Islamic banking is growing faster but is focused in a few core markets and risks missing an opportunity to build a global footprint, the Ernst & Young (EY) consultancy said in a report on Tuesday.
Islamic banks across six core markets of Qatar, Indonesia, Saudi Arabia, Malaysia, the United Arab Emirates and Turkey held $625 billion at the end of 2013 or 80 percent of the global Islamic finance market, the report said, according to a Reuters report.
The figure will rise to 95 percent when Bahrain, Pakistan and Kuwait are included. Estimates exclude Iran which has a distinct model for Islamic finance, which follows religious guidelines such as a ban on interest and on pure monetary speculation.
The report estimated the combined Islamic banking assets in the six core markets will reach $1.8 trillion by 2019, buoyed by growth which has been 1.9 times faster than that of conventional banks over the 2009-2013 period.
Global Market
The six core markets now comprise 82 percent of the global industry, and this could rise even further, said Ashar Nazim, a partner at EY's global Islamic banking center.
"As the populous centers of Turkey and Malaysia gain momentum and Saudi banks continue their transformation to sharia compliance, we expect the market share to account for between 80 percent to 90 percent of the global market."
Beyond these markets, the industry is expected to make some gains in Egypt, Pakistan and North African countries such as Tunisia, Algeria and Morocco, Nazim added.
"However, in the absence of regulatory reforms and strong sovereign support, the pace of growth is likely to be moderate."
Islamic bank revenues are also underweight on trade finance and lending to medium-sized businesses, two core areas in fast-growing emerging markets. According to EY, 10 of the 25 high-value emerging markets are core Islamic finance markets.
"This is a once-in-15-year-opportunity to capture the share of this evolving trade market for younger Islamic banks," Nazim said.
Entry into such markets would allow Islamic banks to build much-needed scale, but many lack the expertise and risk appetite to venture abroad, which has in turn affected profitability.
Average return on equity for a sample of the top 20 Islamic banks was 11.9 percent over a five year period, compared to 14.5 percent for a sample of 20 conventional banks, the report said.
The top 20 Islamic banks were roughly a quarter the size of their conventional peers.
Key Markets Go Mainstream
Islamic banks in some of the core markets for Islamic finance in the Persian Gulf Cooperation Council (PGCC) and Malaysia are emerging mainstream players with significant market share, according to EY, Gulf News reported.
The study shows that the market share of Islamic banking assets in Saudi Arabia, Kuwait, Qatar, Malaysia, the UAE and Bahrain is now between 20 percent and 49 percent. There are 21 Islamic banks around the world with more than $1 billion in equity, and at least one Islamic Bank with more than $10 billion.
Mainstreaming comes at a price. This year, EY analyzed user experience with regard to Islamic banks. “We looked at 2.2 million comments on social media across nine markets. It is quite obvious from the results that customers want more and better. And they are vocal and ready to switch should they not get their desired banking experience. Banks therefore need to listen, respond and adapt” said Ashar Nazim.
Islamic banks are expected to gain from a significant opportunity as the rebalancing of the global trade flows in favor of rapidly growing markets. But trade flows are concentrated in specific “corridors”, and trade services are complex and costly, in part, due to Basel III and know your customer (KYC) requirements.
Hence, it is important for Islamic banks to choose where to play, and where to deploy trade platforms that simplify supply chain process and reduce costs.
