Global Islamic banking assets expected to hit USD 1.6 trillion by 2018

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  • QISMUT countries to be attractive prospects
  • Connectivity, the key to sustainable growth
  • Customer relationships will act as a key differentiator
  • Operational transformation provides long-term value

Kuala Lumpur,  6 January 2014 – Rapid growth markets (RGMs) Qatar, Indonesia, Saudi Arabia, Malaysia, United Arab Emirates and Turkey, recently known as “QISMUT”, are expected to see their collective Islamic banking assets reach an estimated US$1.6 trillion in 2018, according to EY’s latest report World Islamic Banking Competitiveness Report 2013 – 14: The transition begins.

With expanding economies and a fast-growing customer base for financial services, QISMUT is fast becoming an attractive prospect for any bank looking to grow its revenues, having commanded 78% of the international Islamic banking assets in 2012 and growing at a five-year CAGR of 16.4%. By 2018, these RGMs are also envisaged to represent GDP of US$ 4.8t with a mostly young population of around 419m, making them the drivers of the next wave of development for the industry.

Ashar Nazim, Global Islamic Banking Center Leader at EY says, “These markets are vital to the future globalization of the Islamic banking industry. They’re home to 17 of the top 20 Islamic banks and to the global standard-setting bodies. They also hold the largest pool of financial and intellectual capital that will drive development across Islamic banking’s existing and new markets."

Of the 78% of the total international Islamic banking assets, Malaysia contributed 22% or US$125 billion worth of Islamic assets with a 20% market share, and is further expected to grow to more than US$390b by 2018. 

Dato’ Rauf Rashid, EY Malaysia’s Country Managing Partner and Islamic Finance Leader says, “The introduction of the Islamic Financial Services Act 2013 has set Malaysia apart from other markets by providing greater regulatory clarity to the industry. Malaysia is considered one of the key reference centres and is expected to provide leadership for the next phase of the industry’s progress.”

Connectivity, the key to sustainable growth

Internationalization is an important growth driver, with RGMs accounting for 38% of world consumer spending and 55% of fixed capital investment. By 2030, their share of exports is envisaged to approach 20% or double that of advanced economies. This shift in trade patterns is decisively in favour of QISMUT, who is positioned as a major beneficiary with an expected increase of 49% in trade volume in the current decade.

Islamic banks with strong connectivity across these key markets and with links into the world’s growth engines including China and India, are set to gain. Investing in specialized trade finance centres, product innovation based on different Islamic contracts, and regulatory compliance are key to creating a synergy of expertise to address pent-up demand across new segments and markets, and to make it easy for customers to understand and execute transactions across various jurisdictions.

Rauf says, “The on-going liberalization of the financial sector is creating opportunities for partnerships between Malaysian and global banks, particularly those in the Middle East. This may become a key driver for East-to-East linkages, promoting trade and increasing the size of the global Islamic finance industry.”

Customer relationships will act as a key differentiator

Presently, Islamic banks serve close to 38 million customers globally, two-thirds of whom reside in QISMUT. With several leading Islamic banks doubling in size every four years, many are now facing capability constraints and a growing concern about knowing their customers and their clients’ businesses better.

Segmentation and the development of profitable and relevant product suites are important considerations in addressing these concerns. While these are not new concepts, leveraging on advancement in data gathering and analysis through the introduction of data warehouses, customer profiling, customer insights and propensity modeling would give Islamic banks the opportunity to get closer to their present customers as well as attract new ones.

Rauf comments, “With 91% of Malaysians multi-banking, we expect banks to embark on further customer segmentation and investment in customer loyalty schemes. Bridging the gap between the strategy, sales and product teams will be necessary to build a collaborative management model focused on improving profitability through cross-selling.”

Operational transformation provides long-term value

Islamic finance markets are far from homogenous – customer attitudes, regulations and profitability vary significantly from market to market, and a major challenge for Islamic banks is adjusting to varying propositions, operating models, systems, tools and processes to understand and fully capitalize on the international opportunities available.

Continued focus on growing scale and operational transformation programmes has the long-term potential to close the profitability gap between Islamic banks and conventional banks. Many Islamic banks are already in the process of replacing or upgrading their core banking systems, and should benefit from improved operations in the future. Capital planning, in view of Basel III and IFSB guidelines, is also influencing the preferred business mix towards better profitability. Most Islamic banks also believe that digital and mobile banking adoption will grow beyond payments to more complex savings and financing products.

Ashar concludes, “The future success of Islamic banks in diversifying to build regional and global brands will be measured less by growth of assets and more by quality of growth. Excellence in customer focus, operational transformation and expanding international reach is key to moving from merely providing a service to long-term, sustainable growth.”

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