Sources told Business Recorder on Wednesday that the Islamic banking assets, deposits and financing continued exhibiting strong growth with total assets increasing to Rs 424 billion at the third quarter end (September 2010) from Rs 411 billion at the beginning of the quarter; the Year on Year (YoY) growth in the assets was 31 percent.

The overall share of Islamic banking industry in the country's banking system also improved to 6.4 percent in September 2010 from 6.1 percent as at the beginning of the quarter ie June 2010. The share was stood at 5.4 percent at the beginning of calendar year 2010.

However, the profitability of IBI in Pakistan - based on Return on Assets (ROA) and Return on Equity (ROE) - is lower than the previous quarter and also worsen than the industry average. As the tax adjusted ROA and ROE for Islamic banks as of September 2010 are 0.6 percent and 5.3 percent compared to the industry figures of one percent and 9.9 percent, respectively. While, end of June 2010 quarter ROA was stood at 0.8 percent and ROE at 6.9 percent.

Sources said that growing liquidity surpluses in Islamic banks however, is an another universal problem as banks in almost all the jurisdictions are facing diversification of product mix and tapping non-traditional areas like SME, Agriculture and Microfinance, in a gradual manner. The widening gap in the growth rates of deposits and financing has been instrumental in pileup of huge liquidity surpluses in the industry.

While, the recent issue of government of Pakistan Ijarah Sukuk of around Rs 52 billion coupled with another tranche of Rs 40-50 billion in December, 2010 has temporarily addressed the surplus liquidity issue. Despite this the IBI will have to diversify its financing and investment avenues to find a long-term solution.

Similarly the deposits and financing and investments grew by 38.2 percent and 17.7 percent respectively and reached Rs 338 billion and Rs 233 billion as at the close of the quarter. The relatively lower growth in financing and investments is indicative of the difficulties being faced by IBI in exploring new financing and investment avenues to deploy the growing deposits, they said.

While the relatively cautious approach of IBI in assets' acquisition has enabled the Islamic banks to maintain relatively better quality of financing portfolio. It has slowed down the pace of asset build-up; the share of IBI financing and investments is 4.6 percent compared to that of 6.7 percent of deposits.

Bankers said that the declining profitability can be attributed to difficult economic conditions that have adversely affected the assets quality of banks including Islamic banks as reflected by significantly increased Non-Performing Financing (NPF) ratio.Furthermore, the extensive branch expansion during last couple of years has also contributed in low profitability ratios as the branched so opened are gradually achieving the break even.

Brach network of IBI has mounted to 684 branches in September 2010 from 651 branches in December 2009. The Islamic banks' deposits though grew by just 3 percent during the quarter, the YoY growth was healthy 38 percent. The slower growth in deposits during the quarter could be attributed to recent floods and Eid-related withdrawals in September 2010.

Consequently, similar pattern is exhibited in the YoY growth of fixed and saving deposits which stood at 37 percent and 40 percent respectively, while the QoQ basis growth of fixed and saving deposits is 4 percent and 8 percent respectively. Further, the deposits of financial institutions have increased on YoY basis by 47 percent but a declining trend was noticed on the QoQ basis which can be attributed to the fact that the Islamic banks are shifting their institution's deposit to the interbank placements.