Saudi Arabia, with an estimated $207 billion of Islamic assets in 2011, was ranked first in the world, according to a new report by Ernst & Young.
Malaysia was ranked second with total assets of $106 billion. Globally, the Islamic banking industry continues to record robust growth, with the top 20 Islamic banks registering a growth of 16 per cent in the last three years and Saudi Arabia emerging as the largest market for Islamic assets.
According to Ernst & Young’s World Islamic Banking Competitiveness Report 2013, global Islamic banking assets held by commercial banks are set to cross $1.8 trillion in 2013, up from the $1.3 trillion of assets held in 2011.This forecast is significantly higher than some of the earlier industry estimates that predicted Islamic banking assets with commercial banks globally would reach $1.1 trillion in 2012.
The World Bank had forecast a growth between 10 per cent and 15 per cent annually over the next three years buoyed by strong demand and supply factors as well as effective regulation and quality of services that will sustain growth.
The top 20 Islamic banks hold over 57 per cent of 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,” said Ashar Nazim, partner, Global Islamic Banking Center of Excellence at E&Y.
New markets including Indonesia, Egypt, Iraq and Libya are now actively looking at establishing Islamic banking frameworks. Egypt has been actively investigating issuing sovereign Sukuks as well as the development of new regulatory framework for Islamic banks, as several banks in Egypt are expected to launch Shariah compliant products. Iraq is contemplating Islamic banking legislation while Libya prepares to implement its Islamic banking framework.
The report noted that despite the projected asset growth and the introduction of new Islamic initiatives, the profitability of Islamic banking continues to lag behind that of conventional banking in the same markets, the report said.
Gordon Bennie, partner, Mena Financial Services Leader at Ernst & Young, said 10 of the world’s 25 Rapid Growth Markets 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.”
Islamic banks face a number of challenges including sub-scale operations, a very basic risk culture, incomplete market segmentation, limited engagement with clients, and an absence of technologically oriented value propositions, the report said. While steps are being taken to address these issues, more needs to be done.
“Discussions with management and boards of leading Islamic banks suggest that major transformation is happening around regulations, risk and retail banking. This transformation is geared towards efficient capital planning, risk modeling, mitigating Shariah risk and building customer centric organizations,” said Ashar.
“There are also meaningful developments on the regulatory front although a lot more needs to be done to create the right enabling environment for Islamic banks to implement the reform agenda,” he added.
With the successful 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. “If the transformation is successful, Islamic banks’ profits will increase an additional 25 per cent by 2015,” said the report.
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