A Report on

Global Financial Crisis and Islamic Banking System of Pakistan

Submitted To: Mr. Farhan Raza Submitted By: Raheeq, Junaid & Zain MBA (Evening) Course Title: Business Communications

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Conttentts of The Reportt Con en s of The Repor

ACKNOWLEDGEMENTS GLOBAL ECONOMIC CRISIS & STABILITY OF THE BANKING SYSTEM IMF REPORT: ISLAMIC BANKING CAN SPUR GROWTH IN MUSLIM WORLD AN ECONOMY-WIDE APPLICATION OF ISLAMIC BANKING AND FINANCE INTEREST RATE REVIEW FOR CONVENTIONAL BANKING IN PAKISTAN (2007-2010) ISLAMIC BANKING AND FINANCE IN PAKISTAN ISLAMIC BANKING INDUSTRY PROGRESS AND MARKET SHARE (UP TO DEC 2010) CONCLUSION WAY-FORWARD

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Acknowledgements
First of all we would like to thank Almighty Allah for giving us the courage and ability to complete this report. We would also like to state that this report would have not been completed in such a manner of professional report writing without attending Business Communication course. We also thank our mentor, Mr. Farhan Raza who provided us an opportunity to apply Business Communication skill in real action.

GLOBAL ECONOMIC CRISIS & STABILITY OF THE BANKING SYSTEM There is widespread agreement on the fact that the earlier than expected recovery of the global economy is a prelude to improvements in both consumer as well as producer
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confidence; however the process remains uneven and patchy leaving some countries, sectors, industries, and at the micro level, some firms, still struggling to break-even. In Pakistan, the indirect impact of the Global Financial Crisis (GFC) and ensuing recession in advanced economies was clearly evident in 2009. As in the rest of Asia, the indirect impact of the GFC manifested itself in various forms in the real sector of the economy. Indeed there was a decline in exports due to recession in economies which are Pakistan s major trading partners, and there was pressure on capital flows where strained liquidity position in global financial markets impacted foreign portfolio investment. The main components of capital flows are workers remittances, foreign direct investment (FDI) and foreign portfolio investment (FPI). Although workers remittances increased from USD 7 billion in CY08 to USD 8.7 billion in CY09, yet this improvement has been offset by the fall in FDI from USD 5.4 billion in CY08 to USD 2.4 billion in CY09 and further deterioration in FPI from outflows of USD 269 million in CY08 to outflows of USD 608 million in CY09.

However, factors such as the energy crisis leading to under-utilization of industrial capacity and rise in the cost of production, the long-standing issue of inter-corporate circular debt, considerable decline in foreign direct investment due to weak economic fundamentals, and above all, the mounting fiscal deficit breaching previous records in the country s economic history, all had a role to play in keeping the process of economic recovery in Pakistan tenuous at best. The leading evidence of these various pressures on domestic firms and industries was that their loan repayment capacity was compromised, with a consequent rise of NPLs on the banks balance sheets. Cash dividend distributed by the banking sector in CY09 declined by 22.8 percent on YoY basis from Rs. 26.5 billion to Rs. 20.4 billion. Notwithstanding the various challenges in the economic environment, banks have managed to continue to perform well, as is evident from the fact that their overall ROA (net of taxes) is 0.9 percent in CY09, still less than the conventional norm of 1.0 for banks, but an improvement over ROA of 0.8 percent in CY08. This indicates their capacity to withstand challenges from their operating environment. Notably, there were also some positive developments during the year. These include a substantial decline in the international oil and commodity prices which eased the pressure on the external current account deficit, improved crop outputs, and substantial improvement in banks liquidity position, etc. These various developments helped to mitigate persistent inflationary pressures and offered room for lowering the SBP policy rate from 15.0 percent at end-CY08 to 14 percent during CY10. This easing of monetary policy was consistent with signs of improvement in economic indicators. IMF REPORT: ISLAMIC BANKING CAN SPUR GROWTH IN MUSLIM WORLD

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A recent International Monetary Fund (IMF) report of Sept, 2010, has argued that the rapidly growing Islamic banking sector may accelerate economic development of the Muslim world. In their working paper Islamic Banking: How Has it Diffused? IMF researchers Mr. Patrick Imam and Mr. Kangni Kpodar note that Islamic banking with its finance potential can solve the problem of slow growth in the world s Muslim nations. We showed that Islamic banking has, in a few decades, moved from a niche market into the mainstream. Because Muslim populations are under-banked, and given the tremendous need for infrastructure projects like roads and housing across the Muslim world, development of Islamic banking can spur growth in these regions and can be part of the solution to the slow development process, they wrote in the report. Islamic banking came as a market response to the financial needs of devout Muslims who have been looking to invest their savings in a way that does not conflict with Islam, which proscribes engaging in interest-bearing transactions, a mainstay of conventional banks. It is an increasingly visible alternative to conventional banks in Islamic countries and in countries with large Muslim populations, such as the UK. Globally, the assets of these institutions have grown at double-digit rates for a decade, and some conventional banks have opened Islamic windows, with Shariah-compliant financial assets reaching an estimated $509 billion at end-2007, the IMF report said, reiterating the International Organization of Securities Commissions (IOSCO) prediction that as much as half of the savings of the world s estimated 1.2-1.6 billion Muslims will be in Islamic financial institutions by 2015. In addition to that, the international organization s report also opposed the marginal view that Islam negatively affects growth. Much of the evidence does not support this argument. First, the Golden Age of Islam between the 9th and 15th centuries, when advances were made in science, literature, navigation, law, and philosophy, illustrates that Islamic societies are capable of progress and innovation when the right environment is in place. In fact, not only does Islam not negatively impact growth, but Islamic banking could complement conventional banks and thereby help diversify systemic risk, the report concluded.

AN ECONOMY-WIDE APPLICATION OF ISLAMIC BANKING AND FINANCE

Can a Muslim country transform its economy according to the principles Islamic finance in a successful manner? What are the prerequisites for success? The conventional banking still holds sway over the overwhelming part of the banking operations internationally. However, over the last thirty years, some of the Muslim countries have started Islamic banking which is running parallel to the conventional banking system. Islamic banking is yielding a reasonable success as evident by its growth (around 15%) annually. The current success of Islamic banking and finance has been accomplished despite the unavailability of an ideal legal and institutional set up which is imperative to support the operation of these banks. There is no doubt that once an appropriate institutional infrastructure is completed, their degree of success will be even greater. Provision of enabling framework which may include compatible national and banking laws, rules and regulations, tax regime, accounting.

In case all interest-based transactions are abolished from the economy, what would be the economic implications on national and international level? In case all interest based transactions are abolished from the economy, the implications at the national and international level may be visualized as follows: A. Implications at the national level: The following will be the implications at the national level. i. Adopting the operating method of Islamic banking: The economic consequences of eliminating interest at the national level could be anticipated on the basis of considering the nature of the business operations of Islamic banks. As previously pointed out, Islamic banks can undertake financing through partnership modes as well as sales-based modes involving fixed returns. Therefore, Islamic banking offers a wider scope of operations where it can follow up and monitor more closely the activities and performance of the enterprises it finances. It can employ various monitoring techniques and procedures including sitting on boards of directors to obtain information in its capacity as partner who has a stake in the capital of those companies. Economists believe that Islamic banks face fewer risks than purely commercial ones regardless of whether the national economy is undergoing a period of economic recession or upswing. Hence, the greater the ability of Islamic banks to employ the monitoring techniques the less amenable they become to moral hazards. This gives Islamic banking an edge in profitability over commercial banks. Islamic banking has valuable opportunity of using proper mix of financial modes. They can choose the proper mix of partnership and fixed-return modes that would afford them more effective monitoring at lower costs. For this reason, they can become relatively more profitable as well as efficient and as a result the national economy as a whole would gain. ii. Resource allocation on production bases
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The most important aspect characterizing Islamic financing at the macro-economic level is it s unique method of financial resource allocation. The allocation of financial resources in a conventional economy revolves around the rate of interest and where the credit worthiness of the borrower is the main criterion for lending funds. In an interest-free economy, financial resources are allocated on the basis of production and commercial criteria. This implies that under Islamic finance, the vital factor of obtaining the financing facilities is the ultimate results of the enterprise whose operations are being financed whereas the credit worthiness is the secondary factor. Resource allocation on the basis of production and commercial criteria is more oriented towards growth and development wherein the financial sector remains in harmony with economic fundamentals. Islamic finance modes are of two types: partnership and markup. Once an agent obtains finance of the second type, he ends up owing a loan to the finance provider. Nonetheless, an Islamic banking system does not face problems associated with debt accumulation because the debt generated is used to finance real transactions i.e. the purchase of real commodities and assets. In addition, the markup is set once and it is not cumulative. Furthermore, the debt is not marketable, as it is sellable only at face value. This makes debt renewal or accumulation much more difficult. In this context, it is inconceivable that Islamic financing could generate debts to the extent that their volume would exceed the volume of the commercial and production activities financed. Furthermore, the bulk of debts in a conventional economy, mostly government debt, would be replaced in an Islamic economy by financing through Islamic modes. There is no room for a large volume of transactions in debt instruments (bonds) as appears in conventional economies, where the volume of such transactions reaches multiples of GDP. Unlike a capitalist economy, the Islamic economy is not heavily leveraged. Thus, such an economy would be well protected against shocks resulting from debts. iii. Relative stability of the banking system Conventional banks hold assets resulting from personal and business finance which can generally be riskier than their liabilities to their depositors. The conventional banking system would therefore face some measure of instability especially during the downturn of the business cycle or generally during periods of low aggregate demand. At such time, higher rates of business failures and bankruptcy could bring the average rate of return on banks' investments below the average rate of interest they have to pay on time deposits. This exposes banks themselves to business failures. By contrast, Islamic banks guarantee only demand deposits and shares the risks with investment depositors. An Islamic bank may not generally be expected to incur losses, even at times of low levels of aggregate demand, because of its wider scope of activities. When the rates of return on its investments decline, so does the rate of return paid out to the depositors. The possibility of business failure faced by Islamic banking is therefore lesser as compared to its conventional counterpart. We can, therefore, conclude that Islamic banking is more stable which in turn gives an added measure of stability to the domestic economy. B) Advantages of Islamic Financing at the International Level
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The present age of globalization has witnessed the narrowing/eliminating the gaps of communication. Further, the market disclosures are also getting enhanced which would expose the economies to the influences of external factors that pass through trade as well as capital flow channels. A single country cannot place trade controls without consulting the World Trade Organization (WTO). After repeated international financial crises, especially that which befell the South East Asian countries, economists found themselves compelled to reconsider their preference for free capital flows, especially short-term. This cannot be ignored that such flows are associated with interest-based financing, where debt becomes marketable and free moving. In a conventional economy, debt financing comes in a pyramid-shaped chain, where foreign banks lend local banks, which in turn lend individuals and local enterprises. Most of this lending is on short-term basis. Once foreign banks face a problem, they recall their loans from local banks, which in turn recall their loans from domestic borrowers. Thus the pyramid of debts starts to collapse and a financial crisis ensues. An Islamic economy would receive external capital flows using only Islamic modes of finance. Whether based on partnership or markup, those flows would be contractual and are neither marketable nor recallable on notice. It can, therefore, be imagined that those who wish to provide external capital flows to an Islamic economy would have to wait until the maturity dates of their debts before withdrawal. Those interested in providing external funds on a partnership basis would have to abide by the partnership contracts. Therefore, Islamic financial system is not prone to those risks which the conventional banking system is exposed to. Can Islamic banks play any role in economic development of the Country? While functioning within the Shariah framework, Islamic banks can perform a crucial task of resource mobilization and efficient allocation using either profit sharing (Musharaka and Mudarabah) or trading & Ijarah based categories of Islamic modes of financing. Profit sharing modes can be used for short, medium and long-term project financing, import financing, pre-shipment export financing and working capital financing transactions. In order to ensure maximum role of Islamic finance in the development of economy it would be necessary to create an environment which may induce financiers to earmark more funds for Musharaka/Mudaraba based financing. The non-PLS techniques, as acceptable in the Islamic Shariah, not only complement the PLS modes but also provide flexibility of choice to meet the needs of different sectors of the society based on their risk profile. Trade-based techniques like Murabaha with lesser risk and better liquidity options have several advantages vis--vis other techniques but may not be as fruitful in reducing income inequalities and generation of capital goods as participatory techniques would do. Ijarah related financing which requires Islamic banks to purchase and maintain the assets and afterwards dispose them off according to Shariah rules, require the banks to engage in activities beyond financial intermediation. Salam has a vast potential in financing the productive activities in crucial sectors, particularly agriculture, agro-based industries and the rural economy as a whole. It
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provides incentive to enhance production as the seller would spare no effort in producing, at least the quantity needed for settlement of the loan taken by him as advance price of the goods. Salam can also lead to creating a stable commodities market especially the seasonal commodities and therefore to stabilize their prices. It would enable savers to direct their savings to investment outlets without waiting. This would help them to invest their surplus funds till the harvesting time of agricultural products or the time when they actually need industrial goods and without being forced to spend their savings on consumption. On the basis of the above it can be said that supply and demand of capital would continue in an interest-free scenario with additional benefit of greater supply of risk-based capital along with more efficient allocation of resources and active role of banks and financial institutions as required in asset based Islamic theory of finance. Islamic banks can not only survive without interest but also could be helpful in achieving the objective of development with distributive justice by increasing the supply of risk capital in the economy, facilitating capital formation, growth of fixed assets and real sector business activities. Banks might engage in fund and portfolio management through a number of asset management and Ijarah and trading companies. Such companies/entities can exist in the economy on their own or can be an integral part of some big companies or subsidiaries. They can manage Investors Schemes to mobilize resources on Mudarabah basis and to some extent on agency basis and use the funds so collected on Murabaha, Ijarah or equity participation basis. Subsidiaries can be created for specific sectors/operations which would enter into genuine trade and Ijarah transactions. Low-risk Funds based on shortterm Murabaha and Ijarah operations of the banks in both local as well as foreign currencies would be best suited for risk-averse savers who cannot afford possible losses in PLS based investments. Under equity based funds, banks can offer a type of equity exposure through specified investment accounts where they may identify possible investment opportunities from existing or new business clients and invite account-holder to subscribe. Instead of sharing in the bank s profit, the investors would share the profits of the enterprise in which funds are placed with the bank taking a management fee for its work. Small and medium enterprises (SME) sector has a great potential for expanding production capacity and self-employment opportunities. Enhancing the role of financial sector in development of SME sub-sector could mitigate the serious problems of unemployment and low level of exports. Keeping in view the above, it can safely be said that Islamic banking has a great potential of playing an effective role in the development of the country.

INTEREST RATE REVIEW FOR CONVENTIONAL BANKING IN PAKISTAN (2007-2010)

The structure of interest rates in the economy is another important determinant of credit risk in the banking sector. Interest rate volatility, besides affecting interest rate risk, alters the cost of borrowing which is inextricably linked to the repayment capacity of the borrowers. Figure shows trends in leading interest rates like the SBP repo rate, which sets the tone of the term structure of interest rates, along with the weighted-average lending rate (WALR) and the 6-month KIBOR, which is the benchmark for pricing loans. With the start of CY09, two developments took place with the easing in the monetary policy stance: (1) lending rates in the primary as well as secondary market started declining, and (2) interest rate volatility, which aggravates uncertainty in the system, started subsiding. The introduction of the interest rate corridor in August CY09 proved to be instrumental in stabilizing the overnight money market repo rate. As the level of interest rate directly impacts the cost of borrowing, therefore any reduction in its level as well as volatility helps in managing the credit risk profile.

ISLAMIC BANKING AND FINANCE IN PAKISTAN

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Islamic finance, initiated modestly about four decades ago to cater to the financial services needs of faith sensitive Muslim population, particularly the high net worth individuals and groups in UAE and Middle East, has now acquired the status as an integral component of the global financial system. The Islamic finance industry has been growing at an exceptionally fast pace and extending its outreach beyond the Muslim countries, which is indicative of its increasing acceptability as a viable and competitive alternative to the conventional system; since 2006 the industry has grown on average 28 percent annually with assets reaching US$822 billions. Presently more than 1100 Institutions offering Islamic Financial Services (IIFS) operate across the globe, which, coupled with a number of dedicated academic, legal, regulatory and supervisory institutions , provides a solid platform for future growth and development of the Islamic finance industry. The recent crisis in the western financial markets has also given a big boost to the acceptability and promotion of Islamic banking as a more stable and prudent system than its conventional counterpart. The inherent checks and balances in Islamic finance, which prohibits Islamic financial institutions to deal in speculative and Haram activities (the businesses which are detrimental for welfare of the mankind) and requires them to ensure Equity, Justice and Transparency in their transactions, largely kept the Islamic financial Institutions insulated from the financial crisis. The frequently recurring crisis in the conventional system, several in the last four decades, on the other hand highlights its embedded weaknesses and vulnerability to speculative and self interest maximization behavior. As we witnessed during the financial crisis, even the most sophisticated and modern regulatory and supervisory systems were unable to ensure soundness and stability of a system with inherent weaknesses. Accordingly there is a need to revisit the conventional system and extricate from it the embedded weaknesses and avoid the often recurring crisis in the financial markets to achieve longer term economic stability. The inherent strengths and control mechanism of Islamic finance could provide the requisite stability, provided it achieves greater efficiency, consumer convenience and flexibility, that is the hall mark of the conventional system. The current Islamic banking paradigm, both in Pakistan and elsewhere, is however, based on the replication of conventional banking products. While the replication and mimicking of conventional products to make them Shariah compliant does pass the Shariah permissibility test, it is insufficient to achieve the objectives of Islamic finance, particularly the broad based and equitable distribution of economic gains. The complete reliance of Islamic banks on debt based fixed income products and minimizing the risks close to those of the conventional system is not only blurring the distinction between Islamic and conventional finance but also making Islamic banks relatively less efficient than their conventional counterparts. Thus to sustain the growth momentum, the industry will need to diversify its product mix by focusing on areas where it has comparative advantage rather than blindly following the conventional system, that in itself possesses inherent weaknesses that give rise to cycles of booms and busts. In Pakistan for instance 67% of Islamic banks financing is concentrated in the corporate sector through Murabaha, Ijarah, and Diminishing Musharaka. As most corporates maintain banking relationships with conventional banks, the Islamic banks have to offer significant price discounts to attract such corporate clients. While this may improve the quality of its financing portfolio, it
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however reduces profit margins and inhibits its ability to offer better returns to the depositors. This also directs access to finance to the well established businesses and corporates and leaves the SMEs and startup businesses financially excluded. This naturally is contrary to the business model of Islamic finance, that promotes risk and reward sharing and encourages financing to promising startups that is critically important for promoting entrepreneurial culture. The financing to SMEs and startup ventures through participatory modes like Musharaka gives the SMEs/startups the necessary cushion to withstand the teething problems with no fixed interest cost. Although startups are relatively riskier, professional appraisal of the venture, and capacity of the entrepreneur to manage the venture could considerably lower the risk of failure and enable Islamic banks to earn attractive returns that will allow them to pay better returns to their depositors. The Islamic banking initiative was re-launched in Pakistan in 2001 as an alternate and parallel system to provide an option to the public to enable them to choose the product that best serves their needs. Learning from the experience of 1980s, a comprehensive legal, regulatory and Shariah compliant framework was put in place before launching the initiative. The framework allowed three types of Islamic banking institutions: i) Full fledged Islamic banks, ii) Islamic banking subsidiaries of conventional banks and iii) Islamic banking branches (IBBs) of conventional banks. Additionally conventional banks having IBBs could also have Islamic banking windows in their conventional branches. Considering

The increased interest of banks to convert their conventional branches into Islamic branches, we have recently announced the criteria for such conversions. The initiative has been a big success; the Islamic banking Industry has grown manifold since 2001 and presently constitutes more than 6% of the banking system in Pakistan. Although there has been some deceleration in growth during the last couple of years, largely due to a slowdown in overall economic activity, the Islamic banking industry is likely to regain its growth momentum and increase its share to 10-12% over the next 2-3 years.

ISLAMIC BANKING INDUSTRY PROGRESS AND MARKET SHARE (UP TO DEC 2010)
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The Islamic banking industry maintained its growth trajectory during the last quarter of CY 2010 despite various challenges being faced by the economy. The industry s assets base during the quarter increased by 12.5 percent to Rs 477 billion from Rs 424 billion as at the close of September 2010; the YoY growth in the assets was 30 percent. The deposits during the quarter increased to Rs 390 billion from Rs 338 billion in September 2010 reflecting a growth of 15.3% on a QoQ basis whereas on the YoY basis, the deposits grew by 38% from Rs 283 billion as on December 2009.

The investment and financing activity recorded a big surge during the quarter with 96 percent and 18 percent growth respectively on QoQ basis. The unprecedented surge in investments is attributable to issuance of long awaited GOP Ijarah Sukuk of Rs.89 billion during the quarter, whereas the handy growth of 18% in financing could be attributed to seasonal uptake in credit; the cotton harvesting commences during the October-December quarter that gives significant rise to credit/financing demands by textile sector(share of financing by IBIs to the textile sector increased from 18% to 22% during the quarter). The YoY growth in investments and financing was 144 percent and 33 percent respectively as they increased to Rs 158 billion and Rs 180 billion respectively in December 2010 from Rs 72 billion and Rs 153 billion in December 2009. The pick-up in financing and investment activities during the current quarter is encouraging and would be instrumental in further accelerating the growth momentum as the enlarged investment avenues would give boost to IBIs drive for deposit mobilization. On the international front, the establishment of International Islamic Liquidity Management Corporation (IILM) in Malaysia during the quarter would also help IBIs across
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the globe to better manage their liquidity. IILM is a supranational body established to develop Shariah compliant liquidity management solutions for Islamic banks. State Bank has also sought membership of IILM to be part of an important international forum which would further enlarge investment avenues for IBIs. OPERATING PERFORMANCE Despite rapid growth in IBIs assets and deposits, their profitability, as reflected by the key indicators remained considerably lower than the industry average. The ROA and ROE of IBIs at 0.6% and 5.2% respectively for the quarter ended 31st December 2010 was significantly lower than the industry average of 1% and 9.8% respectively.

The lower ROA and ROE for IBIs is attributable largely to the growing and evolving stage of IBIs; the industry has expanded its branch network significantly during last couple of years that entails considerable upfront investment/expense, whereas the new branches take time to acquire customers, achieve breakeven and then start earning profits for the bank. This is evident from the operating expense to gross income ratio for IBIs which is at 73% as compared to 53% for the industry.

ASSET QUALITY
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Encouragingly the pace of growth in Non-Performing Financing (NPF) slowed down significantly during the quarter and reduced to just 2.4% as compared to almost 27% during the last quarter. The NPF increased marginally during the quarter to Rs. 13.8 billion from Rs.13.5 billion as at the beginning of the quarter. Moreover, the amount of recovery has also increased to Rs. 1.25 billion as compared to last years figure of Rs. 0.8 billion; the growth rate of recoveries was in negative during the last quarter. The YoY growth in NPF was however significantly high at 38.2% as the NPF increased to Rs.13.8 billion as on December 2010 from Rs.10 billion as on December 2009.

CAPITAL The capital to total assets of Islamic banks stands at 9.7% as compared to 9.8% for the industry as a whole. Capital net of net NPFs to total assets of IBIs is 8.4% as compared to the industry average of 7.7%. The higher capital of Islamic banking industry compared to the industry as a whole may be attributed to asset based and prudent/conservative financing policy and resultantly lower NPFs of IBIs. FINANCING PORTFOLIO The financing type wise mix of IBIs financing portfolio shows that Murabaha based financing further strengthened its dominance in IBIs portfolio with almost three percentage points increase in its share in the IBIs portfolio. This also lead to increase in share of Murabaha, Ijarah and Diminishing Musharaka to 88% from 85% as at the beginning of the quarter. The share of Musharaka financing declined to 2.9% during the quarter from 3.7% as at the beginning of the quarter. Shares of Salam and Istisna meanwhile marginally increased to 1.4% and 5.8% respectively from 1.0% and 5.4% in the previous quarter. SECTORAL CONCENTRATION OF FINANCING
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The table 5 gives sector wise distribution of IBIs financing portfolio. The largest share of financing went to textile sector (22%), followed by 17% to individuals and 7% to chemical and pharma sectors in comparison to the industry average of 19%, 12% and 3.9% respectively for these sectors. Financing to Production and Transmission of Energy and Cement sectors constituted 7% and 4% of IBIs financing portfolio respectively as compared to the industry average of 9% and 3%. The IBIs financing to the energy and cement sectors witnessed significant growth during the year as their share in the IBIs financing portfolio increased by 3 and 2 percentage points respectively to 7% and 4%. DEPOSIT MOBILIZATION The deposits of IBIs increased to Rs 390 billion as at close of the quarter under review with a YoY and QoQ growth of 38% and 15% respectively. The fixed deposits at Rs 143 billion had the largest share of 37% in IBIs deposit mix followed by savings deposits which at Rs. 126 billion constituted 32% of total deposits. The deposits in current accounts constitute more than 23% of IBIs deposit base. While the fixed and savings deposits grew by about 11% each during the quarter, the growth in current deposits at 23% was more than double than the savings and fixed deposits growth.

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BRANCH NETWORK The IBIs branch network increased to 751 branches during the quarter from 684 as at the beginning of the quarter. The significant growth in number of branches is attributable to the opening of branches planned in the Annual Branch Expansion Plan (ABEP) for the calendar year 2010. The permission for branches, given in ABEP lapses if branches are not opened by 30th November each year. The province wise distribution of the branch network reveals that Punjab and Sindh have the bulk of IBIs branch network (79%), with 339 and 253 branches in Punjab and Sindh respectively. The review of the branch network in these two provinces further reveals that Lahore, Rawalpindi and Faisalabad account for 127, 34 and 30 branches respectively, which constitutes around 56% of the total branches of IBIs in Punjab. Similarly, Karachi alone with 210 branches accounts for 83% of the total branches located in Sindh. The conversion of the conventional branches into Islamic banking branches has picked up pace and in the last seven months 15 conventional banking branches have been converted into Islamic banking branches. The full fledged Islamic banks are gradually increasing their branch network in second tier cities while conventional banks are expanding their outreach to such cities both by establishing stand alone branches and Islamic banking windows. It is expected that gradually IBIs branch/windows network would expand to wider geographic territory of the country. CONCLUSION As a gist we can say that the Islamic banking and finance is growing in the country with an increased interest of general public which is apparently due to collateral / real assets based financing instruments against the conventional banking where major slumps were observed in the recent past due to sub-prime mortgagees.

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WAY-FORWARD We expect that our presentation in combination with the report will illustrate more skills which we have learned in this good course of business communication.

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