Dubai: The Islamic finance sector had a mixed record of growth in assets and a steep decline in profits during the global credit crisis last year compared to 2008, according to a McKinsey and Company study issued last week in Bahrain.
Obtained exclusively by Gulf News, the authors of the report titled Global Competitiveness Landscape of Islamic Finance, showed that while profitability of all banks declined, the fall has been steeper for Islamic banks, largely due to higher provisions and lower investment income.
Higher investment losses are partly due to banks' greater exposure to risky assets such as real estate.
That has been true for all the key markets, including a dip in 2009 of 49.8 per cent in the UAE, 16.2 per cent in Saudi Arabia, 39.7 per cent in Qatar, 88.9 per cent in Kuwait. Outside the GCC, profits declined 33.3 per cent in Malaysia and 73.3 per cent Indonesia.
In the UAE, Kuwait and Qatar the profitability of Islamic banks fell below that of conventional banks for the first time and that, co-authors Amer Afiouni and Ozgur Tanrikulu, who jointly co-lead McKinsey's Islamic Banking Practice, say is due to the banks not being able to command sufficient pricing premiums or access to low-cost funding to cover their higher expenses.
However, there are some positives as the global recovery continues. Islamic banking assets, according to the co-authors, have exhibited positive momentum across all the major markets, including in the region with the overall assets growing globally at 12 per cent from 2008 to 2009.
"Although Islamic banking asset growth has declined in recent years, it continues to outpace overall banking assets and GDP growth," the authors added.
"As a result the Islamic banking market share has increased across key geographies, including the UAE, Kuwait and Qatar.
Between 2003 and 2009, compound annual growth rates in Islamic banking assets in Qatar have been 50 per cent, in Kuwait 23 per cent, in the UAE 38 per cent, in Malaysia 23 per cent, in Indonesia 43 per cent and in Turkey 42 per cent.
The authors, by way of recommendations, suggest that the Islamic banks, in order to meet the current market expectations and capture new pockets of growth, will have to improve operational performance.
One potential scenario in their study suggests that Islamic banks could double profits in the next five years via operational improvements and new growth opportunities.
And for achieving the targets in both these areas, they have much to learn from conventional banks, they say.
"Most Islamic banks lag behind conventional banks on non-performing loans (NPLs), investment write offs and operationals costs," Afiouni and Tanrikulu say. In fact from operational improvements alone excluding any growth, there is up to $15 billion (Dh55 billion) of additional profits available for the Islamic banks.
Further, they say that profits may be captured through growth opportunities in market segments or products under-penetrated by the Islamic banks. Those segments include affluent banking, wholesale finance and emerging regions.