Islamic banks grow but may miss out on global footprint
Islamic bank revenues are also underweight on trade finance and lending to medium-sized businesses
Islamic banking is growing faster than its conventional counterpart but is focused in a few core markets and risks missing an opportunity to build a global footprint, the EY consultancy said in a report on Tuesday.
Islamic banks across six core markets of Qatar, Indonesia, Saudi Arabia, Malaysia, the United Arab Emirates and Turkey held $625 billion at the end of 2013 or 80 percent of the global Islamic finance market, the report said.
The figure was 95 percent when Bahrain, Pakistan and Kuwait are included. Estimates exclude Iran which has a distinct model for Islamic finance, which follows religious guidelines such as a ban on interest and on pure monetary speculation.
The report estimated the combined Islamic banking assets in the six core markets will reach $1.8 trillion by 2019, buoyed by growth which has been 1.9 times faster than that of conventional banks over the 2009-2013 period.
The six core markets now comprise 82 percent of the global industry, and this could rise even further, said Ashar Nazim, a partner at EY's global Islamic banking center.
"As the populous centers of Turkey and Malaysia gain momentum and Saudi banks continue their transformation to sharia compliance, we expect the market share to account for between 80 percent to 90 percent of the global market."
Beyond these markets, the industry is expected to make some gains in Egypt, Pakistan and North African countries such as Tunisia, Algeria and Morocco, Nazim added.
"However, in the absence of regulatory reforms and strong sovereign support, the pace of growth is likely to be moderate."
Islamic bank revenues are also underweight on trade finance and lending to medium-sized businesses, two core areas in fast-growing emerging markets. According to EY, 10 of the 25 high-value emerging markets are core Islamic finance markets.
"This is a once-in-15-year-opportunity to capture the share of this evolving trade market for younger Islamic banks," Nazim said.
Entry into such markets would allow Islamic banks to build much-needed scale, but many lack the expertise and risk appetite to venture abroad, which has in turn affected profitability.
Average return on equity for a sample of the top 20 Islamic banks was 11.9 percent over a five year period, compared to 14.5 percent for a sample of 20 conventional banks, the report said.
The top 20 Islamic banks were roughly a quarter the size of their conventional peers.
Pakistan central bank to phase in new Islamic financeThe initiatives are part of an ambitious five-year plan by the regulator to promote Islamic finance Banking & Finance
Malaysia’s Bank Islam sets up $307 mn Basel III sukuk programMalaysia’s Bank Islam becomes the latest Asian bank to use the structure to boost regulatory capital Banking & Finance
Egypt expects $425 mln from Islamic Development BankThe Islamic Development Bank is an international financial institution that funds development projects in Muslim countries Banking & Finance
Basel III deposit challenge looms over Islamic banksMost of the banks are from the Gulf and southeast Asia, where economies are strong Banking & Finance
Strong lending growth drives up Qatar Islamic Bank’s Q2 profitThe Islamic lender made a net profit of 389.6 million riyals ($107 million) during the three months to June 30 Banking & Finance
Islamic banking rebrands in attempt to go mainstreamIslamic banking is based on core principles of the religion. So it is striking that some banks are removing the word "Islam" from their names Banking & Finance
Kazakhstan eyes ‘unified’ Islamic banking law next yearKazakhstan will start drafting a new Islamic banking law to help the industry develop in the former Soviet state Asia