Gulf Islamic banks to expand market share, S&P says

S&P expects Gulf Islamic banks to expand market Share as demand for sukuk and other forms of Sharia-compliant credit grows.

Islamic banks, including Abu Dhabi Islamic Bank, have been growing at even higher rates amid a boom in sukuk financing. Mona Al Marzooqi / The National

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, the rating agency Standard & Poor’s said.

That comes against a backdrop of buoyant economic growth in the region, where on average GDP may grow by 5 per cent this year, S&P said.

Islamic banks in the GCC have a 25 per cent market share.

“We expect the total credit stock in the GCC banking system will grow by roughly 10 per cent annually in 2014 and 2015 as banks take advantage of the region’s strong economic growth prospects, recovering corporate asset quality and ample financing opportunities,” analysts at S&P wrote yesterday.

“We think Islamic banks will continue to grow faster in the next couple of years than their conventional peers, though, particularly in Qatar and Saudi Arabia, where we believe domestic credit will grow the most.”

Regional banks have had a particularly good run, especially in the UAE. After the economy here grew by more than 4 per cent last year on the tail of several years of lacklustre performance following the 2008 financial crash, consumers have been running to the banks to tap cheap financing to buy everything from cars to homes and washing machines.

Islamic banks, including Dubai-based Noor and Abu Dhabi Islamic Bank, have been growing at even higher rates amid a boom in sukuk financing. So far this year GCC sukuk issuances have reached US$20.3 billion, 27.3 per cent higher than the same period last year, S&P said. Globally the sukuk market is expected to grow 5 per cent this year.

On the retail banking front, recent surveys show that there is a national trend of individuals migrating towards Islamic banks in the UAE, although a lack of understanding of how these banks work is holding back further customer growth.

For years Islamic lenders 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 in the UAE. And while the share of Islamic banking in the UAE is poised to grow to 50 per cent of the whole market by 2020 from the current 20 per cent, on a global scale the penetration of Islamic lending is statistically negligible at 1 per cent.

S&P said there were signs, including Goldman Sachs’ $500 million sukuk issue last month, that Islamic financing was growing beyond its natural constituency. That is especially so in the corporate sphere, where the supply from the UAE has increased in recent years as Dubai recovers from its debt crisis. Demand from investors has also increased because the country’s peg to the US dollar makes it stand out in emerging markets, where most currencies have been volatile over the past year.

This demand, amid record low interest rates, has lowered the yield investors receive and has made it attractive for companies, banks and governments to continue to go to the bond and sukuk market to raise cash. Some of that demand going forward is likely to be boosted by companies and banks seeking to refinance existing Islamic debt that is set to mature soon, S&P said.

The UAE is emerging as a hub for Islamic financial services and many local banks are expanding into neighbouring countries with predominantly Muslim populations such as Egypt, Libya, Tunisia and Morocco. Dubai last year embarked on a three-year strategy to place itself firmly at the centre of the US$8 trillion Islamic economy, to vie with the main sukuk hubs of Malaysia and London.

“The Dubai government, among others, is pushing ahead to create an Islamic finance hub, but also to answer demand from investors seeking debt issues from high-quality counterparties in the Gulf,” said Karim Nassif, a Dubai-based analyst with S&P.

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