Dubai: After going through 7 years of uninterrupted asset and profit growth, Islamic banks are expected to face moderation on both fronts from next year, according to analysts at Standard & Poor’s.

From 2008, asset growth of Islamic banks in the GCC has outstripped their conventional peers. Currently, Islamic banks have a market share of about 25 per cent of the total banking sector assets in the region. Although, Islamic banking assets continue to grow ahead of conventional banking sector assets, the growth rate is seen moderating.

“Tightening liquidity situation in the GCC banking sector is expected to squeeze asset growth. On the liability side, funding is becoming tighter as growth in customer deposits too lost momentum in the first half of this year. The re-emergence of sovereign issues are having crowding out effect on private sector lending,” said Standard & Poor’s analyst Timucin Engin.

Losses to climb

Earnings growth was more resilient thanks to declining provisions, which helped offset slower growth in operating income. But analysts expect credit losses to start climb from the last quarter of this year.

“Over the past few years, GCC banks’ declining credit losses were a key driver of earnings growth and resilience in return on average assets. But after five years of decline, credit losses are set to rise for Gulf banks as they cope with slowing growth and capital market volatility,” Standard & Poor’s credit analyst Suha Urgan.

GCC banks generally operate with healthy liquidity metrics, but may come under pressure from what S&P analysts expect to be a visible change in the liquidity conditions in the Gulf banking markets next year.

Market funding is expected to become more expensive, by the looks of the Gulf’s two largest markets — Saudi Arabia and the UAE. In the GCC, customer deposits remain the main source of funding for banks, accounting for 70 per cent-85 per cent of the banking system’s liabilities. The market is already seeing weakness in deposits by governments and public-sector entities, as a result of lower oil prices. In the first half, government deposits declined 14 per cent in the UAE and 3 per cent in Saudi Arabia.