Muslim countries in Central Asia and Indonesia are seen as the next growth areas for the Islamic finance industry after hopes of expansion into Western markets faded and Gulf Arab markets remain fragmented.
Islamic banks are struggling to expand within the Gulf Arab region that due to shareholders’ sensitivities, a lack of transparency and national interests has seen hardly any acquisitions, forcing them to look elsewhere for growth.
Banks have eyed Muslim minorities in Western countries such as France, the United Kingdom and Germany, but without proper regulatory support these markets will take time to penetrate and earlier hopes for Western issuance of Islamic bonds have faded.
“For many years it’s been viewed as an area with potential but realizing that potential is a lot more challenging than institutions realized,” said Frederick Stonehouse, head of strategic M&A at Bahrain’s Unicorn Investment Bank, said at the Reuters Islamic Banking and Finance Summit in Bahrain.
Some of the Islamic banks in the UK are seen as mere offsprings of the real estate-focused business model Islamic investment houses have used in the Gulf Arab region, and have failed to gain traction.
The former Soviet republics with Muslim populations and regulators that are keener to breed the industry are seen as an alternative for Gulf Arab banks, with regional delegations flocking to recent Islamic finance conferences held in the Gulf.
The Bahrain-based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) told the summit that Russia is considering adopting its standards.
“Kazakhstan will be leading partly because within the region it’s a strong financial player,” said Safdar Alam, head of Islamic structuring at JP Morgan. But bankers also caution that investors might be put off as the Central Asian state’s once-booming financial sector was hit hard by the global crisis with four lenders going into default last year citing asset quality problems and, in some cases, management fraud. Some also say that the banking markets in these countries are too small to accommodate everyone.
“What’s the size of the wallet there? I think there’s much better home runs to make than that one,” said Simon Eedle, head of Islamic banking at Credit Agricole Corporate Investment Banking, adding that he sees North Africa, in particular Egypt and Morocco, as the next markets the industry should tap.