gif Market Review
ISLAMIC BANKS NEED TO OFFER Agriculture Financing in Pakistan
Source:
GlobalIslamicFinanceMagazine.com
Within Pakistan the agriculture sector contributes 21 percent to the Gross Do- mestic Produce (GDP), and provides 40
It has been reported that Islamic banking in Saudi Arabia is set for continued growth. NCB Capital ex- pects that loan growth for Saudi banks will continue to perform strongly in 2012 as they focus on retail lending. In its latest report, NCB Capital stated that it believes government spending and bo- nus salaries in 2011 will have a “recurring effect” on banks’ balance sheet growth in
2012.NCB Capital expects the bottom line this year to be driven by volume growth and non-interest income. “Banks focus on the under-penetrated retail segment is a key re- curring theme,” said Farouk Miah, head of Equity Research at NCB Capital. “Improved provision coverage, asset quality and capi- tal base make Saudi banks well equipped to continue the strong lending growth recorded in 2011. Overall, we expect loan growth of 12.4 percent in 2012 led by a retail loan growth of 16 percent.”
per cent of the country’s employment, as well as placing Pakistan as the fifth-largest milk pro- ducer in the world.He pointed out that Nestlé and other international companies have already realised the opportunities available, and ac- cordingly have invested in the dairy sector. He further stated that huge opportunities exist for Islamic banks in the agriculture sector, and they must make efforts to tap into these through ag- riculture financing.”
the coming years. According to the report, most of the Saudi banks believed that it was unlikely for the mortgage law to be passed in the near-term. As a way of getting around the problem, banks have focused on mortgage lending to state-sector employees on the high end of the income scale. NCB Capital continues to believe that even if the mort- gage law is passed, it will not have an im- mediate and full effect on mortgage lending until the supply of housing becomes more affordable.
The economics team at the National Com- mercial Bank estimated Saudi Arabia’s gov- ernment expenditure during 2012 to be 13 percent higher than budgeted on revenues of SR930 billion, leading to a budget sur- plus of SR150 billion, or 7.1 percent of its GDP. This continued use of an expansion- ary fiscal policy, coupled with low-interest rates, should maintain healthy economic growth and boost domestic liquidity. NCB Capital believes the corporate sector will benefit from continuing government support and estimates a corporate loan growth of 11 percent. Lending by the banking sector was also boosted by the government aban- doning the “advance mobilization scheme” which provided companies with government contracts up to 30 percent of the required financing. This aided the building and con- struction sector, which grew 25.4 percent in 2011 with similar growth levels expected in
30 Global Islamic Finance April 2012
A key trigger for mortgage lending, even in the absence of enforced formal institutions, is the introduction of tax on underdeveloped lands, easing pressure on property prices. This will be a key trigger for mortgage lend- ing going forward; while a mortgage law will facilitate bank lending, a land tax will ensure greater supply to meet the demand of home buyers.
The NCB Capital report highlighted that banks’ share of demand deposit has in- creased significantly over the past few years. It currently stands at its highest level of 58 percent, up from a low of 40 percent at the end of 2008’s fourth quarter. “It is no sur- prise that the switch came after interest rates started to decline; indeed we attribute this to the low interest rate environment which significantly limited the opportunity cost associated with non-interest bearing deposits,” explained Miah. “In addition, the reduced rates had a noticeable substitution
effect as depositors’ preferred short-term liquidity over longer term deposits at limited returns while abundant liquidity reduced banks’ demand for longer matu- rity funds.”
Going forward, however, NCB Capital expects demand for time
deposits to increase as the opportunity cost for demand deposits rises in absolute terms. “We believe conventional banks, particularly those who target high income depositors, to be at most risk. Shariah-complaint banks, on the other hand, face a lesser risk as more conservative depositors forgo interest on re- ligious principles,” commented Miah. “More importantly, however, Shariah-compliant banks target customers on the low-end of the income curve; 90 percent of Al-Rajhi’s retail depositors, for example, are low to mid income earners and hence the opportunity cost, in absolute terms, is limited even in the case of a spike in interest rates.”
On a YTD basis, the daily average value traded in the local equity market is up 98 percent YoY to SR8.7 billion and is 130 per- cent higher from the corresponding period in 2011. NCB Capital expects the TASI to sustain increased level of activity for 2012, supporting a 21 percent sector growth in fee income. According to the report, NCB Capital prefers stocks of established players such as Al-Rajhi, Samba and Riyadh Bank due to their attractive valuations and their ability to take advantage of the opportunity in the retail segment. “These names also stand to benefit most from the strong equity market activity. We downgrade Saudi Investment Bank and Arab National Bank to neutral from overweight” Miah concluded.
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