Global Islamic banking assets are expected to reach $1 trillion by the end of the year as Sharia-compliant financing increases market share in emerging markets, according to the consultancy firm EY.
Sharia-compliant assets of commercial banks in Qatar, Indonesia, Saudi Arabia, Malaysia, the UAE and Turkey are set to exceed $801 billion in 2015, representing 80 per cent of international banking assets. Islamic banking assets are continuing to grow at a rate of 16 per cent per year and by 2020, the global Islamic banking industry profit pool is expected to reach $30.3bn, EY said.
“With the exception of Turkey and Indonesia, Islamic banking has gained market share in all markets, demonstrating the immense success and resilience of the industry,” said Gordon Bennie, financial services leader for the Middle East and North Africa at EY.
“Twenty-two international Islamic banks now have $1bn or more in shareholder equity, making them better positioned to lead the future regionalisation of the industry,” he said. “In relative terms however, they are still only one-third of the size of their largest traditional peers in home markets and also lag in terms of return on equity.” Islamic finance is especially picking up in the corporate world, where demand for sukuk, or Islamic bonds, has been on the rise in the Middle East in recent years as regional companies seek to expand their investor base around the world in countries such as Malaysia, which is the world’s biggest issuer of sukuk.
In the UAE, Islamic banks, including Dubai-based Noor and Abu Dhabi Islamic, have been growing at even higher rates amid a boom in sukuk financing. Last year, GCC sukuk issuances exceeded $20bn, and increase of more than 25 per cent compared to the same period in 2013, the rating agency Standard & Poor’s said. Globally the sukuk market grew more than 5 per cent last year.
On the individual customer front, retail banking has also been making headway. For years Islamic lenders have faced the challenging task of making Sharia-compliant lending, where interest is banned and banks offer “profit” rates instead, more palatable to the large non-Muslim population that resides in the UAE. And while the share of Islamic banking in the UAE is poised to grow to 50 per cent of the whole market by 2020 from the current 20 per cent, on a global scale the penetration of Islamic lending is negligible at 1 per cent.
EY said, however, that the next big challenge for Islamic banks will be to go digital, offering more services online than they do at the moment. Customers around the world are increasingly choosing to bank with lenders that offer the most access online.
“There is still a lot of opportunity,” said Ashar Nazim, partner at EY’s global Islamic banking centre. “The industry today is yet to reach 100 million customers. The potential captive market is six times bigger, but requires a different banking model. A digital-first strategy has to be the stimulus for Islamic banks to sign up the next 100 million customers over the next decade.”
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