Global Islamic assets expected to reach US$1.8 trillion by 2013
- Top 20 Islamic banks have registered a growth of 16% per annum in the last 3 years
- Saudi Arabia is the biggest market for Islamic banking followed by Malaysia and UAE
- South Africa has made significant strides in the inclusion of Islamic Finance into its tax legislation with the relevant amendments expected to be effective from 2013
Global Islamic banking assets held by commercial banks are set to cross US$1.8 trillion in 2013, up from the US$1.3 trillion of assets held in 2011, according to Ernst & Young’s World Islamic Banking Competitiveness Report 2013.
Across Africa, the need for government Sukuks (Islamic Bond) has become more pronounced as in some instances banks are required to hold a certain percentage of interest bearing instruments. Islamic banks are prohibited from gaining from the yields that interest bearing instruments produce and consequently any interest received.
South Africa has made significant strides in the inclusion of Islamic Finance into its tax legislation with the relevant amendments expected to be effective from 2013. The obvious challenge remains around ensuring that a proper regulatory framework exists to facilitate both sovereign Sukuks and corporate Sukuks.
“The market currently has great interest in the sovereign Sukuk. Sukuks are seen to be attractive as a result of the foreign direct investment (FDI) that it would attract particularly from the Middle East where investors will seek Shariah compliant instruments”, says Emilio Pera, Financial Services Leader at Ernst & Young.
“Islamic finance continues to provide significant opportunities in Africa with Africa being home to more than 400 million Muslims. With the majority of the Muslim community being unbanked together with the need to attract foreign investment from Gulf Cooperation Council (GCC) countries who seek Shariah compliant investments, the market appetite for these products continues to grow. The introduction of Basel III and its more onerous liquidity and capital requirements will pose challenges for Islamic Banks and hence increased traction around regulatory reform to support these product offerings may be required to assist these banks to comply with the requirements of Basel III,” says Merisha Kassie, Director in Financial Services at Ernst & Young.
The strong global market growth forecast as outlined in Ernst & Youngs World Islamic Banking Competitiveness Report 2013, and the surge of activity in Africa with respect to the proposed issuance of sovereign sukuks in South Africa and other African countries support the growing momentum of Islamic Banking in Africa.
Globally, the Islamic banking industry continues to record robust growth, with the top 20 Islamic banks registering a growth of 16% in the last three years and Saudi Arabia emerging as the largest market for Islamic assets.
Top 20 Islamic banks hold over 50% of global Islamic banking assets
Ashar Nazim, Partner, Global Islamic Banking Center of Excellence at Ernst & Young, said: “The top 20 Islamic banks hold 57% of the total global Islamic banking assets and are concentrated in the seven core markets for Islamic banking which include: Saudi Arabia, Kuwait, UAE, Bahrain, Qatar, Malaysia and Turkey.”
According to the report, the Islamic banking industry in Saudi Arabia – with an estimated US$207 billion of Islamic assets – was ranked first in 2011. Malaysia ranked second with total assets of US$106 billion in 2011 and UAE ranked third with total assets of US$75 billion.
New markets on the horizon – Indonesia, Egypt, Iraq and Libya
Egypt has been actively investigating issuing sovereign Sukuks as well as the development of a new regulatory framework for Islamic banks, as several banks in Egypt are expected to launch Shari’a compliant products.
Iraq is contemplating Islamic banking legislation while Libya prepares to implement its Islamic banking framework.
A number of banks, both established and new, are considering introducing Islamic banking operations in these markets – highlighting the continued growth and development of Islamic banking throughout the Middle East and North Africa (MENA) region.
Gordon Bennie, Partner, MENA Financial Services Leader at Ernst & Young, said: “10 of the world’s 25 Rapid Growth Markets (RGMs) have large Muslim populations and present significant growth prospects for Islamic banking. The fast growth economies now form almost half of the global GDP and remain the main contributors to overall global growth. The outlook for Islamic banking in these markets is bright.”
Profitability still a challenge
Despite the projected asset growth and the introduction of new Islamic initiatives in a number of countries, the profitability of Islamic banking continues to lag behind that of conventional banking in the same markets. These issues have prompted several institutions to initiate wide-ranging transformation programs that will see the industry take the next step in its evolution from being a niche market to a profitable, service-orientated industry attracting customers for product innovation and value-added services.
Ashar continues: “Discussions with management and boards of leading Islamic banks suggest that major transformation is happening around the “three Rs” of transformation – regulations, risk and retail banking. The “three Rs” are geared towards efficient capital planning, risk modeling, mitigating Shari’a risk and building customer-centric organizations. There are also meaningful developments on the regulatory front although a lot more needs to be done to create the right environment to enable Islamic banks to implement the reform agenda.”
With the implementation of these transformation agendas over the next two to three years, Islamic banks are aiming to close the performance gap that currently exists with the overall banking industry. According to Ernst & Young’s report, successful transformation could see the profit pool of Islamic banks rise by an additional 25% by 2015.
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