KARA CHI - Total investments in the Islamic Banking Institutions (IBIs) swelled to Rs 64.7 billion during the third quarter (July-Sept) of current calendar year 2009 as against Rs 53.5 billion in April-June this year. The State Bank of Pakistan in its quarterly performance review of the banking system for the quarter July-September 2009 stated that investments in Islamic banks registered a healthy growth of 21 per cent during a quarter under review as most of the increase in investments resulted from 4th auction of GoP Ijara Sukuk of Rs 14.4 billion in September, 2009. Periodic issues of Ijara Sukuk have contributed towards the resolution of key issue i.e. lack of alternative avenues for Islamic banks. So far GoP Ijara Sukuk of Rs 42.2 billion have been issued, which now represent 65 percent share in investments of the Islamic Banks. According to banking review, the Islamic Banking Institutions (IBIs) maintained their profitability, though with slight deceleration during the quarter under review. SBP said in line with general trend, financing of Islamic banks decline by 4.7 percent to Rs133.7 billion in Sep-09 and its share in overall assets decreased to 41pc. The growth in the profitability and equity of Islamic banks fell to 0.3 percent and 3.1 percent while share of Islamic banking in the assets of banking industry posted 2.8 percent dismal growth during Jul-Sep CY09. However, growth in assets remained higher than that of the conventional banks, thus increasing share of IBIs in the system. Islamic banks assets amounted to Rs323.2 billion, compared with Rs312.6 billion in April-June CY09. SBP report pointed out that the balance sheet composition with slight changes remained more or less stable during the quarter. On the asset side, significant increase was observed in investments and interbank lending, while financing portfolio contracted. As per SBP statistics, deposits of the Islamic banking increased to Rs 244.8b in Jul-Sep CY09 from Rs 238.2b during Apr-Jun CY09 despite a decline in deposit base of the banking system. Deposit mix of Islamic banks, due to decline in deposits from financial institutions tilted toward the customer deposits. The composition of financing shows a substantial increase in share of Ijarah and a moderate increase in Istasna. Other modes of financing declined over the quarter, with considerable decline in Mudarbah and salam. The financing portfolio of IBIs is concentrated in corporate and consumer with smaller shares of SMEs and commodity finance, while financing to agriculture is almost negligible. Segment-wise breakup of financing revealed that Islamic banks lent Rs 84 billion to corporate and Rs 11.8 billion to SME sectors while Rs 31.6 billion disbursed to agriculture borrowers. However, in the segments of consumer and commodity financings, total amount of Islamic banks reached at Rs 31.6 billion and Rs 6.9 billion respectively during the analytical period. The liquidity position of IBIs improved over the quarter under review, as the decline in Financing and increase in deposit base led to further lowering in Financing to Deposits ratio (FDR). Report apprehended that increasing financing risk continues to pose challenge to IBIs. Increase in NPFs coupled with drop in financing led to deterioration in asset quality indicators .Since NPLs increased mainly in Loss category, which attract higher provisioning, provision coverage ratio improved over the quarter. Sector-wise analysis shows that textile, chemical and individuals have the major share in financing. However, infection ratio is quite high for cement, electronics and individuals. While Non-Performing Funds (NPFs) of individuals are generally adequately secured through collaterals, low infection ratio for textile sector vis-a-vis conventional banks reflects upon the better risk management of IBIs. The year to date profits of IBIs remained higher than the results of corresponding period of last year, though there was significant increase in provisioning for NPFs. However, Islamic banks saw a marginal decline in ROA due to shift in the mix of earning asset towards low-return assets. Incidentally, major part of IBIs profitability is coming from IBBs of conventional banks and a couple of Islamic banks. Report predicted that there is a strong potential for the IBIs to expand into SME and Agriculture sector.