Muhammad Arif : Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan

Islamic Banking and Finance in recent years

The Islamic banking industry in Malaysia, on the back of a supportive regulatory environment that offers a level playing field with conventional banking, sustained its growth momentum, albeit modestly, in the year to 3Q19. The industry now captures 28.4% (2Q18: 26.5%) of the Malaysian commercial banking system. The growth outlook for the Malaysian Islamic banking sector is strong even as the Islamic banks adjust to the initial effects of the value based intermediation business model. In this regard, Malaysia’s well-established Islamic banking infrastructure and deep customer penetration are key elements in this regard.

Bangladesh and Indonesia have also slightly improved their shares of Islamic banking assets, to 21.5% (2Q18: 20.1%) and 5.9% (2Q18: 5.7%), respectively, as at 3Q19. In Bangladesh, the eight Islamic banks and 16 windows have sustained the gradual but steady growth recorded in recent years. Prudential policy support and increasing demand for Islamic banking have fueled the growth of the sector, which has seen further penetration into the domestic market especially through rural banking operations and the provision of remittance services.

Brunei still maintains a high market share of Islamic banking assets at 62.8%, although it is down slightly from the previous year (2Q18: 63.6%). Notwithstanding, Brunei remains fourth position in the ranking of jurisdictions based on the highest domestic share of Islamic banking assets after Iran, Sudan, and Saudi Arabia.

Within the Central Asian region, the Islamic banking sector in Kazakhstan constitutes 70% of the total Islamic finance assets; however, domestically, Islamic banking assets still account for less than 1% of the total Kazakhstan banking industry, which is worth USD 1 billion. Digitalization and strong government support are providing a major boost to Islamic banking. Attention to the development of a regulatory framework for Islamic banking has also been a key focus in the Kyrgyz Republic. Improvement of the legal and regulatory framework has been initiated to support the growth of Islamic banking assets, among other risk management and corporate governance measures. Such developments contribute to a positive outlook for stable growth of the Islamic banking sector there to improve on its existing 1.5% market share.

In Pakistan, the Islamic banking sector recorded growth across various indicators. Specifically, the sector recorded 21% growth in assets and 19% growth in deposits of both Islamic banks and windows. In Pakistan, these include Islamic counters at conventional branches and stand-alone Islamic banking branches of conventional banks. Both Islamic banks and windows have also grown their market share, to 13.8% in 3Q19 (2Q18: 12.9%), and their share of total banking deposits is now about 16.1%. Although the number of Islamic banking institutions increased only marginally, from 21 in 2018 to 22 in 2019, the number of Islamic banking branches grew significantly, from 2,685 in 2018 to 2,979 in 2019 (8.5% y-o-y), as a manifestation of the enhanced market penetration.

While the number of full-fledged Islamic banks and Islamic banking windows remains unchanged at one and six, respectively, in Afghanistan, the country’s Islamic banking sector continued its growth momentum. Islamic banking in Afghanistan now accounts for 11% (2Q18: 9.1%) of the domestic banking market share.

In the GCC, offsetting the decline of Qatari Islamic banks’ market share in 2018 by -0.5%, the shares as at Q319 have increased by 1 percentage point to 26.1% (2Q19: 25.1%) due to the operational consolidation of two merged Islamic banks. The merging banks are expected to create improved efficiency amid regional geopolitical tensions, and to achieve about a 6% share of the Qatari banking system.

Bahrain’s Islamic banks remain consistent in improving their market share by sustaining their recovery momentum following the 2Q16 marginal decline. The Kingdom’s Islamic banking system now accounts for 15.5% of its total banking assets as at 3Q19 (2Q18: 14.3%). On the other hand, the UAE Islamic banks’ share of domestic banking assets decreased after crossing the 20% mark that was reported in 2018. This decline was due to the slower growth (2.3% in 3Q19) brought about by heightened economic challenges faced by the entire domestic banking market, especially the slow recovery of oil prices in 2019 as the core sector in the economy.

Oman’s Islamic banking industry, meanwhile, was poised to gain further systemic importance, gaining 1.4 percentage points to capture 13.8% of the domestic banking system in the Sultanate as at 3Q19. Elsewhere in the Middle East, Jordan maintained its position in the list of jurisdictions in which the Islamic financial sector is regarded as systemically important, with the Kingdom’s Islamic banking share increasing marginally to 16.2% of its total banking sector assets (2Q18: 15.6%). This follows a moderate increase in Jordan’s Islamic banking asset base (4.1%) which is lower than the growth in the overall Jordanian banking sector, which registered 9.4% growth between 3Q18 and 3Q19. Palestine’s Islamic banks are close to Jordan’s in terms of their Islamic banking share, now standing at 15.9% (2Q18: 14.6%). In Turkey, the share of the participation banks continued to grow and now represents 6.3% of the total domestic banking assets. Moreover, with the recent change in the Banking Law (Article No. 77), the development and investment banks are now permitted to provide interest free finance, which will see the share of Islamic finance in Turkey continue to grow in future.

The African continent has witnessed several developments highlighting its significant potential for the Islamic banking industry. While new full-fledged Islamic banks are being licensed to commence operation, a few notable conventional banks have also established Islamic banking windows. At the moment, there are over 80 institutions offering Islamic financial services in Africa. Several participation banks have opened their doors in Morocco since May 2017, and Tunisia is in the process of enhancing its regulatory framework to support further expansion of the Islamic banking industry’s 5.1% market share. Algeria is following in its neighbors’ footsteps, preparing to allow a few banks to launch Sharīʿah-compliant banking products and putting in place relevant regulatory guidelines.

A few countries, including Nigeria, Senegal and Kenya, have recently commenced implementation of their Islamic banking legal and regulatory framework. Nigeria’s noninterest banking has maintained its share of total domestic banking assets, at 0.5% in 3Q19 (2Q18: 0.3%). Uganda is yet to operationalize its Islamic banking regulation, which was gazetted in early 2018, while Kenya is considering a proposed Islamic banking regulatory framework that aims to encourage growth of the sector and attract foreign cash inflows to a country that is already home to three Islamic banks and a few Islamic banking windows. In addition, with the support of multilateral organizations, Islamic banks have been established in several African countries, including Ethiopia, Benin, Ivory Coast, Mali and Senegal.

Geographical concentration of Islamic banking assets remains substantial and similar to what was reported as at 2Q18, with 91.5% of these assets in countries in which the Islamic financial sector is considered systemically important. The top 10 Islamic banking jurisdictions by asset size account for 94.1% of the global Islamic banking industry, slightly higher than its 93.7% level reported in 2Q19, while the top five countries – namely Iran, Saudi Arabia, Malaysia, the UAE and Kuwait – account for more than 79% of the industry’s assets globally.


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