Posted on December 02, 2014

According to EY’s World Islamic Banking Competitiveness Report 2014-15: Participation Banking 2.0, Islamic banking assets with commercial banks in international markets are set to exceed US$778b in 2014. Global Islamic banking assets witnessed a compound annual growth rate (CAGR) of around 17% from 2009 to 2013. Approximately 95% of international Islamic banking assets of commercial banks are based out of nine core markets, five of which are in the GCC (Saudi Arabia, UAE, Qatar, Kuwait and Bahrain). The market share of Islamic banking assets in Saudi Arabia, UAE, Qatar, Kuwait, Bahrain and Malaysia is now between 20% and 49%. The analysis excludes Iran.

Islamic banks in Saudi Arabia, Kuwait and Bahrain represent more than 48.9%, 44.6% and 27.7% market share respectively. Positive progress has been has made in Indonesia, Pakistan and Turkey, with 43.5%, 22.0% and 18.7% CAGR respectively from 2009 to 2013. Gordon Bennie, MENA Financial Services Leader at EY, says: “The six rapid-growth markets (RGMs) Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey (QISMUT) commanded 80% of the international Islamic banking assets at US$625b in 2013. QISMUT Islamic banking assets are expected to continue to grow at a five-year CAGR of 19% to reach US$1.8t by 2019.”

International Islamic banking assets [].jpgListening to customers

Ashar Nazim, Global Islamic Finance Leader at EY, says: “The Islamic banking industry has gone mainstream in several core markets. This presents new opportunities as well as new challenges, and demands a fundamentally different approach to profitable growth. Customers have mixed emotions about their experiences of dealing with Islamic banks. In the future, growth will be most significant for the banks that are able to strengthen customer experience through the use of digital technology. Banks that do not keep pace with technological advances are expected to face serious pushback from mainstream customers who will gravitate toward the larger conventional players who can deliver on digital.” EY analyzed the sentiment of over 2.2 million customers’ social media posts on their banking experiences with Islamic banks in Saudi Arabia, Bahrain, Kuwait, UAE, Malaysia, Indonesia, Turkey, Qatar and Oman. The results showed that customer satisfaction is mediocre for many Islamic banks.

Ashar says: “Customers are increasingly active online and vocal about their experiences. Going mainstream and building a customer base that is based on added value to the customer has not been easy for Islamic banks. Bridging the performance gap requires listening to customers. The transformation of customers’ banking experience across channels and all touch points is going to be crucial as digital and social banking and customer expectations continue to evolve. Understanding and analyzing changing customer patterns can help anticipate needs, and encourage desired behaviors. Most importantly, user experience conversations have to be an ongoing activity and not a discrete project. Institutionalization of these core capabilities requires boards and executives to efficiently shift their spending from running the bank to developing the bank.” The ROEs of Islamic banks remain approximately one-fifth lower than those of traditional banks in the same markets. This performance gap could cost its shareholders, and to some extent the investment account holders, up to US$17b in total forgone profit over the next five years.  Structural transformation and scaling up is therefore becoming extremely critical to improve shareholder returns.

Saudi Arabia and Malaysia, and increasingly Turkey and Indonesia, will drive the future of the industry

Trade finance, mobile payment solutions and managing the cost of regulatory compliance will drive the next phase of profitability. Most Islamic banks remain underweight when it comes to their role in trade finance business. Ashar says: “The key driving markets for Islamic banking will continue to be Saudi Arabia and Malaysia, with Turkey and Indonesia also establishing themselves as large Islamic banking centers. With increasing market size and greater propensity for the adoption of technology-based, customer-centric solutions, the industry can be expected to further reduce its profitability gap with respect to conventional benchmarks. The challenges of going mainstream will be eliminating operational silos and leveraging customer insights to improve risk management, pricing and channel performance.”

Qatar Airways flies daily to Kilimanjaro, Tanzania