Since the global financial meltdown of 2008, the asset-backed model of Islamic Banking has earned a shine that has continued to attract funds. So much so, that some institutions are finding it a challenge to place their excess liquidity in return-worthy Islamic baskets.
Meezan Bank Limited (MEBL) went from strength to strength as it reported results for the first nine months of the year. Achieving a bottom line growth of 52 percent over the same period last year, the board of directors reserved dividend announcements till the end of the year.
The countrys leading Islamic bank has been aggressive in opening doors to new branches. In the first nine months of the calendar year, the bank opened 36 new branches. Its reach has now expanded to 202 branches, up from 166 in the same period last year.
In line with this growth and the relative popularity of Islamic banking in recent years, deposits at the bank grew by nearly 19 percent in the first nine months of the calendar year. Yet, credit managers at Meezan were unable to extend fresh financings, which saw a decline of 2 percent over the same period.
Islamic banks, when compared to conventional banks, tend to have lower advances, owing to lesser number of avenues. Still, MEBLs advance-to-deposit ratio of 36.5 percent - down from 44 percent nine months ago - is considerably conservative even within the Islamic banking industry.
"We have a very cautious approach in lending practices since we got hit two years ago, instead we invest excess liquidity in foreign sukuks", Shabbir Khandwala, CFO Meezan Bank, told BR Research.
Sukuk investments bore well for the bank not only in terms of investments, which rose 9 percent in the first nine months over the corresponding period last year, but also in terms of forex earnings. MEBL posted a gain of more than 26 percent in other income, which includes income for forex operations, commissions and fees.
Infection ratio might have been on the decline as can be witnessed by the 35 percent decline in provisioning in the 9MCY10 compared to the same period last year. And so, the coverage ratio for Meezan has risen to 85 percent, up ten percent from same period a year ago.
Administrative expenses continue to gather pace, as other expenses increased by more than 34 percent, largely led by costs to open new branches, increasing human capital at branch and support level. Rising inflation makes the job even more challenging, but in due course Meezan needs to curb such high costs.
Fuelled by organic growth Meezan Bank is working closely to the central bank to introduce sukuk investments products to cater to excess liquidity needs. The leading Islamic bank is also looking to expand its reach, targeting 222 branches by the end of the year.
Yet, finding avenues for mobilising domestic financings remains a key challenge for the leading Islamic bank.