Posted on December 02, 2015

Islamic banking assets of commercial banks based in Qatar, Indonesia, Kingdom of Saudi Arabia (KSA), Malaysia, the United Arab Emirates (UAE) and Turkey (denoted as QISMUT) are set to exceed $801b in 2015 and will represent 80% of international Islamic banking assets, according to EY’s World Islamic Banking Competitiveness Report 2016. Globally, Islamic banking assets with commercial banks are set to exceed US$920b in 2015.

Gordon Bennie, MENA Financial Services Leader, EY, says: “With the exception of Turkey and Indonesia, Islamic banking has gained market share in all markets, demonstrating the immense success and resilience of the industry. Twenty-two international Islamic banks now have US$1b or more in shareholder equity, making them better positioned to lead the future regionalization of the industry. In relative terms however, they are still only one third of the size of their largest traditional peers in home markets, and also lag in terms of return on equity.”

Islamic banking continues to see strong growth with a compounded annual growth rate of c. 16%. In 2014, the Gulf Co-operation Council (GCC) countries added US$91b in Shari’a compliant assets, representing a year-on-year growth of c. 18% share, despite Turkey losing market share by 0.3% nationally due to political pressure on one of the leading Islamic banking institutions in the country.

EY Global Islamic banking assets 2 [].jpgHigh-performing countries

KSA continues to dominate the share of the global Islamic banking market at 33% and is the highest contributor to total global Islamic banking assets, followed by Malaysia at 15.5% and the UAE at 15.4%. Islamic banks in Bahrain have also been steadily gaining market share over traditional banks.

Ashar Nazim, Partner, Global Islamic Banking Center, EY, says: “Leading Islamic banks have done well to mainstream with a competitive, sizeable business in their home markets. The combined profit pool of Islamic banks across QISMUT was estimated at US$10.8b in 2014, which is a notable milestone. However, the return on shareholder equity could be significantly enhanced, by at least 15%–20%, and this need becomes more pressing in the context of the prevailing macro-economic environment.”

Drivers of growth in Islamic banking

Two main areas are expected to drive future growth in Islamic banking; average growth in banking sector assets and increase in market share.

Muzammil Kasbati, Director, Global Islamic Banking Center, EY, says: “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 localized 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 Organization of Islamic Cooperation markets.”

Islamic banking in 2020

The total Islamic banking assets with commercial banks in QISMUT are expected to reach US$1.6t by 2020 and the total industry profit pool of QISMUT is expected to reach US$27.8b. In terms of banking market share, Saudi Arabia, Kuwait, Bahrain and Qatar are expected to be the major players by 2020.

“QISMUT will remain the key driving market with the GCC providing the additional acceleration for future growth of the industry, with Turkey expected to recover from the current temporary setback. There is still a lot of opportunity; the industry today is yet to reach 100 million customers. The potential captive market is six times bigger but requires a different banking model. A digital-first strategy has to be the stimulus for Islamic banks to sign up the next 100 million customers over the next decade,” concludes Ashar.