NEWS
The Islamic Finance Industry Still Faces Challenges
01 January, 2012
The World Islamic Banking Competitiveness Report launched at the World Islamic Banking Conference in Bahrain highlighted that following the 2008-2009 slowdown, 2010 has witnessed clear signs of a global economic revival with the GCC and key markets for Islamic finance outperforming the rest of the world. In fact the report predicted that the Islamic finance industry will grow to $1.1 trillion by the end of 2012, a 33% increase on 2010. The report also noted, however, that despite strong growth, profitability has declined and the road ahead is challenging. In order to meet market expectations, Islamic banks will have to improve operational performance by learning from conventional banks and capture new pockets of growth.
According to the report, the small and medium-sized enterprise (SME) and mid-market segments offer significant opportunity for banks, particularly in emerging markets, given that the SME and mid-market segments account for approximately 25-35% of loan volumes and are growing faster than the rest of the market. The report pointed out that in addition to filling selected gaps in product portfolios through investment in product development, Islamic banks must also aggressively bolster sales models and design tailored credit strategies for SME and mid-market segments in order to seize the opportunity they provide.
The report noted that going forward, retail banking will be one of the key drivers of banking revenue growth in the Middle East and capturing the affluent banking customer segment will be critical. It also noted that Islamic banks have the opportunity to grow beyond their core principles but that they are increasingly facing stiff competition from conventional banks who offer Islamic products. As a result, it is critical for Islamic banks to develop a compelling value proposition in order to attract affluent customers, which will require defining core elements including the relationship model, branding, the service model and product offerings.
Exploring the growth opportunities that takaful offers in the GCC market, the report suggested that, although the GCC insurance market has grown rapidly, it is still under-penetrated. Takaful insurance represents approximately 36% of the total premiums in key markets and continues to gain a larger share of the total insurance premium. Despite the faster growth, however, takaful operators’ Return on Equity (RoE) is lower compared to conventional players. The report said that strong growth in population in the GCC and a high and fast growing GDP per capita and private consumption is likely to propel the growth of takaful. With a mix of good demographics and positive steps in regulation takaful operators are likely to boost their future profits.
Exploring the growth opportunities that takaful offers in the GCC market, the report suggested that, although the GCC insurance market has grown rapidly, it is still under-penetrated. Takaful insurance represents approximately 36% of the total premiums in key markets and continues to gain a larger share of the total insurance premium. Despite the faster growth, however, takaful operators’ Return on Equity (RoE) is lower compared to conventional players. The report said that strong growth in population in the GCC and a high and fast growing GDP per capita and private consumption is likely to propel the growth of takaful. With a mix of good demographics and positive steps in regulation takaful operators are likely to boost their future profits.
Providing an in-depth analysis on how Islamic banks need to change the way they measure performance in a liquidity and capital constrained world, the report said that since the crisis in 2008, capital and liquidity pressures have not eased and in order to manage capital and liquidity, Islamic banks need to ensure that they increase transparency and put in place greater management discipline and oversight. According to the report, banks need to re-assess their internal asset and liability pricing for both liquidity and their cost of capital and include it in their business unit profit calculations
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