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GCC Islamic Banks Turn Offshore For Growth

GCC-based Islamic banks are increasingly eyeing international markets

Islamic banks in Gulf Cooperation Council (GCC) nations need to expand abroad to maintain their pace of growth in the future, according to Al-Baraka Banking Group, which operates in 15 countries from the Middle East to Asia.

“Banks have no alternative,” says group chief executive officer Adnan Yousif from Manama, Bahrain. “Some of the banks in the region are huge, and since most Gulf countries are already well banked, lenders can only grow so much if they stay in their home markets.”

“It’s going to be hard for [Islamic banks] to grow faster than the conventional [lenders]. In two-to-three years, for the majority the growth will slow down”

Expansion of market share for Shariah-compliant lenders within the six-member GCC may be limited as conventional banks constrain the pace of growth, Standard & Poor’s said in November. Islamic banking assets in the region won’t exceed 30 percent of the total in as much as six years from about 25 percent currently, the ratings company said.

While Ernst & Young forecasts Islamic banking assets globally will almost double in the four years through 2018 to $3.4 trillion, the pace of growth in the GCC slowed to 12 percent last year from an average 18 percent in the three years through 2012, according to S&P. Lenders need to consider consolidating, and to target corporate business deals to gain market share, according to Doha-based Qatar International Islamic Bank.

 “A point of maturity has been reached in some markets and this is why Islamic finance needs to reach out to a new market segment and continue to identify new innovations to help it grow further,” says Tirad Mahmoud, chief executive of Abu Dhabi Islamic Bank, the UAE’s second-largest Shariah-compliant bank.

About 60 percent of the UAE’s residents over 15 years old have bank accounts, compared with 20 percent in Indonesia, home to the world’s biggest Muslim population, according to World Bank data.

ADIB bought the retail assets of Barclays in the UAE earlier this year, gaining about 110,000 customers. Dubai Islamic Bank, the country’s biggest Shariah-compliant lender, plans to increase its stake in Indonesia’s Bank Panin Syariah to 40 percent by the end of 2014, while Qatar’s Masraf al-Rayan completed the acquisition of Islamic Bank of Britain in January.

“They’re at a very challenging place at the moment because they don’t offer anything over and above conventional banks,” says Emad Mostaque, a London-based strategist at Eclectic Strategy. “It’s going to be hard for them to grow faster than the conventional. In two-to-three years, for the majority the growth will slow down.”

The potential market share for Islamic banks in the GCC won’t be limited to 30 percent, Al-Baraka’s Yousif says. Interest in Islamic finance and sukuk is “taking off”, and people are keen to get involved with the industry, he says.

A number of regional issuers, including the sheikhdom of Sharjah in the UAE and Damac Real Estate Development, have sold debut Islamic bonds this year, with demand for the sales exceeding supply.

Global sukuk sales have jumped 22 percent to $37 billion so far this year compared with the same period in 2013, according to data compiled by Bloomberg. S&P estimates global sukuk issuance will increase 5 percent in 2014 compared to last year.

Still, “in the end, the GCC, except maybe Saudi Arabia, is a limited market, with limited people”, says Mohammed Ghiyath Sheikhah, first manager for international investment and finance at Doha-based Qatar International Islamic Bank. “Islamic banks must spend on their infrastructure and improve their customer service.” 

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