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EY: GCC Islamic banking assets to hit $515bn

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The Islamic banking assets at commercial banks in the GCC are likely to surge to more than $515 billion by the end of 2013 from $452 billion last year led by the regional giant Saudi Arabia, according to a report.

The global Islamic banking assets banks reached $1.54 trillion in 2012, said Ernst & Young’s Global Islamic Banking Center in its report.

Saudi Arabia was the biggest market with an estimated $245bn in assets in 2012, followed by the UAE with more than $80bn and Qatar with $53bn.

“There are six markets that are systemically important to future internationalisation of the Islamic banking industry. They are Saudi Arabia, Malaysia, the UAE, Qatar, Indonesia and Turkey,” according to Ashar Nazim, Partner, Global Islamic Banking Centre of Excellence, E&Y.

This includes both Islamic banks and Islamic windows of conventional banks. The annual growth of the industry remains at 16 per cent (5-year CAGR) which is faster than the growth of conventional banking system assets in each of the core Islamic finance markets, it added.

“Of the top 15 Islamic banks with a capitalization of $1 billion or more, 13 of them are located in these rapid growth markets. With trade patterns shifting decisively in favor of these rapid growth markets, this is a huge opportunity for Islamic banks,” he stated.

E&Y said a common theme across leading GCC Islamic banks is the fundamental repositioning of their balance sheets and their business following the global financial crisis in 2008.

“Going forward, many Islamic banks are looking to expand regionally, where a sizeable amount of their revenues are expected to be generated from outside their local market,” it said.

Stressing that the progress of the industry is not without challenges, E&Y said large scale and technology-enabled transformation around customer centricity remains a critical consideration for Islamic banks which intend to become mainstream in their respective markets.

“The rapid growth of Islamic banks over the years has also been costly due to increased operational complexity as the banks transform from operating in a single market to becoming multi-jurisdiction businesses,” Nazim said.

These factors have had an impact on profitability, which despite gains, still remains approximately 18% lower compared to their conventional banking peers, he noted.

“A significant change is required to sustain and improve performance with regard to organisational capacity and the capabilities of the Islamic banks which intend to expand,” he said.

However, the industry however has recently experienced a slowdown caused by two major developments.

The continuing economic and political setbacks in some of the Islamic finance markets have adversely impacted overall business sentiments, including the financial services sector, said the E&Y report.

In addition, the large scale operational transformation that many of the leading Islamic banks initiated approximately 18 months ago, continue to consume time and investment, it added.

In the GCC, Saudi Arabia was the dominant player with an estimated $245 billion in assets in 2012, followed by the UAE whose Islamic banking assets, including windows were estimated at more than $80 billion and Qatar at $53 billion, said the report.

Going forward, many Islamic banks are looking to expand regionally, where a sizable amount of their revenues are expected to be generated from outside their local market, it added.

Nazim pointed out that the progress of the industry was not without challenges. “Large scale and technology-enabled transformation around customer centricity remains a critical consideration for Islamic banks which intend to become mainstream in their respective markets,” he noted.

The rapid growth of Islamic banks over the years has also been costly due to increased operational complexity as the banks transform from operating in a single market to becoming multi-jurisdiction businesses, said Nazim.

“These factors have had an impact on profitability, which although is improving, still remains approximately 18% lower than their conventional banking peers. A significant change is required to sustain and improve performance with regard to organizational capacity and the capabilities of the Islamic banks which intend to expand,” he added.

Qatar market upgrade to lure institutional investors: HSBC

Qatar’s recent upgrade to ‘emerging’ market from ‘frontier’ status will capture the attention of institutional investors in a big way and the 2022 World Cup will trigger $70bn of infrastructure spend, according to HSBC, a global banking giant. This was aired by Simon Williams, chief Middle East economist at HSBC, at the 16th Middle East economics road-show, which was held in Doha yesterday.

“Qatar is the fastest growing and richest country in the Middle East. It remains one of the strongest growth stories in the region, with the highest GDP (gross domestic product) per capita, some of the largest surpluses and the fastest growing non-oil sector,” he said.

Both MSCI and Standard & Poor-Dow Jones had recently upgraded Qatar into ‘emerging’ market from the ‘frontier’ status, a move that could enhance the foreign funds inflow into the bourse.

Williams, however, said transforming the country from a hydrocarbon economy to a knowledge economy in time for the post-oil afterlife is the “longer-term challenge”.

“But there is strong evidence of good progress being made,” he told the road-show, which was attended by more than 170 people.

Stephen King, HSBC Group chief economist, highlighted the prospects of the wider Middle East region. The (Middle East) region – which comprises more than 20 countries with a population of more than 400mn people – has the potential to become an emerging market leader and engine of world growth,” he said.

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