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Gulf Islamic banks ready to fill in void left by HSBC

The contrast suggests that rather than being a sign of weakness in the Islamic finance sector, HSBC’s decision reflected its own business priorities — and to the extent that the British bank pulls back from the industry, local banks will gain an opportunity to expand.

HSBC announced early this month that except for wholesale banking operations, it would no longer offer Islamic products in Britain, the UAE, Bahrain, Bangladesh, Singapore and Mauritius.

It said it would focus its Islamic finance business on customers in Malaysia and Saudi Arabia, while keeping a limited presence in Indonesia. Through its HSBC Amanah arm, headquartered in the UAE, HSBC was a pioneer in the industry and it operated the largest Islamic business of any Western bank, so the news sent ripples through the sector.

The details of HSBC’s announcement, however, suggest the bank will not come close to pulling out of Islamic finance, and may even continue growing in some parts of the industry. The bank estimated it would keep about 83 per cent of its Islamic business revenue after the move.

HSBC also stressed it would keep its wholesale Islamic banking operations, which are believed to be more profitable than retail and include its business of arranging issues in the Gulf’s booming sukuk market, where it is a leader.

“The impact on the competitive landscape and the Islamic banking market as a whole will be minimal, as the closures affect only relatively small Islamic banking markets or countries where HSBC’s retail banking presence is limited,” said Alexander von Pock, principal at consultancy A.T. Kearney.

An HSBC spokesman said the decision on HSBC Amanah followed a global strategic review, announced in May last year, which judged businesses on their compatibility with global strategy and the need to allocate capital efficiently.

“In conventional banks, an Islamic window is non-core business, and hence banks may be exiting to refocus on core business,” said John Chang, head of retail banking at Dubai-based Noor Islamic Bank.

Days after HSBC’s announcement, NBAD chief executive Michael Tomalin said the bank would boost its Islamic operations partly by introducing Shariah-compliant services in Egypt, Oman and Malaysia. NBAD aims to derive up to 10 per cent of its operating income from Islamic banking by 2020, up from three per cent currently, he said at the launch of the bank’s Malaysian subsidiary.

Other Gulf institutions also plan to grow in the sector. Dubai-based investment bank Shuaa Capital is seeking to increase its share of Shariah-compliant business through the Islamic window of its credit division, a company spokesman said.