IFP - Oct 2012

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Non-Performing Loans (NPLs) analysis of the IslamicBanks

Compiled by Saad Faruqui

Financial year 2012 has witnessed an exponential

rise in the Non-Performing Loans (NPL) with the4th quarter of the year just beginning.

NPLs of local private banks surged by Rs 16.35

billion to Rs 394.72 billion. NPLs of DFIs have

mounted by Rs 2.15 billion to Rs 18.2 billion in

June 2012 from Rs 16.05 billion.

During the period under review, NPLs of public

sector banks have gone up by Rs 9.79 billion to Rs

196.40 billion. During the first half, NPLs of

foreign banks have increased to Rs 7.88 billion

from 7.57 billion.

The significant rise in the NPLs reveals that the

challenges for the banking industry are far from

ISLAMIC FINANCE INDUSTRY NEWSLETTER

ISLAMIC FINANCE PAKISTAN

VOLUME 3 ISSUE 9 OCTOBER2012

Ayat of month:

O you who believe, why do

you say what you do not do?

It is severely hateful in Allahs

sight that you say what you do

not do.

[Surah Al-Saf: 2,3 ]

Inside this issue

Financial year 2012

has witnessed an

exponential rise in

the NPLs with the

4th quarter of the

year just

beginning.Inside Story 1

Editors Message 2

Local andInternational NewsGet a glimpse of what

is happening in the

world of Islamic

finance

4

In the SpotlightFind our read of the

month

7

Ask USBy Mufti Ibrahim Essa

and Mufti Javed

Ahmed

8

Non Performing Loan (provisions) of the industry Figures inRupees 000

Description 2011 2010 2009

Soneri Bank Limited 137,472 54 516

Standard Chartered Bank 185,514 196,064 218,492

United Bank Limited - 2,476 -

National Bank of Pakistan 192,874 278,223 -

Muslim Commercial Bank 5,530 49,942 37,736Habib Metropolitan bank 73,661 4,043 -

Askari Bank Limited 7,379 138,794 63,484

Faysal Bank 15,731 6,493 -

Habib Bank Limited 112,279 40,193 172,353

Bank Al Falah 23,046 29,664 47,204

Bank of Khyber 47,701 37,444 65,968

Bank Al-Habib - - -

Meezan Bank Limited 1,471,614 1,330,057 1,430,536

Dubai Islamic Bank 10,075 181,224 115,136

Burj Bank 165,374 382,826 232,089

Bank Islami 21,423 7,424 89,780

Al-Baraka Bank 229,204 759,301 309,788

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Editorial

Page 2 An initiative of IFP forum

Advisory Board

Mufti Irshad Ahmed Aijaz

Mufti Najeeb Khan

Anwar Ahmed Meenai

Mohammad Aslam

Mujeeb Baig

Syed Shahjahan Salahuddin

Faizan Memon

NusratUllah Khan

Muhammad Shahzad

Hussain

Arshad Hussain Zubairi

Ammar Khalid

Rima Farooq

The Islamic finance industry is undoubtedly in the phenomenal

expansionary phase, demonstrating more than an average annual growth rate

of 30%. This extraordinary growth has not only come with glad tidings for

the aggravated Muslims and riba- allergic minds, but it also brought with

itself many challenging issues. These issues are not all-new on the spectrum,

and even most of them have been reportedly addressed since the inception of

this industry. It has been overlooked arguing that they are not strong enough

to stand on their own.

The IFIs have considerably penetrated into the contemporary realm of

economical and financial system of the world. The significant growth of this

industry including the formation of related markets, comparatively firm risk

management structure and attractive profitably are the sufficient reasons to

provide them survival. Thus they cannot be abrogated or annulled if theytake some bold steps.

Granting the name of Islamic from the Shariah scholars was not for

making business on the frontiers of Halal and Haram, where a minor

slip in the procedure of transaction can make it non-Islamic. The bounties of

Islamic economical system lie beneath the following Shariah injunctions in

the way of Ihsaan by opting the ideal solutions in spite of way-outs.

Among those issues are lack of equity financing, using interest bearing

benchmark, mimicry attitude of IFIs, independence of Shariah supervisory

institution, regulatory reforms, lack of competent human resource and

developing institutions, global harmony in the formation and adoption of

standards and legal documentation.

However, IFIs are not stand alone responsible for these issues, as we observe

diversified practices of Islamic banking across the globe due to diversification

in corporate, consumer and regulatory attitudes in the different parts of the

world, especially the materialistic attitude of our corporate industries is

weighing more in this regard.

It is not possible to address every single issue here, even so, we must realize

that we are far away from the top and the ideal and we must climb up.

In moving forward, the optimum step should be academic development by

infiltrating the theories of Islamic economics into the conventional discipline

of economics and commerce from the beginning. Though it is macro and

long-run strategy, it will seed and water the real Islamic economics into ourfuture. For now, we need consensus based decisions on intra-industry and

regulatory levels.

In the conclusion, I would prefer to quote an anonymous, Even if you fall

on your face, you're still moving forward.

Happy Reading!

Let us know, if you know friends or colleagues who, in your view, may benefit from this newsletter. Send us their email

addresses at [email protected]

Editor-in-Chief

Associate Editors

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Page 3

ContinuedNon-performing loans (NPLs) analysis of the Islamic banks

An initiative of IFP forum

over, new stringent policies will have to

be developed and careful monetary

measure needs to be taken. However, a

fact needs to be highlighted that the

reason of these NPLs is also the ever

increasing downturn of Pakistans

economy which is resulting in difficult

business conditions hence making it

hard to repay the financings.

The monetary policy 20112012,

succeeded in curtailing financing to

private sector but it could not control

the ever increasing defaults.

An analysis of provision created by

Islamic banks and window operations

of the conventional banks during the

year ended 31 December 2011, have

been formed. The analysis is shown

below .

Description

Advances NPL to advances ratio (%)

2011 2010 2009 2011 2010 2009

Soneri Bank Limited 1,764,097 1,611,508 846,427 7.8% 0.0% 0.1%

Standard Chartered Bank 14,335,084 9,338,716 6,474,212 1.3% 2.1% 3.4%

United Bank Limited 521,109 461,342 638,131 0.0% 0.5% 0.0%

National Bank of Pakistan 1,754,031 1,003,331 510,730 11.0% 27.7% 0.0%

Muslim Commercial Bank 5,611,142 3,688,579 3,477,600 0.1% 1.4% 1.1%

Habib Metropolitan Bank 6,446,125 5,465,838 3,684,234 1.1% 0.1% 0.0%

Askari Bank Limited 3,036,063 3,480,377 5,872,292 0.2% 4.0% 1.1%

Faysal Bank 4,974,329 3,445,171 - 0.3% 0.2% -

Habib Bank Limited 396,172 396,107 1,558,478 28.3% 10.1% 11.1%

Bank Al Falah 25,262,319 25,957,935 16,920,995 0.1% 0.1% 0.3%

Bank of Khyber 3,071,604 2,949,588 1,953,031 1.6% 1.3% 3.4%

Bank Al-Habib 5,359,450 3,976,591 3,081,304 0.0% 0.0% 0.0%

Meezan Bank Limited 59,155,585 54,195,163 41,709,656 2.5% 2.5% 3.4%

Dubai Islamic Bank 23,340,602 22,764,954 20,589,613 0.0% 0.8% 0.6%

Burj Bank 10,509,340 5,616,202 4,763,622 1.6% 6.8% 4.9%

Bank Islami 20,110,401 16,670,125 13,282,152 0.1% 0.0% 0.7%

Al-Baraka Bank 27,610,708 26,599,261 9,439,243 0.8% 2.9% 3.3%

Advances Figures in Rupees 000

Banks operating in Pakistan

Public sectorbanks

SpecializedBanks Private banks Islamic banks Foreign banks

Microfinance

banks /institutions

Development

financeinstitutions

05 04 17 05 07 09 08

Disclaimer:The data presented in this summary is extracted from the published audited financial statements of the respective Banks for the

year ended 31 December 2011. The newsletters management does not take any responsibility of authencity of any data

presented here and will not assume any liability due to any loss or damage caused by the usage of the information presentedhere. User discretion advised.

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The Central Bank of Bahrain (CBB)

announces that the monthly issue of

the short-term Islamic leasing bonds,

Sukuk Al-Ijara, has been fully

subscribed by 328%. Subscriptions

worth BD65.5 million were received

for the BD20 million issue, which

carries a maturity of 182 days. The

expected return on the issue, whichbegins on 20 September 2012 and

matures on 21 March 2013, is

1.35%. The Sukuk Al-Ijara are

issued by the CBB on behalf of the

Government of the Kingdom of

Bahrain.


Disclaimer:

The news included here is on the basis of information obtained from local and international print and electronic mediasources. IFP team does not accept any responsibility about their bona-fide.

Several recent landmark corporate and infrastructure Sukuk by companies inthe GCC issuing in Malaysian ringgit may signal the start of a trend that

could help develop and globalise the market, according to a new report from

Standard & Poor's, or S&P. In an era when the world's conventional banks

are producing fewer and shorter loans and companies are considering other

options for finance, S&P believes that Islamic financial instruments could

become a key funding source, especially in GCC and Asian countries, S&P

said in a report entitled, "Beyond Borders: The GCC And Asia Could Rev

Up Their Economies - And The Islamic Finance Market".

CBB Sukuk Al-Ijara fullysubscribed

S&P report says greater use of Sukuk in the GCC andAsia could fund infrastructure needs and developIslamic finance

T h o m s o n R e u t e r slaunches new global

Islamic index to monitorSukuk market

Thomson Reuters , the world's

leading source of intelligent

information for businesses and

professionals, announced the launch

of the Thomson Reuters Global

Sukuk Index, an independent and

transparent benchmark for investors

seeking exposure to Sukuk (Shariah

compliant) fixed-income

investments, to be used to monitor

the performance of the Sukuk

market. The announcement of the

launch of the index was made at the

Global Islamic Finance Forum

(GIFF) 2012 in Kuala Lumpur,

Malaysia.

The Senate approved the draft Is-

lamic Sukuk Law, the Awaqf and

Islamic Affairs Law and the

Appropriation Law. During the

session, chaired by Senate President

Taher Masri and attended by Prime

Minister Fayez Tarawneh and Cabi-

net members, the Senate approved

the 2012 Islamic Sukuk Law asreferred from the Lower House of

Parliament.

Jordan senate approves anumber of laws

Innovative investment product

provides strategic exposure to gold

and oil markets, backed by high level

of capital protection Dubai,

September 25, 2012: Dubai IslamicBank ( DIB ) announced today the

launch of its Al Islami Aurum+ 1

Dirham Certificate, an innovative

investment product that provides

strategic exposure to the commodity

markets with the peace of mind that

DIB launches Al IslamiA u r u m + 1 D i r h a mCertificate

comes with a high level of capital

protection. Developed by the Royal

Bank of Scotland (RBS), the Al

Islami Aurum+ 1 Dirham Certificate

attempts to generate returns in any

market environment by taking

exposure and switching between oil

and gold.

Kuwait Finance House Research

(KFHR) prepared a series of financialreports that discussed the reality of

Islamic banking sector and the

horizons of its development during

the coming period, in order to

discuss that during the Global Islamic

Financial Forum that will begin in

Malaysia. The four day event that is

organized by the Malaysian

government and Malaysia's Central

Bank, will tackle on its first day a

study regarding the status of global

Islamic banking sector. The total

value of Islamic financial assets is

expected to reach $1.6 trillion this

year, and the financial sector is

expected to continue its robust

growth in 2013.

Shariah-compliant assets toreach $1.6 trillion

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Qatar I s lamic Bank (QIB)

announced that its General

Assembly has approved the Board of

Directors' recommendation to

establish a medium-term $1.5

Billion Sukuk Programme.

The announcement was madefollowing the General Assembly

meeting at Four Seasons Hotel,

16th of September 2012.

Based on the approval, the Bank will

now pursue all necessary regulatory

approvals from the relevant

authorities.


Disclaimer:


The much-awaited regulation for Islamic banks and window operations of

conventional banks will be announced through a Royal Decree at any time.

"It can come at any time. The Majlis A'Shura and Cabinet have already

cleared the new regulation and now we are waiting for a Royal Decree,

which can come at any time,- Central Bank of Oman Executive President

Hamoud Sangour Al Zadjali, told Times of Oman over phone. It appears

that the Royal Decree is for amending certain clauses to incorporate Islamic

banking business.

QIB's General Assemblyapproves $1.5 billionS u k u k i s s u a n c eprogramme

Islamic banking regulation expected at any time:Central Bank of Oman

Bloomberg launches newcorporate Sukuk indexfor Islamic finance

Bloomberg announced furthercommitment to the Islamic finance

market with the launch of a

Malaysian Ringgit corporate Sukuk

index, developed with the

Association of Islamic Banking

Institutions Malaysia and Bursa

Malaysia. The Bloomberg AIBIM

Bursa Malaysia Corporate Sukuk

Index will serve as a benchmark for

investors of ringgit-denominated

Islamic bonds in Malaysia.

Dar Al Takaful eyes 40%growth

Dar Al Takaful , formerly known

as Takaful House , is confident to

achieve premium targets set for 2012

as it plans to introduce various

products to target small and

medium enterprises, travel, medical

and institutional business to bring

profitable volumes.

The Islamic insurance firm intends

Dubai Islamic Bank ( DIB ) unveiled

its first account developed

specifically for children. Created tohelp children understand financial

responsibility from an early age, the

Shaatir Savings account includes a

number of innovative features that

encourage young people to save

towards specific goals in the lives.

Dubai Islamic Bankunveils Savings accountfor kids

Tokio Marine Middle East Ltd, the

Dubai-based regional hub of

Japanese insurance giant Tokio

Japanese insurer all set toenter Saudi Takafulmarket through joint

venture

Kuwait Finance House " KFH "represented by its subsidiary,

Liquidity Management House

"LMH", succeeded in arranging for

Ijarah Sukuk for the Turkish

Treasury amounting USD1.5bln for

5 years, in cooperation with

Citigroup and HSBC, where this is

the first issuance of its kind for the

Government of Turkey.

The issuance witnessed a large

turnout exceeded expectations. 250

investors have requested to

participate in the issuance totaling

$7.1billion (i.e. 5 times

oversubscription coverage).

The annual rate yield on these

sukuk is 2.8% and to be distributed

every 6 months.

First Sukuk issuance forthe Turkish Treasury of$1.5 billion

Marine, plans to launch its new

Saudi joint venture which will

spearhead its activities in the

Kingdom and beyond.

to grow by at least 40 per cent each

year for the next two years. It has

achieved an 85 per cent year-on-year

growth in its premium business

during the first seven months of this

year.

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Disclaimer:


Kazi Abdul Muktadir, Deputy Governor, State Bank of Pakistan (SBP) has

said the central bank is developing a new fiveyear (2013

17) strategic plan for

Islamic banking industry.

The new plan will set the strategic direction for the Islamic banking industry.

This would define the strategies and action plans to move the industry to the

next level of growth and SBP would expect active and meaningful involvement

of the industry in development of the plan, Mr. Muktadir said while

delivering his keynote address on Islamic Finance in Pakistan Where We

Stand and The Way Forward at the Islamic Finance News (IFN) Roadshow

2012 at SBP Learning Resource Centre (LRC), Karachi

State Bank developing new fiveyear strategic plan forIslamic banking industry: Kazi Abdul Muktadir

The three-year bilateral Currency

Swap Arrangement (CSA) between

the State Bank of Pakistan (SBP)

and the Central Bank of Republic of

Turkey (CBRT) amounting to US$

1 billion in equivalent local

currencies is being implemented andSBP has i s sued nece s s a ry

instructions to banks for its

i m p l e m e n t a t i o n a f t e r d u e

consu l t a t ions w i th v a r ious

stakeholders and completion of

operational formalities with CBRT.

C u r r e n c y S w a pA r r a n g e m e n t w i t hT u r k e y b e c o m e soperational

Pakistans central bank hasannounced it will develop rules

d e f i n i n g t h e r o l e s a n d

responsibilities of all those involved

in the sharia compliance process of

Islamic banks, including scholars.

The rules aim to strengthen

governance of the Islamic finance

sector in the worlds second most

populous Muslim nation, the

central bank said in a statement. It

did not give details of the new rules.

Pakistan central bankaims to strengthen Islamicfinance sector

S a l m a n R a z a , G e n e r a lManager Branch Banking of KASB

Bank, which is one of the leading

banks of the country, has said KASB

B a n k h a s e v o l v e d a n

aggressive marketing strategy for the

year 2013 under which we have

planned to further expand

our branch network apart from

expanding KASB products .

KASB Banks futurep r o m i s i n g I s l a m i cbanking industry movingforward in competitiveenvironment

Dubai Islamic Bank Pakistan

Limited (DIBPL) and Western

Union (WU) have launched a

convenient remittance solution for

Dubai Islamic Bank

Pakistan and WesternUnion launch remittanceservice

Optimists will hail the fact that

finally, after a mushroom growth in

Pakistan of Islamic and other banks

offering Sharia-compliant services

and products, a debate has finally

been generated about the viability

Rede f in in g I s l amicfinance

and genuine adherence to religious

teachings of these products and

services.

I s s u e o f S u k k u k Regulations, 2012 bySECP on 28th September,

2012S e c u r i t i e s a n d E x c h a n g e

Commission of Pakistan (SECP)

issued draft regulations namely

Issue of Sukuk Regulations, 2012

through S.R.O. 1223(I)/2012 on

28th September, 2012.

sending money to families living in

Pakistan. DIBPL is now servicing

Western Union customers for

inward remittances through its

branches across Pakistan.

Speaking at the occasion Najam

emphasised that Inward remittances

are extremely crucial for the

development of Pakistan's economy

because it was a major contributor

to the country's foreign exchange

reserves. Naveed Malik said that theDIBPL distribution network was

consistently growing. The DIBPL

network had witnessed significant

organic growth in the past few years

taking the branches to 91 branches

in 33 cities.

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Ask UsBy Mufti Ibrahim Essa and Mufti Javed Ahmed

Question:

What are the Shariah permissible

measures in Istisnaa contract if the

ultimate purchaser delays in the

process of taking the possession of

subject-matter?

Answer:

It is permissible to state in a contract

of Istisna'a that the manufacturer will

act as the agent of the ultimate

purchaser to sell the subject-matter if

there is a delay on the part of the

purchaser in taking delivery of the

subject matter within a particular

period of time. In this case, the

manufacturer will sell the subject-

matter on behalf of the ultimate

purchaser and, after deducting the

agreed contract price, the balance, if

any, will be returned to the purchaser.

If the price obtained is less than the

contract price, the manufacturer shall

have a right of recourse to the

ultimate purchaser for the recovery of

the remaining balance. In addition,

the ultimate purchaser will bear the

expenses incurred in selling thesubject-matter.

Question:

Is it permissible to accept mortgage

in the form of investment units?

What are the Shariah instructions in

this regard? What will be the status

of profit realized in the mortgage

period?

Answer:

The Islamic bank can acceptmortgage in the form of investment

units in Islamic investment funds. In

this case the institution as a

mortgagee can suspend the right of

the client to get back or draw from

the account, absolutely or proportion

to the amount of the debt, whichever

is more appropriate.

The income and growth earned by

units or the account are considered

to be mortgaged along with the

principle. This should hold true

M o v e s a n d

Promotions

Mr. Kamran Masud, - New Group Head

Bank of Khyber (BOK), Islamic BankingGroup. Previously worked at Meezan

Bank - Regional Head North.

Mufti Zahid Siraj, Head of Internal

Shariah Audit, Burj Bank Pakistan.

Previously Shariah Coordinator - Audit.

Mr. Arshad Hussain Zubairi, Senior

Manager Islamic Financial Services

Group (Ernst & Young). Previously

worked as Manager EY-IFSG

whether the contractual relationship

between the client and the Islamicbank or the fund is Mudarabah or

investment proxy, unless the two

parties agree on other agreement.

Documents

IFP - Oct 2012