By Mushfiq Ahmad

KARACHI: At a time when deposit growth of conventional banks has almost stagnated, Islamic banks are enjoying handsome growth in deposits, indicating increasing preference to Islamic banking in the country.

According to latest data, deposits of Islamic banks rose by Rs 31 billion or 18 percent to Rs 202 billion at the end of second quarter of current fiscal year (Oct-Dec 2008) from Rs 171 billion at the end of first quarter (Jul-Sep 2008).

It is pertinent to mention here that deposits of overall banking industry rose by Rs 20 billion or 0.52 percent to Rs 3.801 trillion from Rs 3.781 trillion during the quarter under review. This means that there was negative growth in deposits of conventional banks during the quarter and the growth in overall banking industry's deposit base came only from Islamic banks.

There was a phenomenal growth of 40 percent in the number of branches of Islamic banks during the quarter. Islamic banks had 514 branches at the end of December 2008, an increase of 147 branches from 367 branches at the end of September 2008. Five years ago-at the end of 2003-Islamic banks had only 17 branches.

There was only one full-fledged Islamic bank at the end of 2003 and three conventional banks with Islamic banking divisions. Now there are six full-fledged Islamic banks and 12 conventional banks with Islamic banking divisions, which means that 18 banks are providing Islamic banking services in the country now.

Karachi leads the growth in Islamic banking with 152 branches followed by 92 in Lahore, 24 in Peshawer and 14 in Quetta. Interestingly, the number of Islamic banks' branches in Federal Capital alone is higher than that in Balochistan province. While there are 29 branches in Islamabad, there are only 23 branches in Balochistan.

The rapid growth in Islamic banking is reflected in growing share of Islamic banking in assets, deposits and financing of banking industry. The respective share of Islamic banking assets and deposits are 4.9 and 4.8 percent of the banking sector. On the face, these look modest shares but given the smaller timeframe and other countries experiences this is really significant.

Islamic banking assets grew at 10 percent during the quarter. The assets mix showed some interesting changes. The lower growth of financing and substantial increase in balance with other banks and due from financial institutions category show a greater degree of risk aversion. Moreover, there is a shift towards investments as well. These trends are not surprising as the conventional banks are showing similar trends in the aftermath of global financial crises.

The financing & investment mix have changed in favor of investments during Oct-Dec 2008.

The increase Investments shows the increase in investment avenues arising from issuance of GoP Ijarah Sukuk.