“The growth is credit positive for Pakistani banks because it attracts customers from the previously unbanked population, which creates new business opportunities and boosts banks’ financial performance,” said Moody’s in a statement.
According to the Islamic Banking Bulletin for December 2020 released by State Bank of Pakistan on Wednesday, the Islamic banking assets grew 30 percent in 2020.
Islamic deposits saw a 22pc annual compound growth rate since June 2013 while the banking assets grew to Rs 4.3 trillion as of year-end 2020, comprising 17pc of total banking system assets.
It was also reported that Islamic financing grew faster than conventional loans and were Rs 1.9 trillion, or 23pc of Pakistani banks’ total loans at year-end 2020. The profitability of Islamic operations has also been stronger, with return on assets for Islamic banking institutions was 2.4pc at year-end 2020, versus the system average ROAA of 1.8pc, and Islamic nonperforming financing (NPF) was 3.2pc, lower than the system weighted average of 9.2pc at year-end 2020.
Moody’s believes that the growth in Pakistan’s Islamic banking is going to greatly benefit the banking sector. ‘’Because attracting previously unbanked customers facilitates deposit and loan growth while reducing funding costs because of the banks’ access to a large pool of non-remunerated deposits”, it said.
The agency had previously stated that it expects Islamic Financing to expand more than conventional financing as the loans are being taken out by the people aged 25-54, who make up for the higher percentage of the total population. This will increase the share of Islamic financing in the total financing in South and Southeast Asia.
In Pakistan, Moody’s expects Islamic banking to continue growing by targeting customers who prefer Islamic products or are voluntarily excluded or underserved because of their religious belief.
“We believe that all rated banks will benefit from the increase in Islamic banking penetration, especially Habib Bank Ltd. (HBL, B3 stable, caa11), which, at year-end 2020, had a 7.5% market share of Pakistan’s Islamic banking assets and MCB Bank Limited (B3 stable, b3) which had a 3.3% market share, the largest shares among their rated peers,” stated the international credit rating agency.