Assets of UAE Islamic lenders to more than double in the next five years

In 2013, Islamic banking assets crossed the US$100 billion mark for the first time in the UAE, capturing a market share of 21.4 per cent.

Islamic banking in the UAE is growing twice as fast as conventional banking as bumper profits prompt spending on digital banking and overseas expansion, according to a report by the financial services company Ernst and Young.

The assets of Sharia-compliant lenders in the UAE are also set to more than double in the next five years, EY said.

“UAE participation banks are eyeing revenue growth through experience-led transformation of their domestic business,” the report said. “Stronger capital position is also driving international expansion. Initiatives in mobile payments are likely to cause positive disruption to banks’ traditional operating model.” Islamic banks are sometimes referred to as “participation banks”, especially in Turkey. In 2013, Islamic banking assets crossed the US$100 billion mark for the first time in the UAE, capturing a market share of 21.4 per cent. That is a more than 3 percentage point increase from the industry’s share of the total banking market in 2009, according to EY.

EY is not the only one betting on growth Islamic bank growth. The ratings agency Standard & Poor’s said in October that Islamic banks in the Arabian Gulf are likely to grow their market share in the next five years to 30 per cent, supported by an increase in demand for sukuk and other forms of financing for both corporations and individuals.

For years Islamic lenders in the UAE have faced the challenging task of making Sharia-compliant lending, where interest is banned and banks offer “profit” rates instead, more palatable to the large non-Muslim population that resides here.

And while the share of Islamic banking in the UAE is poised to grow to 50 per cent of the whole market by 2020, on a global scale the penetration of Islamic lending is statistically negligible at 1 per cent, according to a report this year from Abu Dhabi Islamic Bank, the largest Sharia-compliant lender in the emirate. That leaves a lot of opportunity for Islamic banks successful in their natural constituencies to expand farther afield, offering the same kind of straightforward banking practices.

“The Islamic banking industry has gone mainstream in several core markets,” said Ashar Nazim, global Islamic finance leader at EY.

“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,” he added.

Globally, Islamic banking assets are expected to more than double to US$1.8 trillion in the next five years amid increased demand for Sharia-compliant finance in the Middle East and Asia, EY said in its report.

From 2009 to 2013, Islamic banking assets grew at a compound rate of 17 per cent and in 2014 exceeded $778 billion from $625bn in 2003, according to its World Islamic Banking Competitiveness Report 2014-15.

“The six rapid-growth markets – Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey (Qismut) – commanded 80 per cent of the international Islamic banking assets at US$625bn in 2013,” said Gordon Bennie, Mena financial services leader at EY.

“Qismut Islamic banking assets are expected to continue to grow at a five-year compounded annual growth rate of 19 per cent.”

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Published: December 2, 2014 04:00 AM


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