Interpreting Middle East Economic News and Analyzing Market Trends

Islamic banking assets grow faster than conventional banking assets

Islamic banks, which also suffered during the financial crisis, are back on track and growing faster than their conventional counterparts.  Though still small by global standards, Islamic banking assets topped $1.55 trillion for the first time in 2012.  Here’s more from Arab News:

Islamic banking assets with commercial banks in the GCC* reached $445 billion at the end of 2012, up from $390 billion in 2011, with the outlook for the industry remaining relatively positive in 2013.  This represents a 14 percent year-on-year growth, which is considerably lower than the five-year average of 19 percent.

According to estimates by Ernst & Young’s Global Islamic Banking Center, Qatar was the fastest growing market where Islamic banking assets are expected to have grown by more than 23 percent during 2012.  While Islamic banking assets with commercial banks in the GCC grew by 14 percent in 2012, conventional banking assets grew by only 8.1 percent — indicating the relative resilience and potential of the industry.

In comparison to their conventional banking peers, Islamic banks remain technologically disadvantaged as software systems are primarily designed for financial institutions based on conventional banking frameworks.  While the industry regulators are looking to tackle this issue, it remains a concern for the industry leading to significantly higher operational and commercial risk.  In Oman for example, the Islamic banking regulatory framework has recently been introduced, requiring Islamic banking institutions to ensure that all core banking systems are certified as Shariah-compliant.

Read the full article from Arab News.

There are two factors contributing to the faster growth of Islamic banks.  First, Islamic banks tend to have a loyal client base and are attracting new clients faster than conventional banks.  Second, countries which once didn’t allow Islamic banks or restricted them are now opening their doors.  Egypt, Libya, Oman, Tunisia and Turkey are now jumping into Islamic banking.

Islamic banks have their challenges, one of which was mentioned above.  They also face mounting issues on what to do with their interest-free cash and where to park it.  On the customer side, one of their biggest complaints is the lack of investment products.  With these challenges in mind, we still expect Islamic banks to continue to outpace conventional banks for the next few years.

 

*Gulf Cooperation Council (GCC) countries include Bahrain, Kuwait, Qatar, Oman, Saudi Arabia and the UAE.