Global Islamic banking assets held by commercial banks are set to cross $1.8 trillion in 2013, up from the $1.3 trillion of assets held in 2011.This forecast is significantly higher than some of the earlier industry estimates.
Globally, the Islamic banking industry continues to record robust growth, with the top 20 Islamic banks registering a growth of 16% in the last three years and Saudi Arabia emerging as the largest market for Islamic assets.
“The top 20 Islamic banks hold 57% of the total global Islamic banking assets and are concentrated in the seven core markets for Islamic banking which include Saudi Arabia, Kuwait, UAE, Bahrain, Qatar, Malaysia and Turkey,” Ashar Nazim, Partner, Global Islamic Banking Center of Excellence at Ernst & Young, said.
Egypt has been actively investigating issuing sovereign Sukuks as well as the development of new regulatory framework for Islamic banks, as several banks in Egypt are expected to launch Shari’a compliant products.
Iraq is contemplating Islamic banking legislation while Libya prepares to implement its Islamic banking framework.
A number of both established and new banks are considering introducing Islamic banking operations in these markets – highlighting the continued growth and development of Islamic banking throughout the MENA region.
“Ten of the world’s 25 Rapid Growth Markets (RGMs) have large Muslim populations and present significant growth prospects for Islamic banking. The fast growth economies now form almost half of the global GDP and remain the main contributors to overall global growth. The outlook for Islamic banking in these markets is bright,” Gordon Bennie, Partner, MENA Financial Services Leader at Ernst & Young, said.
Despite the projected asset growth and the introduction of new Islamic initiatives in a number of countries, the profitability of Islamic banking continues to lag behind that of conventional banking in the same markets. Over the period 2008-2011, the leading ROE for Islamic banking was only 11.6%, against 15.3% for conventional banking. Islamic banks continue to face a number of issues affecting the profitability of the industry. These include sub-scale operations, a very basic risk culture, incomplete market segmentation, limited engagement with clients, and an absence of technologically oriented value propositions.
These issues have prompted several institutions to initiate wide-ranging transformation programs that we believe will see the industry take the next step in its evolution from being a niche market to a profitable, service-orientated industry attracting customers for product innovation and value-added services.
“Discussions with management and boards of leading Islamic banks suggest that major transformation is happening around Regulations, Risk and Retail Banking or the 3 R’s. These 3 R’s of transformation are geared towards efficient capital planning, risk modeling, mitigating Shari’a risk and building customer centric organizations. There are also meaningful developments on the regulatory front although a lot more needs to be done to create the right enabling environment for Islamic banks to implement the reform agenda,” Ashar, added.
With the successful implementation of these transformation agendas over the next two to three years, Islamic banks are aiming to close the performance gap that currently exists with the overall banking industry. According to Ernst & Young’s report, successful transformation could see the profit pool of Islamic banks rise by an additional 25% by 2015.