Sharia-com­pli­ant lenders are grow­ing but non-core as­sets will be­come less vis­i­ble.


Sharia-com­pli­ant lenders are grow­ing but non­core as­sets will be­come less vis­i­ble.

AS­SET GROWTH WITHIN GCC Is­lamic banks is ex­pected to out­pace that of con­ven­tional banks, with Qatar post­ing the fastest as­set growth in the re­gion, ac­cord­ing to credit rat­ings agency Stan­dard and Poors (S&P).

How­ever, the prof­itabil­ity of Shari­a­com­pli­ant lenders is nar­row­ing, said the firm.

“Not sur­pris­ingly, Is­lamic banks con­tinue to grow faster than their con­ven­tional bank­ing peers and the most im­por­tant rea­son is the very sig­nif­i­cant state sup­port and stim­uli,” said S&P an­a­lyst Timucin En­gin. Based on a sam­ple of Gulf Is­lamic and con­ven­tional banks an­a­lysed by S&P, as­set growth of Is­lamic banks has ex­ceeded that of con­ven­tional banks since 2008, with as­sets of Sharia-com­pli­ant lenders ris­ing more than 15 per cent in 2012, com­pared with 10 per cent as­set growth for con­ven­tional banks.

How­ever, re­turn on aver­age as­sets for Is­lamic banks de­clined from 2.7 per cent in 2008 to 1.7 per cent in 2012, while re­turn on aver­age as­sets for con­ven­tional lenders grew from 1.4 per cent in 2008 to 1.7 per cent in 2012, based on anal­y­sis of the sam­ple.

“This theme of con­verg­ing re­turns is here to stay, par­tic­u­larly as the Is­lamic bank­ing in­dus­try be­comes more ma­ture and a larger por­tion of the over­all bank­ing uni­verse in the GCC,” said En­gin.

“Cer­tain Is­lamic banks prior to the cri­sis had this busi­ness model where they had vis­i­ble con­tri­bu­tion to rev­enues from non-core bank­ing items. “Given what hap­pened dur­ing the cri­sis, this kind of rev­enue is no longer there or its po­ten­tial con­tri­bu­tion has come down sig­nif­i­cantly and this shows in the re­sults of cer­tain Is­lamic banks.”

Prior to the on­set of the 2008 fi­nan­cial cri­sis, Is­lamic banks in­vested in non-core bank­ing ac­tiv­i­ties such as property and cap­i­tal mar­kets, both of which took a hit as land prices plum­meted and stock prices sunk. But the as­set struc­ture of Is­lamic banks is chang­ing.

“We be­lieve we will ob­serve a rel­a­tive and grad­ual lower weight­ing of non-core as­sets in the bal­ance sheets of cer­tain GCC banks. Also in­com­ing reg­u­la­tions, such as Basel III, in­creas­ingly pe­nalise banks in terms of hav­ing non-core bank­ing as­sets on the bal­ance sheet,” said En­gin.

“Given the na­ture of Is­lamic bank­ing in the Gulf, real es­tate is an im­por­tant as­set class, so po­ten­tially we will see that par­tic­u­lar re­la­tion­ship there, but we ex­pect it will be less vis­i­ble.”

As­set growth of Is­lamic banks in Qatar is ex­pected to ex­ceed Is­lamic peers in other Gulf states due to strong govern­ment back­ing and high state spend­ing on in­fra­struc­ture.

“You see that the reg­u­la­tor dis­al­lowed con­ven­tional banks to op­er­ate through Is­lamic win­dows around two years ago to pro­vide a level play­ing field so to speak be­tween the Is­lamic play­ers and con­ven­tional play­ers,” said En­gin.

“When the govern­ment-re­lated en­ti­ties come to mar­ket to fi­nance some of their projects and specif­i­cally for Qatar, we see these en­ti­ties en­sure to struc­ture a very rea­son­able por­tion of this fund­ing in a Sharia-com­pli­ant struc­ture so that the coun­try’s Is­lamic banks can at­tend these fa­cil­i­ties.”

S&P is fore­cast­ing Qatar’s Is­lamic banks will grow over the next five years, reach­ing an as­set base of $100 bil­lion by 2017, up from $54 bil­lion at the end of 2012, which would place Qatar as the third-largest Is­lamic bank­ing mar­ket af­ter Saudi Ara­bia and the UAE.

The growth in Qatar is mainly due to govern­ment pol­icy rather than its Is­lamic struc­ture.

“The per­for­mance of the banks in the Gulf seems to be driven more by coun­tryspe­cific con­di­tions than the busi­ness de­sign, for ex­am­ple Sharia-com­pli­ant ver­sus con­ven­tional bank­ing model,” said En­gin.

Is­lamic banks in Qatar cur­rently rep­re­sent a quar­ter of the coun­try’s bank­ing sys­tem in terms of as­sets, up from 13 per cent in 2006, ac­cord­ing to S&P.

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