The report was launched on Wednesday during the 20th Edition of the World Islamic Banking Conference opened in Manama, Bahrain. In 2012, Islamic banking assets with commercial banks globally reached $1.54 trillion.
The report highlighted that the six rapidly growing markets i.e. Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey (QISMUT) constitute 78% of the international Islamic banking assets with commercial banks, excluding Iran.
This includes both pure-play Islamic banks and windows of conventional banks. There is also increased demand on established and new reference centers including Bahrain and Malaysia to provide leadership for the next phase of industry’s development.
“We believe that the future success of Islamic banks will be measured less by the growth of assets and more by the quality of this growth. Impact made through responsible banking, inclusive growth and alignment with the broader halal asset class will be the defining features. Also, trade patterns are shifting decisively in favor of rapid growth markets and QISMUT will be the major beneficiaries. Banks with strong connectivity across key markets and sectors are set to gain,” Gordon Bennie, Partner and MENA Financial Services Leader at EY, said.
QISMUT is home to 17 of the top 20 Islamic banks and the global Islamic banking standard setting bodies. QISMUT holds the largest pool of financial and intellectual capital of the industry that will drive the next wave of development across existing and new markets.
“Bahrain and the six rapid-growth markets are systemically important to the future globalization of the Islamic banking industry. We expect Islamic banking to grow at a CAGR of 19.7% across QISMUT to reach US$1.6 trillion by 2018 compared to US$567 billion in 2012,” Ashar Nazim, Partner, Global Islamic Banking Center at EY, said.
According to the report, Islamic banks today serve approximately 38 million customers globally, two third of whom reside in QISMUT. However, few Islamic banks are able to fully apply customer insights to innovate. Going forward, emphasis on customer excellence will be the key differentiator that will separate successful Islamic banks from others.
“Islamic finance markets are far from being homogenous as each market is at a different stage of maturity and profitability varies significantly compared to conventional banking. For 2012, the average ROE of the 20 leading Islamic banks was 12.6% compared to 15% for its conventional peers,” Ashar, added.
The reports revealed that many banks are currently in the process of replacing or upgrading their core banking system. Capital planning in view of Basel 3 and IFSB guidelines is already influencing the preferred business mix and more Islamic banks believe that the collaborations between mobile providers and banks will further accelerate the adoption of mobile banking beyond payments to more complex savings and financing products.
The biggest challenges for Islamic banks are how to become a mainstream form of banking in their home markets, diversification to build regional brands, and taking a more socially responsible approach to differentiate themselves from conventional banks. The growth of the industry is expected to remain moderate going into 2014, as several leading Islamic banks contemplate large scale operational transformation.
“Driving such a broad change program – combining cost improvement with revenue growth – requires exceptional leadership capabilities and significant management capacity. Moving forward, customer and technology will be among the top transformation themes for the global Islamic banking industry,” Ashar, added.