Islamic Banking -Challenges in 2020
Sharia-compliant assets worldwide rose by 8.05% over the 2018-19.
While Iran’s Islamic banking sector is the world’s largest, it remains (perhaps uniquely) susceptible to external shocks, with weak regulatory controls and a central bank that lacks independence being two examples of the challenges it faces.
GCC and the remainder of the Middle East registered single-digit growth in the 2018 rankings, the latter registered a 13.36% growth in assets in the 2019 rankings, spurred on by growth in markets such as Iran. While the GCC remains the largest global sub-region in terms of sharia-compliant assets, its growth in assets was a more muted 3.17%, a sign of both the region’s sheer size and its comparative maturity.
The dominance of the wider Middle East and North Africa (MENA) region is confirmed in the list of the year’s top 10 fastest growing fully sharia-compliant institutions with more than $500m in assets. Eight of the 10 are based in the wider region, and Iran’s Day Bank leads the way with a doubling of assets. Iran accounts for five of the 10 lenders in the ranking, with the UK’s Gatehouse Bank, Turkey’s Ziraat Katılım Bankası, and Faisal Islamic Bank and Farmers’ Commercial Bank, both of Sudan, the only institutions from outside the MENA region.
.After posting growth of 20.2% in the 2018 rankings (albeit off a small base), the Australia/Europe/Americas region’s sharia-compliant assets shrank 12.8% in this year’s review period, impacted by the economic crisis in the region’s largest market of Turkey. Its second and third largest sharia banks, Türkiye Finans Katılım Bankası and Albarakah Tur, saw their asset bases shrink by 13.7% and 16.7%, respectively, dragging down the region as a whole.
The Australia/Europe/Americas region still has plenty of potential, however, especially from the Commonwealth of Independent States (CIS). Moody’s Investors Service expects the CIS to register significant growth in the coming five years, thanks to the region’s large Muslim populations and improving regulatory and legal frameworks for Islamic finance in countries such as Kazakhstan and Kyrgyzstan.
Asia and sub-Saharan Africa have once again posted strong gains, from very different positions. Sub-Saharan Africa, previously the smallest Islamic banking region, saw its sharia-compliant assets grow 18.2% to $18.79bn in 2018-19, overtaking Australia/Europe/Americas in the process. Islamic banking is set to expand further in the continent, buoyed by large Muslim populations (many of whom remain unbanked) and the growing familiarity of governments with Islamic instruments, according to Moody’s.
In Africa as a whole, Morocco and Nigeria issued $105m and $327m of sukuk in late 2018-19, respectively, with the Moroccan issue more than three times oversubscribed. Egypt, Algeria and Sudan have all expressed interest in issuing sukuk, with Egypt setting up a sharia supervisory committee to oversee such issuances.
The trend is particularly pronounced in Sudan, with Faisal Islamic Bank and Farmers Commercial Bank ranking a respective second and sixth in the top 10 fastest growing fully sharia-compliant institutions with more than $500m in assets. Al Salam Bank of Algeria is third in the table, one of just three banks in the list that also featured in last year’s top 10, the others being Gharzolhasaneh Mehr Iran Bank and Ziraat Katılım Bankası of Turkey.
Asian sharia-compliant assets have increased by 14.7% to $341.1bn in the 2019 rankings. The region’s dominance is reflected in the list of the top 10 fastest growing Islamic windows with more than $500m in assets. While the United Arab Emirates’ First Abu Dhabi Bank tops the list, with BankDhofar of Oman coming in ninth place, the remainder of the rankings all stem from Asia; Pakistan and Indonesia each contributing three banks in the ranking, with the list rounded out by two Malaysian lenders.
Malaysia’s Islamic banking boom shows little sign of slowing, with seven of its largest banks posting double-digit sharia-compliant asset growth in 2018-19. The sector continues to benefit from the proactive approach of Malaysia’s central bank, Bank Negara Malaysia. It is working to standardize sharia contracts, to further ensure that Islamic banking products across the board adhere to the highest standards.
Growth in the less developed market of Pakistan has proven even more dramatic, with five of its largest banks posting growth of 20% or more in 2018-19. Such growth – which is attracting swathes of the country’s unbanked population – has been accompanied by impressive profitability, with returns on assets (ROA) rising to 2.1 % in 2019 from 1.3% in 2018, according to the State Bank of Pakistan (SBP).
Sharia-compliant assets had a market share of 13.8% in the country at the end of Sep 2019, according to the SBP. The central bank is aiming to increase this proportion to 20%, supporting the sector with structural and regulatory reforms, as well as regular Islamic bond issuances.
Beyond the growth in assets, the 2019 rankings confirm the trend of falling profitability within the sector globally. After falling for the first time in recent years in 2018, average ROAs dropped to 0.93% in this year’s rankings. Once again such a trend reflects the ongoing strength in asset growth, which exceeds the growth rate of both the 2017 and 2018 rankings. Yet the falling ROA also continues to highlight the ongoing maturity of key GCC lenders in markets where spending is being cut in the midst of economic uncertainty.
The list of the top 10 commercial banks ranked by ROA (only fully sharia-compliant banks with minimum $100m in profit) is dominated by banks from the MENA region, with the top three positions all held by African institutions. Sudanese banks the Blue Nile Mashreg Bank and Faisal Islamic Bank occupy the first and third spots, respectively, with ROAs of 16.59% and 3.24%. Faisal Islamic Bank’s Egyptian operations come second, with an ROA of 3.59%.
At the other end of the spectrum, a lower number of smaller Islamic banking institutions have been added during this ranking period. The number of Islamic financial institutions with less than $100m in assets has risen by just four to 106 in the 2019 ranking, compared with 11 new institutions in the previous ranking. And as evidence that Islamic banking’s spread may have hit a peak, no new countries have offered sharia services, with the number unchanged at 45.
Specifically the rise of Dubai Islamic Bank is notable. The UAE-based lender saw its sharia-compliant assets increase by 7.89% to $60,899bn in 2018-19, pushing it up to second place behind Saudi Arabia’s Al Rajhi. Dubai Islamic Bank is set to narrow the gap with Al Rajhi further in future rankings, with the announcement in June of a plan to acquire UAE-based rival Noor Bank.
The tie-up would be the latest stage in the consolidation within the wider banking sector of the GCC, as maturing markets and challenging economic conditions persuade banks to pursue partnerships with their competitors.
Also on the acquisition trail is Kuwait Finance House, which has slipped from third position in the 2018-19 rankings to fifth this year. The bank’s proposed merger with Bahrain’s Al Ahli United, which stands at 32nd position in 2019, would create a regional lender that comes within touching distance of Al Rajhi.
The Banker’s 2019 Top Islamic Financial Institutions ranking is confirmation that the industry is in fine health, having recovered from the hiccups of a few years ago. Asset growth remains strong across all regions with the exception of Australia/Europe/Americas, though even the latter has plenty of reasons for optimism. And while profitability at the highest level continues to slip, it remains buoyant across areas such as Asia and North Africa.
Demand for Islamic banking services across both north and sub-Saharan Africa are set to fuel growth in the sector for the foreseeable future, aided by large unbanked populations waiting to come on stream, together with increasingly developed legal and regulatory structures.
And while growth is slowing in the more mature markets of the GCC, the expanding demand for Islamic banking services in key Asian markets such as Malaysia, Indonesia and Pakistan signify that there is plenty of growth to come in the sector.
However forward going the main challenges for Islamic Banks are that how they can play their role in economic and GDP growth of a country and how they can play their role to control inflation and create employment. For these objectives extensive research is required to devise products and policies for Islamic Banks. With ongoing turmoil in the world economy and of Pakistan these questions would remain main questions for the year 2020.