islamic banks' financing stayed concentrated in Murahaba and Diminishing  Mushara. The two modes, put together, shared 63 per cent of Islamic financing. Splitting the two indicated that while Murahaba financing was down compared to the fourth quarter of 2014, the volume of Diminishing Musharaka rose. At the same time, Ijara, Musharaka and Salam modes of financing all recorded a rise in the their share of financing. "The net investments of Islamic banking institutions increased to Rs368.2 billion, or 3.2 per cent, by the end of December 2014," the SBP says.
Just as experienced by conventional banking, government borrowing, to fill its budgetary gap, is rising, even from Islamic banking institutions. It was true for the first quarter, too; Islamic banking institutions' investment in government bonds, paper and securities was as high as 63.3 per cent in overall investments with a value of Rs240 billion. It was followed by other investments of Rs67 billion and still another Rs45 billion invested in bonds, certificates and paper.
How are these investments and other lending funded by Islamic banking institutions? The SBP reports that it was funded from these bank's assets, which rose by 3.5 per cent during the first quarter to total Rs1,302 billion as of March 31, 2015, up from Rs1,259 billion in the previous squatter. Deposits during the quarter were at Rs1,122 billion.
Islamic banking institutions' market share of assets in the overall banking industry stayed unchanged at 10.4 per cent. The market share of their deposits in the overall banking industry rose to 12.2 per cent in the first quarter, from 11.6 per cent in the fourth quarter of 2014.
The combined profitability of all Islamic banking institutions rose to Rs4.8 billion from Rs3.2 billion. But a negative fact is that their non-performing loans rose, too.
"The financing of the non-performing loans of Islamic banking institutions increased during the quarter resulting in an increase in provisioning against non-performing loans."
The overall health of Islamic banking is excellent; it is moving forward, raising market share and winning more customers - and hearts.
Views expressed by the author are his own and do not reflect the newspaper's policy.

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