Islamic banks' growth to continue in GCC
Dubai, October 1, 2013
Islamic banks are likely to grow faster than their conventional counterparts and increase their share of GCC banking system assets for the foreseeable future, said a report.
But profitability rates for the two banking models are converging as Islamic banks are taking a more pronounced hit from lower interest rates and non-core banking revenues as they traditionally operate with larger bases of non-interest bearing liabilities, said the Standard & Poor report.
The contrasting fortunes shaping Islamic finance will be the subject of S&P's second Islamic Finance Conference to be held in Dubai on October 2.
A key focus at the conference will be the prospects for the Sukuk sector, which despite registering healthy volumes this year, is seemingly struggling to match last year’s exceptional growth due to tougher market conditions.
"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’s 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.
Unless we see a cycle of higher interest rates that would help Islamic banks to expand their net interest margins, we expect to continue to see convergence between conventional and Islamic banking returns in the GCC region over the next few years.
Stuart Anderson, managing director and regional head, Middle East at S&P, said: “We remain upbeat on the outlook for the global Islamic finance industry, but are increasingly conscious that as it achieves critical mass, the industry will be exposed, more than ever, to the volatility of international markets.”
"While growth has continued, we have seen mixed fortunes across sectors and a broad spectrum of structural problems continues to pose challenges. The conference will discuss the progress and outlook for the industry with a focus on the conflicting trends and expectations associated with its evolution,” said Anderson.
Worldwide year-to-date issuance dipped 25 per cent from last year to$77.4 billion as on September 22.
Despite challenges, S&P believes 2013 sukuk issuance is on course to cross the $100 billion mark.
Other issues to be discussed at the conference include the key drivers of credit risk for the new ‘International Islamic Liquidity Management’ vehicle, the widening sovereign adoption of Islamic finance instruments and the developing viability of the Takaful business model. - TradeArabia News Service