Chal­lenges to main­tain lead­ing growth in Is­lamic bank­ing

The Financial Daily - - MARKET SUMMARY -

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 non­bank 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 solu-tions 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 year­swell 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 en­joy- ing 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 op­portu- ni­ties 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 li­cens- es 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.- In or­der to de­lib­er­ate on ways and means for cre­at­ing pub­lic aware­ness of con­ven­tional and Is­lamic bank­ing prod­ucts, in­sur­ance

and taka­ful and their ben­e­fits for the masses, Prof. Dr. Fazal Ahmed, Depart­ment of Is­lamic Learn­ing Jin­nah Univer­sity for Women, Sec­re­tary Board of Gov­er­nor Sheikh Zayed Is­lamic Cen­tre, Prof. Ejaz Ahmed Faruqi, Pres­i­dent, Uni Kar­i­ans, Karachi Univer­sity, Sec­re­tary Arts Coun­cil of Pak­istan were called upon by Prof. Dr. An­wer Ir­shad Burny, Dean KASBIT; Syed So­hail Hassan, Direc­tor Pub­lic Re­la­tions Maxim Group; and Ameer Haider, Aca­demic Man­age­ment Con­sul­tant 'The Redo­lent' and had

de­tailed dis­cus­sions on the sub­ject.

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