Islamic Finance

Islamic banks search for growth


With oil prices low and concerns about a slowdown in China gathering pace, the outlook for many Islamic financial institutions is rather worrying. The problems are perhaps most evident in the Gulf countries, where low oil revenues are leading to cuts in government spending and tighter liquidity, but slower economic growth is also on the cards for other Islamic finance strongholds in South and Southeast Asia.

In its Islamic Finance Outlook Report for 2016, launched at the World Islamic Banking Conference in Bahrain in December, consultancy firm Middle East Global Advisors described the growth prospects for Islamic finance in the next 12 months as “muted.” Its survey of Islamic finance executives found that 49 percent of them thought the low oil price would slow the growth of Islamic banking, while 21 percent cited interest rate volatility and 9 percent pointed to the slowdown in China as the biggest worries.

These concerns are understandable, particularly in regard to oil prices.

“Typically, when oil prices turn south then Islamic wealth creation globally tends to grow much more slowly,” says Jarmo Kotilaine, chief economist at Bahrain’s Economic Development Board.

None of these issues are likely to go away anytime soon. But despite all the difficulties, there is still plenty of room for growth, given the relatively small market share that Islamic financial institutions have in most countries.

GLOBAL ISLAMIC FINANCE ASSETS 2014 - 2020, in USD millions, e = estimate; p = projected
  2014 2015 (e) 2016 (p) 2017 (p) 2018 (p) 2019 (p) 2020 (p)
Islamic banking 1,345,891 1,507,398 1,688,286 1,890,880 2,117,786 2,350,742 2,609,324
Sukuk 295,094 309,849 325,341 341,609 358,689 376,623 395,455
Islamic funds 55,794 60,258 65,078 70,285 75,907 81,980 88,538
Takaful 33,390 35,394 37,517 39,768 42,154 44,683 47,364
Other 83,916 87,272 90,763 94,394 98,170 102,096 106,180
TOTAL 1,814,086 2,000,171 2,206,986 2,436,936 2,692,706 2,956,126 3,246,862

Source: ICD Thomson Reuters Islamic Finance Development Report 2015

 

ROOM FOR GROWTH

The ICD Thomson Reuters Islamic Finance Development Report 2015: Global Transformation predicts that the value of Islamic finance assets will rise from around $2 trillion in 2015 to more than $3 trillion by 2020, with most of that growth coming from Islamic banks.

Banks are targeting a diverse range of areas in pursuit of that growth. According to the Middle East Global Advisors survey, 46 percent of executives think that asset and wealth management services will be the biggest driver of bank revenue growth in the next three years, followed closely by investment banking (43 percent), commercial and industrial loans (40 percent), cross-selling of services (23 percent), and mortgages and personal loans (21 percent).

On a more tactical basis, the survey found that 21 percent of banks were looking at new product launches as their primary focus for growth in 2016, followed by 20 percent looking to expand their financing portfolio. In addition, 14 percent said they were targeting higher fee income and 13 percent said they were eyeing entry into new markets.

How banks approach the task of growth depends to a great extent on the conditions in individual markets. In some countries, there is a strong need for educating the local population first.

NEW MARKETS

In Kazakhstan, for example, the market is in its infancy. The first law regulating the sector was passed in 2009 and there is still only one provider in the market, a subsidiary of Abu Dhabi’s Al Hilal Bank, which set up operations in 2010. Perhaps unsurprisingly, 71 percent of people in Kazakhstan say they have never heard of Islamic banking, according to the Kazakhstan Islamic Finance 2016 report produced by Thomson Reuters. However, 46 percent say they would be interested in using Islamic banking services and products.

It is a similar situation in non-Organisation of Islamic Cooperation (OIC) countries. In Canada, for example, the major local banks have yet to become involved in Islamic finance domestically and no corporate sukuk has yet been issued.

The Canada Islamic Finance Outlook 2016 report from Thomson Reuters estimates that Islamic mortgage products alone could be worth $2.3 billion in the first year following their launch, rising to $17.7 billion in five years. Other areas that the report suggests look promising include mutual funds and takaful.

For the industry to meet its potential in the years ahead, it will need to move into new markets like these. But it will also have to develop its product portfolio within countries where it is already strong. In this second group of countries, the challenges are different but just as daunting.

“One third of the banking assets in the GCC are now Shariah-compliant,” says Ashar Nazim, financial services customer leader for the MENA region at consultancy firm EY. “That means that, going forward, Islamic banks will be competing head-on with big conventional banks. Many of these Islamic banks lack a distinct value proposition beyond Shariah-compliance. Therefore we expect strong headwinds.”

 

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Funds
Islamic banking
Sukuk
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Dominic Dudley