KARACHI - The asset-base of the Islamic banks increased by 13.3 per cent in Oct-Dec 2009 compared to 7 per cent growth in total assets, posted by conventional banking system during the same period under review. According to the SBP latest report, Islamic banking operations remain profitable and steady in Dec-09 quarter. Growth in assets of Islamic banking continued to surpass the growth of assets in conventional banking by expanding the share of Islamic Banking Institutions (IBIs) in the industry as a whole. Report stated despite decline in the rate of infected portfolio during Dec-09, increasing Non-Performing Finance (NPFs) remains the key challenge facing IBIs since the first quarter of CY09. The NPFs to financing ratio decreased by 20 bps to 6.3 per cent amid healthy growth in financing. Category-wise analysis shows continuous increase in NPFs in loss category which now constitutes almost half of the NPFs. However, increase in NPFs has resulted in marginal change in provision largely due to enhancement of FSV benefit on classified loans. Resultantly, net NPFs to financing ratio increased and provision coverage ratio declined. Increasing net NPFs also deteriorated the capital impairment ratio by 1.5 percentage points during Oct-Dec 2009. Sector wise analysis depicts that textile, others and individuals have the major share in financing. However, infection ratio is quite high for the sectors of automobile & transportation equipment and textile. As per the report revelations, the balance sheet composition of Islamic banks remains stable during the quarter. Nevertheless, in line with the historical quarterly trend, most components saw improvement during Dec-09. On the asset side, significant increase took place in financing and investments. Interestingly, financing declined during the last three quarters, however, 14.7 per cent growth during Dec-09 not only off-set the decline, but also increased financing by 6.1 percent YoY. On the other hand, investments increased by 11.6 per cent mainly coming from PIA Sukkuk of Rs6.8 billion and WAPDA Sukkuk of Rs8 billion. The investments saw YoY increase of 71 per cent due to various Sukkuk issues during the year, which is a healthy development for the IBIs. Deposits continue to be the main stay in the funding structure of IBIs. The fund base of Islamic banking saw a strong growth due to across the board increase in all categories of deposit. Islamic banks financing observed substantial change in the composition due to significant increase in Murabaha and Istisna modes during Dec-09. Among the core modes of financing, Mudarbah surged its share marginally while Musharaka declined in absolute and percentage terms. The segment-wise analysis show increase in concentration of corporate financing portfolio largely came from growth in Murabaha financing. Interestingly, the consumer finance of IBIs saw a rise despite the decrease in overall consumer financing of the banking industry. Increase in Diminishing Musharaka facilitated that increase while decline in Ijarah somewhat dampened the growth in consumer financing. SME financing observed some increase, however, in absolute terms, still represents one of the neglected areas of Islamic banking. IBIs may develop products for channelization of their funds to their unexplored opportunities and bring in more diversification to their portfolio.