SBP says that Islamic banking failed to penetrate rural areas

KARACHI (January 04 2009): Although the performance and pace of branch extension by Islamic banking institutions (IBIs) seems impressive, they have largely failed to penetrate the rural areas, and no real efforts have been made in this direction by them, said State Bank of Pakistan (SBP) in its report.

According to SBP report on Islamic banking industry for June 2008, Islamic banks had continued their efforts to extend their outreach and specifically the number of branches reached 326 in June 2008 from 289 branches in December 2007. Criticising the slow growth of IBIs in rural areas, the SBP said that though the overall rate of branch network extension was impressive, the IBIs had largely failed to penetrate the rural areas.

It said that the agreement on extension of rural branch network and increasing focus on SMEs and microfinance was available in the form of Islamic Banking Strategic Plan chalked out by taking extensive feedback and buy-in from the IBIs, they should work on extending rural branch network, catering to the needs of financially excluded segments of the economy. But there was no real efforts made by IBIs in this direction.

The report that despite the overall slowdown in banking, the Islamic banking industry continued its progress and its share of assets in the overall banking system increased by 0.3 percentage points (pp) to 4.3 percent in June 2008.

“The growth in IBIs is also reflected in increased share of Islamic banking deposits, and financing and investment that stood at 4.0 percent and 4.1 percent respectively at the end of first half of 2008.” The deposits of IBIs as on June 30, 2008 stood at Rs 169 billion, reflecting an impressive growth of 15 percent during the first quarter of 2008.

In specific terms, shares of savings, fixed and current accounts of customers' deposits were 31 percent, 38 percent and 23 percent respectively. Investment position of IBIs as on June 30, 2008 stood at Rs 34.9 billion, which showed an increase of 20 percent from January-June. The increase in investments reflected the new investment in Sukuk.

SBP was expecting that investment would get a further boost in future due to largely issue of GoP 'Ijara Sukuk'. IBIs in Pakistan depict financing (net of provisions) of Rs 131.5 billion at end June 2008, while around 90 percent of financing comes through three modes of financing, that is, Murabaha 38 percent, Ijarah 21.5 percent and Diminishing Musharaka (DM) 29.4 percent.

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