Dubai: The Islamic banking sector continues to outpace growth of conventional banking in key markets, often supported by proactive regulations and strong retail customer demand, according to rating agency Moody’s.

“Despite slowing, growth in the Islamic banking sector continues to broadly outpace that of conventional banks in most systems where Islamic banks have been established. This is driven by strong retail demand and proactive government legislation,” said Khalid Howladar, Global Head of Islamic Finance at Moody’s.

Analysts say the broader slowdown in growth, reflects more challenging economic conditions across a number of core Islamic markets — particularly in the GCC countries due to lower oil prices. Despite the current challenges the sector still has potential for further growth, especially in countries such as Oman, Turkey and Indonesia where the penetration of Islamic financing assets remain relatively low (between 5 and 10 per cent) and there are recent initiatives supportive of the growth of this industry.

In Turkey and Indonesia Islamic banks have historically struggled to push beyond 5 per cent of banking system financing in the absence of any significant regulatory support, and despite the introduction of Islamic banking in these countries more than two decades ago.

In Turkey, while the sector’s overall share of the banking market has dropped due to the troubles of Bank Asya, the creation of new government sponsored Islamic “participation” banks with vast customer reach is expected to double the size of the sector over the next five years.

Public financing

In Indonesia, an ambitious, wide-ranging government master plan will drive growth, despite a shortfall of human capital. The recent announcement that 50 per cent of all public financing will be Sharia compliant in the next 10 years provides a massive, state-sponsored boost to the sector. Both countries have significant pent-up demand for Sharia-compliant financial services especially among the relatively under-banked rural populations, who seek products that are more aligned with their ethical and moral principles.

Among the GCC countries, Oman a relatively new entrant in the sector has been highly successful in achieving a high level of Islamic banking penetration higher than countries with a far longer history of Islamic finance. Despite only permitting Islamic financial services since the end of 2012, the sector has since seen the creation of two new stand-alone Islamic banks and six Islamic ‘windows,’ in conventional banks. The sector has gone from zero to an aggregate of around 10 per cent of banking system financing assets as of June 2016 compared to Indonesia and Turkey which have around 5 per cent of banking system financing assets penetration. This has been a result of a government strategy that has allowed conventional banks to offer Islamic services, thereby leveraging existing banking infrastructure to drive broad customer penetration.

“The rapid growth of Islamic banking in Oman shows the pent-up demand for such services and, crucially, the effectiveness of government support and regulation in acting as a catalyst for growth,” said Howladar.


Factbox: Growing market share

Across the GCC the Islamic banking sectors have been experiencing growth in their respective market shares with the lone exception of Kuwait

Growth of Islamic financing in Kuwait remained low at around 5 per cent in 2015, and broadly in line with conventional banking. Bahrain, too, shows comparable growth levels to conventional peers.

In the UAE, Islamic financing assets are now estimated to represent almost 30 per cent of the system, up from around 20 per cent in 2010. The strong expansion has been mainly achieved by the rapid growth of Islamic windows through which conventional banks have captured new market shares and clientele in recent years.

In Saudi Arabia — the largest Islamic banking market in terms of — even conventional banks have Islamic products and as a result the sector is estimated to represent more than 50 per cent of financing assets. Stand-alone Islamic banks in Saudi Arabia have enjoyed double-digit growth rates between 2010 and 2015, achieving notable market share gains at the expense of their conventional peers.