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Tuesday, 10 January 2017

Islamic Banking: Challenge To Maintain Leading Growth In A Competitive Market


Islamic banking continues to broaden its reach and is able to compete effectively with conventional banks, supported by an increasing range of products and higher quality ser­vice. Islamic banking assets in the GCC are now worth over $600 billion, and well over $1.1 trillion for the wider region.

In the past, Islamic banks were some way behind their conventional banking counterparts in terms of innovation, technology and service, which are not only important to defend market franchises but are crucial as a differentiator in a competitive market environment. But now many in the Gulf and the Middle East, which have performed well over the last few years, have become early investors in technology, targeting product and service innovation as a central theme of their strategy. Technology is changing rapidly in the bank­ing sector, and the intermediary link between institutions and customers has become less direct as other non-bank players enter the market.

Product innovation and the increasing use of mobile bank­ing and apps are helping Islamic banks in the region to widen their reach to customers, particularly those that were pre­viously un-banked or under-serviced. Technology and product innovation is removing the service and delivery distinction that was present in the past between Islamic and conventional banks. Increasing product launches for Islamic banks are providing customers with a wider range of financing solu­tions that were previously not avail­able, forcing some to turn to conven­tional banking when otherwise they would not. This is helping to support growth in the sector.

Islamic banks in the region are building their activities in key sectors of the economy. Retail banking has traditionally been the mainstay of Islamic banking in the region. Here, investment in digital and smartphone banking will be crucial in future. In the region, attitudes and expecta­tions have changed at a rapid speed due to a young popula­tion that is increasingly mobile and has greater access to media and technologies. According to EY, the boards of most of the important Islamic banks in the region have been generous in sanctioning spend on digital initiatives—between $15 million and $50 million over the next three years—well aware that in­action could cost up to 50% of their retail banking profit in the next few years.

Bahrain-based Gulf International Bank recently launched its retail banking arm in Saudi Arabia—‘meem’. Combining online and mobile banking with physical locations, meem ca­ters to the Kingdom’s increasingly sophisticated retail bank­ing segment. Meem has invested heavily in proprietary IT systems, including complex back-end systems, which increase efficiency and reduce the need to visit traditional branches.

Fast-growing Islamic banks, including Dubai Islamic Bank (DIB), Abu Dhabi Islamic Bank and Noor Bank have always emphasised the use of technology to drive growth and profit­ability. And these banks continue to perform well despite the recent tough operating environment due to low oil prices and weaker growth in the region.

Another major development for Islamic banks in the re­gion is the flurry of capital increases, with Islamic banks build­ing their capital and liquidity bases for Basel III purposes and to support future growth. DIB recently raised AED3.2 billion in a rights issue, oversubscribed by nearly three times.

Other recent issues are Sharjah Islamic Bank’s $500 mil­lion sukuk, Ajman Bank’s AED675 million rights issue, Qatar Islamic Bank’s QAR2 billion Basel III compliant Tier 1 per­petual Sukuk, and Qatar International Islamic Bank’s QAR1 billion sukuk.

In July 2016, Noor Bank celebrated the listing on the Nasdaq Dubai of its $500 million debut Perpetual Tier 1 capital sukuk. In August 2016, Emirates Islamic closed a $250 million tap of its earlier $750 million five-year Sukuk issued in May 2016. Emirates Islamic is enjoying fast rates of growth, aided by new products, including credit cards and a mobile banking app. It is also making strong strides in wholesale banking with its recent financing deal in partnership with Natixis, to close the largest collateralised Murabaha transaction this year.

Despite the sukuk issuance, observers believe the market would grow at a faster rate if it became more standardised. Sukuk issuance is currently more time consuming and com­plex than a conventional bond issue. The IMF has advised GCC governments to integrate sukuk issuance in their debt-manage­ment strategies. The Islamic Development Bank is also working on a new structure that could simplify sukuk issuance.

Regional Islamic banks are looking at opportunities in other markets, both to diversify their footprint and in recog­nition of limited growth potential in domestic markets. DIB aims to expand its geographic footprint through a variety of options including acquisitions, establishing new subsidiaries and branches, and pursuing strategic partnerships with local partners in Asia, Africa and the Gulf. The bank already has a 40% interest in Panin Bank Syriah in Indonesia and Kenya remains a country of interest.

ADIB’s international expansion began in Egypt with the acquisition via a joint venture structure of the National Bank of Development followed by the establishment of Iraq, U.K. and Saudi Arabia op­erations, and it will con­tinue with new operations in Qatar and Sudan. ADIB is in the process of apply­ing for banking licenses in a range of other countries.

The bank is accelerating the development of digital prod­ucts and services for customers to enhance their banking experience. Those include mobile-banking iOS applications that allow a more dynamic customer experience and client relationship management tools from iPads. ADIB has wit­nessed a rapid growth in customers using digital channels, especially through mobile devices. Users of ADIB’s digital banking channels more than doubled in the last 12 months while smartphone transactions increased by 73% in the first half of 2016. The bank also launched a new version of its internet banking platform to create a more convenient cus­tomer experience.

Bahrain-based Al Baraka Banking Group is one of the most geographically diversified Islamic banks. It has a presence in Turkey, Jordan, Egypt, Algeria, Tunisia, Sudan, Pakistan, South Africa, Lebanon, Syria, Iraq, Saudi Arabia, Libya, and Indonesia as well as in Bahrain. It has recently won official approval to es­tablish a banking unit in Morocco, and is working to complete the establishment pro­cedures.

For Islamic bank­ing, the opening up of Iran is a huge devel­opment. Iranian banks make up the world’s largest financial system based on Islamic law; Iran’s Islamic banking assets total around $500 billion. Despite the size of their assets, most of the Iranian state-owned banks are loss-making entities due to a large stock of non-performing loans.

A large number of sukuk and other Islamic financ­ing issuance from Iran are expected over the next few years. Estimations are that there are over 150 Iranian companies con­sidering Islamic sukuk sales. Iran also requires funds for its infrastructure development programmes estimated at around $1 trillion over the next decade.


Industry projections for Islamic banking are generally positive, driven by the significant unmet demand despite the prevailing macroeconomic and political challenges across the region. Credit expansion in the region has been impacted by the low oil price but Islamic financing has continued to grow. Key public sector corporates and real estate private developers have considerable appetite for Islamic financ­ing both at bank and capital market levels. Retail banking will continue to expand aided by technology developments and, on the wholesale front, large scale corporate financing, project finance and debt capital market deals also represent growth opportunities.

Source: Forbes/10 January 2017
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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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