The world’s 100 largest Islamic banks have outpaced conventional banks with an annual asset growth rate of 26.7 per cent, according to a new study.
The Islamic institutions reported a growth to nearly $350 billion (Dh1.28 trillion) in assets, beating the 19.3 per cent growth rate of mainstream banks, says the Asian Banker research group.
This growth rate is well above previous estimates of 15 to 20 per cent.“We’ve seen a rise in the number and size of Islamic banks across the world and they are growing popular in non-Muslim countries as well,” Asian Banker research manager Benny Zhang Wei told Emirates Business.
“I do not expect any slowdown in growth in the long term. There is enormous wealth coming from oil and gas in the Middle East and 1.5 billion Muslims worldwide make a good customer base.”
Dr Taha El Tayeb – who heads Mashreq’s Islamic banking division, Badr Al Islami, in the UAE – is a little cautious about the reported growth rate. “I’m a little surprised by the 26 per cent figure because I thought it was about 20 per cent,” he told Emirates Business.
“I believe this growth rate is sustainable in the short term but it may come down owing to the growing base of Islamic banking. Overall the prospects seem bright as a large number of corporates and family businesses in the region are moving to Islamic banking for religious reasons,” he added.
Zhang Wei said: “The potential [of Islamic banks] to eat into a conventional bank’s business model is huge and should not be underestimated. The threat will only get worse as Islamic banks grow organically or as a result of intensive mergers and acquisitions.”
Islamic banks’ expansion plans are paying off. The most successful international Islamic banking player, Albaraka Banking Group of Bahrain, is a good example. It has 11 Islamic banking licences in 10 countries in the Middle East, North Africa, South Asia and Europe.
Albaraka sources more than 90 per cent of its revenue from overseas – a ratio even higher than Citi’s, said Zhang Wei.
An analyst at Standard & Poor’s in Singapore believes that Islamic finance has reached a critical mass and the level of interest means it makes sense to reach out beyond the predominantly Muslim countries.
Asia is a lucrative market for Islamic banks. According to Merrill Lynch and Capgemini the total wealth of high-net-worth individuals in the Asia-Pacific region may grow by 8.5 per cent a year to $12.7trn by 2011, the second-fastest increase after the Middle East, making it highly lucrative for Islamic banks.
Islamic banks are performing well in financial centres such as Singapore and London where they are trying to earn oil and gas dollars by encouraging the handling of cross-border financial deals through Shariah-compliant instruments.
But despite the impressive growth of Islamic banking in recent years it remains a niche segment in the global financial services industry. The largest company in the Asian Banker’s list of the top-100 Islamic banks is Iran’s state-owned BMI, which has total assets of $39.4bn.
This is equivalent to the size of Chang Hwa Bank in Taiwan, the 75th largest bank in the Asia-Pacific region and 395th in the world, said the report.
In Malaysia, where the number of Islamic banking players has almost doubled and their aggregate size has more than tripled in the last two years, Islamic banks account for only 5.2 per cent of the country’s banking assets.
Even if Islamic banking services offered by conventional Malaysian banks were included, the percentage of financial intermediations handled in a Shariah-compliant manner would not exceed 10 per cent.
And even in more developed Islamic banking systems such as the UAE, Bahrain, Saudi Arabia and Kuwait, intermediation through an Islamic bank or Islamic windows of a conventional bank accounts for less than 50 per cent of the total, said the report.
The Middle East is a major player in Islamic banking. Of the top-100 Islamic banks worldwide, Iran dominates with 14 players, followed by Saudi Arabia, Malaysia and the UAE.
Top-ranked BMI and the other 13 Iranian state-owned and privately managed banks in the list hold aggregate assets of $162.2bn, accounting for nearly 50 per cent of the world’s 100 largest Islamic banks’ assets. Saudi Arabia’s Al Rajhi Bank is in second place.
The story of Islamic banks in Iran differs from other countries as most banks there are state-owned. Government efforts to transform all financial institutions into Islamic ones drove the intense growth of Iran’s Islamic banking system.
Banks were nationalised as early as 1979 and regulations changed with the approval of an Islamic banking law. In 1983 the country made a wholesale switch to Shariah-compliant Islamic banking.
Sudan followed a similar policy, adopting Islamic banking practices as early as 1990. Today all banks are Shariah-compliant and despite their small scale, 19 of them figure in the top 100.
Pakistan is a mixed bag as the banking sector still runs on the dual system of both Islamic and conventional practices. The Islamic banking sector is driven by the government but at a relatively slower pace than elsewhere, even though 97 per cent of the population is Muslim.
Saudi Arabia, a big player in Islamic banking, has only three banks in the list that are wholly Shariah-compliant – Al Rajhi, Al Bilad and Al Jazira. With an aggregate 10 per cent of the total assets, they make it to the first quartile of the top 100. As many as eight Saudi commercial banks have begun to make their deposit taking and financing Shariah-compliant.
In the UAE, Dubai Islamic Bank was set up in 1975 to drive the sector’s growth and is in seventh place. Abu Dhabi Islamic Bank is ranked tenth. A lot is expected from Noor Islamic Bank, which was established recently.
With a paid-in capital of $1.09bn, the bank is expected to become the world’s largest Islamic player within five years by acquiring other institutions in countries such as Indonesia and Egypt.
Abu Dhabi plans to launch another Islamic bank, Al Hilal, in June, taking the number of dedicated Islamic banks in the UAE to seven.
“Consolidation could be a possibility,” says Zhang Wei.