Gulf Islamic banks are surging ahead of conventional banks
Profitability seen converging as they take relatively larger hit from lower interest rates
Dubai: Islamic banks in the Gulf Cooperation Council (GCC) are growing faster than their conventional counterparts and their share of GCC banking assets are surging ahead for the foreseeable future, Standard & Poor’s Ratings Services said on Tuesday.
The rating agency has attributed the increase in asset growth to overall supporting environment for Islamic banks in the GCC.
“We believe that GCC Islamic banks have grown very fast because of significant direct and indirect support from governments, ruling families, and authorities, and we expect this support to continue. For example, the granting of banking licenses is a discretionary power of the state authorities, and most of the new banks in the GCC region are Islamic,” said Timucin Engin, Associate Director, Ratings Analytical Financial Institutions.
In the recent years governments in the region have been allowing conventional banks to change into Islamic ones — Bank of Kuwait & The Middle East in Kuwait, and Sharjah Islamic Bank and Dubai Bank have all done this.
Government involvement has been particularly strong in Qatar, where the Central Bank banned conventional banks from having “Islamic windows.” The Qatari authorities also structure a large part of their infrastructure funding to be sharia compliant to allow Islamic banks to participate in these projects.
“The regulatory support and direct and indirect government support to the sector have helped it to grow at a faster rate the recent years. We expect such support to remain strong during the foreseeable future,” said Stuart Anderson, Regional Head of Middle East at S&P.
According to S&P analysts, the GCC Islamic banks outgrew their conventional peers between 2009 and 2012. Their asset bases showed a compound average growth rate of 17.4 per cent compared with conventional banks’ 8.1 per cent, while their net lending and customer deposits grew by an average of 18.2 per cent and 19.9 per cent compared with conventional banks’ 8.1 per cent and 10 per cent.
GCC Islamic banks’ overall credit growth is expected to remain strong over the medium term, with Saudi and Qatari Islamic banks accounting for a big chunk of the increase because of their planned infrastructure investments.
Despite the exceptionally supportive operating environment and strong asset growth analysts expect profitability rates of the two banking models to converge as Islamic banks are taking a relatively larger hit from lower interest rates and decline in non-core banking revenues than their conventional peers because they traditionally operate with larger bases of non-interest bearing deposits.
“Low interest rates and lower capital market-related gains than 2008 pre-crisis levels are impairing revenue growth for most Islamic banks in the region, leading to profitability convergence with their conventional peers. Unless we see a cycle of higher interest rates that would help Islamic banks to expand their net interest margins, we expect to continue to see convergence between conventional and Islamic banking returns in the GCC over the next few years,” said Engin.
