Dubai: The UAE’s sharia-compliant banking assets crossed $100 billion (Dh367 billion) this year as the UAE’s Islamic banking sector became a major contributor to global Islamic finance industry, according to Ernst & Young’s (EY) World Islamic Banking Competitiveness Report 2014-15.
Islamic banking assets with commercial banks in international markets are set to exceed $778 billion in 2014. Global Islamic banking assets witnessed a compound annual growth rate (CAGR) of around 17 per cent from 2009 to 2013.
Approximately 95 per cent of international Islamic banking assets of commercial banks are based out of nine core markets, five of which are in the GCC such as Saudi Arabia, the UAE, Qatar, Kuwait and Bahrain.
The market share of Islamic banking assets in Saudi Arabia, the UAE, Qatar, Kuwait, Bahrain and Malaysia is now between 20 per cent and 49 per cent. The analysis excludes Iran.
Islamic banks in Saudi Arabia, Kuwait and Bahrain represent more than 48.9 per cent, 44.6 per cent and 27.7 per cent market share respectively. Positive progress has been has made in Indonesia, Pakistan and Turkey, with 43.5 per cent, 22 per cent and 18.7 per cent CAGR respectively from 2009 to 2013.
“The six rapid-growth markets (RGMs) — Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey (QISMUT) — commanded 80 per cent of the international Islamic banking assets at $625b in 2013. Islamic banking assets in these markets are expected to continue to grow at a five-year CAGR of 19 per cent to reach $1.8 trillion by 2019,” said Gordon Bennie, Middle East and North Africa Financial Services Leader at EY
Despite the strong asset growth, the EY study finds that the returns on equity of Islamic banks remain approximately one-fifth lower than those of traditional banks in the same markets. This performance gap could cost its shareholders, and to some extent the investment account holders, up to $17 billion in total forgone profit over the next five years. Structural transformation and scaling up is therefore becoming extremely critical to improve shareholder returns.
Saudi Arabia and Malaysia, and increasingly Turkey and Indonesia, will drive the future of the industry. Trade finance, mobile payment solutions and managing the cost of regulatory compliance will drive the next phase of profitability. Most Islamic banks remain underweight when it comes to their role in trade finance business.
“The key driving markets for Islamic banking will continue to be Saudi Arabia and Malaysia, with Turkey and Indonesia also establishing themselves as large Islamic banking centers. With increasing market size and greater propensity for the adoption of technology-based, customer-centric solutions, the industry can be expected to further reduce its profitability gap with respect to conventional benchmarks,” said Ashar Nazim, Global Islamic Finance Leader at EY.
