Opportunities for growth in the Islamic finance market

Financially the Middle East region is burgeoning and is challenging traditional financial centres as the major focus for Islamic finance.

By Jonathon Taylor

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Published: Fri 17 Oct 2014, 12:04 AM

Last updated: Fri 3 Apr 2015, 7:27 PM

Indeed, the government of Dubai declared its intention in early 2014 to make the city the global capital of the Islamic economy within three years.

According to Ernst & Young’s (EY) World Islamic Banking Competitiveness Report 2013-14 the six rapid-growth markets of Qatar, Indonesia, Saudi Arabia, Malaysia, the UAE and Turkey (Qismut) represented 78 per cent of the international Islamic banking assets with commercial banks, excluding Iran. Although there are more than 300 Islamic banks operating in more than 50 countries around the world, the Middle East has the greatest concentration of lenders — some 35 per cent.

Both the UAE and the Kingdom of Saudi Arabia are rapidly advancing in their pursuit to become major hubs in the Islamic financial services sector. While traditional Islamic markets such as the UK, and the strong arenas of Asia Pacific (Malaysia and Indonesia) will continue to hold strong, at the present pace the Middle East and North Africa (Mena) Islamic banking assets are set to grow by an additional $575 billion by 2015. Furthermore, the Islamic banking profit pool across Qatar, the UAE and KSA alone is forecast to exceed $25 billion by 2018.

It is estimated that Islamic banks will account for 40 to 50 per cent of the total savings of Muslims in the coming eight to ten years. Moreover, according to the International Islamic Finance Forum, the banks’ holdings are growing by 15 per cent a year.

The value of Islamic loans is growing at an annual rate of 40 per cent, which is likely to increase. With rising demand, the number of banks offering Islamic products worldwide is expected grow. Across Qismut alone Islamic banking is expected to grow at a CAGR of 19.7 per cent to reach $1.6 trillion by 2018 compared to $567 billion in 2012. Islamic banks today serve approximately 38 million customers globally, two thirds of whom reside in Qismut.

The three main GCC markets — Qatar, the UAE and Saudi Arabia — ensured that Qismut Islamic banks surpassed $10 billion in profit for the first time in 2013. The Islamic banking profit pool across these markets is forecast to exceed $25 billion by 2018.

Islamic banking continues to be positive, growing 50 per cent faster than the overall banking sector. This rapid growth provides an exciting opportunity for businesses ready to seize it. The World’s Islamic population is forecast to grow by 30 per cent by 2030, and across the Mena region only 18 per cent of adults have a formal bank account.

The CEO at Mashreq Al Islami states that in the “…next five years, Islamic banking and finance will witness tremendous growth... only (when it has) product offerings that are at par with the conventional banking in terms of servicing, delivery channels and efficiency.” Businesses that want to take advantage of this exciting opportunity need to partner with an organisation that can support them in the areas of regulation and risk decision optimisation and in improving efficiency and customer service, to provide faster lending decisions and access to credit. With the right partner lenders no longer need to distinguish and separate the risk orientated procedures and systems between conventional and Islamic products, since they can be product agnostic, meaning a single deployment caters for both conventional and Islamic lending.

There is no doubt that proactive lending organisations that offer customers both conventional and Islamic products will benefit greatly from this Islamic banking growth.

However, few Islamic banks to date have truly invested in proactive credit risk, nor have the knowledge and experience to fully apply customer insights to innovate product development and decisions. Going forward, emphasis on customer service, product choices and speed of decision will be the key differentiator that will separate successful Islamic banks from others.

The writer is the Middle East regional manager at Experian. Views expressed are his own and do not reflect the newspaper’s policy.

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