EY: Islamic banking growth on the increase across globe

19 January 2016 Consultancy.uk

Islamic banking, termed participant banking, is outgrowing conventional banking in many of the world’s predominantly Islamic countries. Today the total participant banking market is worth around $920 billion, which is projected to grow to more than $1.6 trillion by 2020, research by EY shows. Particularly the Gulf States are seeing rapid participant banking growth. RoE within the sector remains relatively robust at 12.6%.

In a recent EY study, titled ‘World Islamic Banking Competitiveness Report 2016’, the professional services firm explores the Islamic Banking landscape. The report is built up from an analysis of 69 participation banks (Islamic Banks) and 45 conventional banks, covering the markets of Bahrain, Qatar, Indonesia, Saudi Arabia, Malaysia, United Arab Emirates, Turkey, Kuwait and Pakistan.

International Participation banking assets

Market growth
The report finds that the markets covered contain 93% of international participant banking industry assets, valued in excess of $920 billion in 2015. The largest part of that value stood in GCC (Gulf Cooperation Council) countries, at $606 billion, followed by ASEAN countries at around $159 billion. In terms of the total share of banking assets, in the GCC region participant banks held 34% of total assets, while ASEAN area participant banks accounted for around 13% of the total market value.

The increase in asset value has been impressive between 2010 and 2014, growing with a CAGR of 16%. This is despite the political upheaval that has plagued the various regions in recent years.

Regional participant banking size

Regional size
Internally participant banking makes up more than half (51.2%) of the total banking space in Saudi Arabia. The country has the largest international participant banking share, at 33%. Malaysia comes in second at 15.5% of the global share, with participant banking taking a 21.3% share of its domestic banking market. The UAE comes in third in terms of international share, with 15.4%, followed by Kuwait at 10.1%. The smallest contenders are Pakistan at 1.4%, even while it represents 10.4% of the internal markets, and Bahrain at 1.6%, while internally it represents 29.3% of the total banking sector in the gulf state.

Asset growth

The participant banking sector shows considerably stronger growth than the conventional banking system in almost all of the banks in the countries surveyed in 2014. Saudi Arabia stands at the forefront with participant banking growing at 18%, while conventional banking grew at 7%. Malaysia saw its participant banking grow by 4% and its conventional system by 1%. The UAE booked considerable growth in both types of banking institutions; participant banking was up 18% and conventional banking 19%. The largest growth has been booked in Qatar, where participant banking was up 20% in 2014. The only country to see negative growth in its participant banking system has been Turkey, where it fell -1%.

Top 20 participant banks

Growth and profit
According to the analysis, the combined profitability of the top 20 participation banks has increased by $1 billion to more than $7 billion in 2014, growing with a CAGR of 14% (2010-2014). This resulted in a healthy growth of return on equity (RoE), which has positively contributed towards increasing shareholders’ equity (22 banks have crossed the equity landmark of $1 billion).

The report finds that participant banking assets grew slightly faster than conventional assets, at 14% relative to 11%, between 2010 and 2014. The RoE for 2014 fell slightly in favour of conventional banking asset investments, at 14.5% compared to participant banking investments at 12.6%.

Increase of participant banking assets by 2020

Future projections
The projected asset pool is set to increase considerably over the coming five years. For 2015 the estimated Saudi Arabia pool stands at $343 billion, which will more than double to $766 billion by 2020. The UAE pool will increase by more than $100 billion, while Malaysia will see an additional $70 billion. The total market will be worth more than $1.6 trillion in the regions considered. In contrast, a recent BearingPoint analysis places the total market value at around $3 trillion by 2018, up from an estimated $1.8 trillion today.

According to Muzammil Kasbati, Director at EY’s Global Islamic Banking Centre: “The external operating environment is certainly getting tougher, given the prevailing oil price and the resulting impact on banking system liquidity and infrastructure spend. Islamic banks are in a better position to weather this storm due to the simpler nature of their balance sheets, basic products and localised operations. However, they do not appear to be ready for the digital changes that are impacting the way customers engage with banks. A fundamental review of their operating models at this stage will be critical to the success of Islamic banking across the Organisation of Islamic Cooperation markets.”


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