Dubai: Islamic banking's market share of all banking assets in Gulf crossed the 25 per cent threshold in 2011, according to Ernst & Young's inaugural World Islamic Banking Competitiveness Report 2011 published on Tuesday.
Islamic banking assets with commercial banks globally are expected to reach $1.1 trillion next year, a 33 per cent jump from $826 billion in 2010.
Islamic banking assets in the Middle East and North Africa (Mena) increased to $416 billion in 2010, a five-year compounded annual growth rate of 20 per cent compared to less than nine per cent for conventional banks. Currently the segment has a market share of 14 per cent in the region.
The report expects Mena Islamic banking assets with commercial banks to more than double to $990 billion by 2015 as Islamic banks compete for mainstream customers who are open to Islamic or conventional banking.
"Competing for mainstream customers is not all about products; banks need to think about service as being the differentiator. People will pay a small premium if they know their needs will be met. The fact of the matter is that you will see customers going for the best bank in town, not the best conventional or Islamic bank in town," said Ashar Nazim, Mena Islamic Financial Services Leader, Ernst & Young.
The recent regime changes and move towards opening up of regional economies are expected to improve regulatory change. Ernst & Young expects these changes to help the expansion of Islamic banking across the region.
Newly opened markets in the region are expected to give a big boost to the industry. Analysts expect a potentially $6 billion to $10 billion Islamic banking market could emerge over the next five years in Oman, as the first two licences have been awarded. In Turkey the market is worth an estimated $25 billion, growing at an annual rate of 30 per cent plus for the 2006-2010 period.
The combined Mena Islamic banking profit pool is expected to rise to $15 billion-$19 billion in 2015 from the 2010 levels of $5 billion-$6 billion, primarily by combining operational transformation with a more robust risk infrastructure.
"Ensuring sustainable growth will require brave, meaningful and decisive performance improvement initiatives. CEOs and boards appear keen on transforming operating models for quality growth," said Gordon Bennie, Mena Financial Services Leader, Ernst &Young.
The report cautions that the Islamic banking industry is still fragmented with most Islamic banks holding less than $13 billion in assets and are yet to achieve scale as they face pressure on profitability.
"Islamic banks have been severely impacted by the drop in asset values for real estate. Our report shows the deposit concentration in real estate by Islamic banks has been 50 per cent more than conventional banks. The easy answer is to reduce this deposit concentration but this requires product innovation and specialism in sectors that are currently not serviced," said Nazim.
Sovereign funds on radar
Countries belonging to the Organisation of Islamic Conference (OIC) offer huge opportunities for market expansion by Islamic banks. The best way to take advantage of them, according to Ernst & Young, is by establishing Islamic sovereign wealth funds (iSWF).
"Most Islamic banks remain localised to their GCC base which makes it very difficult to get a holistic picture of emerging markets and opportunities. iSWF could provide this visibility very effectively. As the lead promoter, the iSWF would attract significant interest from other financial institutions, helping the industry grow in a sustainable way," said Ashar Nazim. Islamic SWF will help as they often invest for medium to long terms. Some of this could go into Islamic banks as well as other Islamic asset classes.