Manama - Financial markets with a significant Islamic finance sector are recovering faster at 5% growth compared with the global average of 3.5%, stated a new report produced in
collaboration with global management consultancy McKinsey & Company.
Despite Islamic banking assets growing at an average of 12% from 2008 to 2009, the profitabilityof Islamic banks in these markets has declined.
The authors recommend that Islamic
banks need to significantly improve operational performance and capture new pockets of growth to satisfy markets expectations.
The Islamic finance sector in the Gulf Co-operation Council (GCC) countries as well as key Islamic finance markets such as Malaysia have been able to stage a stronger recovery partly due to relatively stronger government support, the authors added.
There is widespread consensus on the sustainability of the recovery of GCC, comprising of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.
However, with due to the fragility and interdependency of the global recovery, this outlook may dampen, the authors added.
While Islamic banking asset growth declined in 2009 to 15% (compared to about 40% from 2005 to 2007 and about 27% in 2008), the sector still grew significantly faster than the share of overall banking assets which stayed flat, and nominal GDP which declined
As a result, the market share of Islamic assets as a share of overall banking assets continues to increase, the authors added.
However the same was not true for profitability of Islamic banks. While profitability of all banks declined, the fall has been steeper for Islamic banks, largely due to higher provisions and lower investment income, the authors said.
The profitability of Islamic banks in some key markets dipped for the first time below that of conventional banks, as banks have not been able to command sufficient pricing premiums or access to low cost funding to cover their higher expenses.
In order to meet current market expectations, Islamic banks will have to improve operational performance by learning from conventional banks and capture new pockets of growth, the authors stated.
Most Islamic banks lag behind conventional banks on nonperforming
loans (NPLs), investment write-offs and operational costs.
In fact, from operational improvements alone excluding any additional growth, there is up to USD 15 billion of additional net profits available for Islamic banks.
Further profits maybe captured through growth opportunities in market segments or products underpenetrated
by Islamic banks including affluent banking, wholesale finance and emerging
Other key findings from the report
• Islamic banking assets globally grew at a rate of 12% from 2008-2009.
• Key countries where Islamic Finance has captured meaningful share are estimated for real GDP growth of 5.2 percent and GCC countries at 5.7% in 2010, outperforming the rest of the world at 3.8 percent.
• Between 2003 and 2009, compound annual growth rates in Islamic banking assets in Qatar have been 50%, in Kuwait 23%, in the UAE 38%, in Malaysia 23%, in Indonesia 43% and in Turkey 42%.
• However, profitability in almost all key Islamic finance markets has declined between 2009 and 2008, falling by 49.8 % in the UAE, 16.2% in Saudi Arabia, 88.9% in Kuwait, 39.7% in Qatar, 33.3% in Malaysia and 73.3% in Indonesia.
• One potential scenario for the sector shows Islamic banks could double profits over the next 5 years my making operational improvements and seeking new growth opportunities.
• Islamic banks should explore to capture opportunities in underpenetrated segments and product including affluent customers and wholesale banking• Islamic banks can explore opportunities to expand internationally, which will allow
them to increase scale and diversify their asset bases.