Islamic banks in the GCC are likely to grow faster than their conventional counterparts and increase their share of the region’s banking system assets for the foreseeable future, Standard & Poor’s (S&P) Ratings Services said on Tuesday.
However, with Islamic banks taking a more pronounced hit from lower interest rates and non-core banking revenues than their conventional peers because they traditionally operate with larger bases of non-interest bearing liabilities, profitability rates for the two banking models are converging, S&P analysts said on Tuesday in a report titled “Gulf Islamic banks continue to grow faster than their conventional peers, but profitability rates are converging.”
Stuart Anderson, managing director and regional head, Middle East at S&P, said Islamic banks outgrew their conventional peers between 2009 and 2012 in the GCC.
The asset bases of Gulf Islamic banks, roughly estimated at one-third of the assets of conventional peers, showed a compound average growth rate of 17.4 per cent compared with conventional banks’ 8.1 per cent, while their net lending and customer deposits grew by an average of 18.2 per cent and 19.9 per cent compared with conventional banks’ 8.1 per cent and 10 per cent,” he said. “We think Islamic banking will continue to increase its market share in the Gulf, and we expect the operating environment over the next two years to remain supportive for Islamic banks’ credit quality,” said S&P credit analyst Timucin Engin.
Low interest rates and lower capital market-related gains than 2008 pre-crisis levels are impairing revenue growth for most Islamic banks in the region, leading to profitability convergence with their conventional peers, said Engin.
Anderson said strong government support is the key to the rapid growth of Islamic banking in the region. “We expect Qatari Islamic banks to grow especially fast because of the country’s large infrastructure needs and investments, including the 2022 soccer World Cup.”
He said S&P expects Islamic banking to continue to increase its market share in the Gulf with the operating environment remaining supportive for Islamic banks’ credit quality over the next two years.
“That said, low interest rates and lower capital market-related gains than 2008 pre-crisis levels are impairing revenue growth for most Islamic banks in the region, leading to profitability convergence with their conventional peers.”
Engin said unless there is a cycle of higher interest rates that would help Islamic banks to expand their net interest margins, the convergence between conventional and Islamic banking returns in the GCC region would continue over the next few years. “Islamic banks used to be able to rely on strong returns from non-banking activities such as capital markets and real estate owing to the inflationary asset valuation cycle in the region. After their recent credit losses we now expect them to have similar provisioning levels to their conventional peers,” he said.
“We believe the convergence of returns between the conventional and the Islamic banking models in the GCC region is here to stay,” said Engin.
(Khaleej Times / 03 Oct 2013)
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com