Islamic Banking: New Markets To Emerge

BMI View: We expect 2014 to be a key year for the global Islamic finance industry as several new markets come to the fore. It has been our long-held view that rather than becoming an integrated global financial system, Islamic banking will see the creation of regional hubs. Even with this slightly fragmented outlook, we still expect significant growth for the sector. That said, we think the impact of low base effects is beginning to wear off and we expect to see lower growth rates in the coming years.

We expect 2014 to be a pivotal year for the US$1.5trn global Islamic finance industry. Despite political turmoil rumbling on across the Middle East and North Africa (MENA), strong sukuk issuance from banks in the Gulf Cooperation Council (GCC) and sovereigns in Asia, combined with landmark product and regulatory developments, have helped bolster the industry. Our core view is that 2014 will see the development of regional hubs as the Islamic banking industry grows, but little coordination on a global level. We still see potential for strong growth, in part fuelled by a more promising global macroeconomic outlook. However, growth rates are likely to be slightly lower over the coming years on the back of higher base effects.

Recent Developments

  • The Lebanese central bank revealed that the assets of Islamic banks meagrely increased to US$712mn by November 2013, compared with US$674mn in December 2012. The country has four shari'a-compliant banks, which failed to raise their share beyond even 1%.

  • On January 16 2014, Pakistan-based MCB Bank announced its decision to establish a wholly-owned Islamic banking subsidiary. The State Bank of Pakistan (SBP) has given a no-objection certificate to the bank in reply to its application for setting up a standalone Islamic bank, according to a statement issued by MCB.

  • The Pakistani Ministry of Finance has established a committee to explore Islamic banking opportunities in the country, including exploring possibilities of converting conventional banks into shari'a-compliant ones. The country's regulators are launching a range of initiatives, including a media awareness campaign, to increase Islamic banks' share to 15% of the total banking industry by 2017. The committee is scheduled to submit its recommendations on 10 areas by December 2014.

  • The government of Morocco adopted a bill in January that would regulate Islamic banks and sukuk issues. The bill has now been forwarded to parliament for a final vote to be held later in 2014. The bill seeks to establish full-fledged Islamic banks in Morocco, either as subsidiaries of Moroccan banks or foreign rivals. The move will likely bring more investment from the Gulf Arab into the country. The country has been planning to develop Islamic finance for around two years now, partly as a way of attracting Gulf money and funding a huge budget deficit.

Outlook Remains Positive
Global Islamic Bond Issuance

BMI View: We expect 2014 to be a key year for the global Islamic finance industry as several new markets come to the fore. It has been our long-held view that rather than becoming an integrated global financial system, Islamic banking will see the creation of regional hubs. Even with this slightly fragmented outlook, we still expect significant growth for the sector. That said, we think the impact of low base effects is beginning to wear off and we expect to see lower growth rates in the coming years.

We expect 2014 to be a pivotal year for the US$1.5trn global Islamic finance industry. Despite political turmoil rumbling on across the Middle East and North Africa (MENA), strong sukuk issuance from banks in the Gulf Cooperation Council (GCC) and sovereigns in Asia, combined with landmark product and regulatory developments, have helped bolster the industry. Our core view is that 2014 will see the development of regional hubs as the Islamic banking industry grows, but little coordination on a global level. We still see potential for strong growth, in part fuelled by a more promising global macroeconomic outlook. However, growth rates are likely to be slightly lower over the coming years on the back of higher base effects.

Recent Developments

  • The Lebanese central bank revealed that the assets of Islamic banks meagrely increased to US$712mn by November 2013, compared with US$674mn in December 2012. The country has four shari'a-compliant banks, which failed to raise their share beyond even 1%.

  • On January 16 2014, Pakistan-based MCB Bank announced its decision to establish a wholly-owned Islamic banking subsidiary. The State Bank of Pakistan (SBP) has given a no-objection certificate to the bank in reply to its application for setting up a standalone Islamic bank, according to a statement issued by MCB.

  • The Pakistani Ministry of Finance has established a committee to explore Islamic banking opportunities in the country, including exploring possibilities of converting conventional banks into shari'a-compliant ones. The country's regulators are launching a range of initiatives, including a media awareness campaign, to increase Islamic banks' share to 15% of the total banking industry by 2017. The committee is scheduled to submit its recommendations on 10 areas by December 2014.

  • The government of Morocco adopted a bill in January that would regulate Islamic banks and sukuk issues. The bill has now been forwarded to parliament for a final vote to be held later in 2014. The bill seeks to establish full-fledged Islamic banks in Morocco, either as subsidiaries of Moroccan banks or foreign rivals. The move will likely bring more investment from the Gulf Arab into the country. The country has been planning to develop Islamic finance for around two years now, partly as a way of attracting Gulf money and funding a huge budget deficit.

Outlook Remains Positive
Global Islamic Bond Issuance

Whilst we expect growth in Islamic banking on a global scale to slow as the impact of low base effects starts wears off, there are areas which have substantial potential. The most notable of these is Africa, where the low level of penetration of Islamic Banking, as well as the large numbers of Muslims will likely cause significant growth in the coming quarters. We highlight Nigeria as best placed for this growth. The low level of this can be seen as although being home to 80mn Muslims, the country opened its first committed Islamic bank, Jaiz Bank, in 2012.

Outside of Nigeria, South Africa, Africa's biggest economy and home to about 750,000 Muslims, has rewritten its tax laws to ensure that shari'a-compliant products are more transparent. Uganda, Botswana and Zambia are also looking to make regulatory changes to grow their Islamic banking sectors.

Slowly Heading Higher
Bloomberg Takaful Index

New Markets On The Horizon

Over the past quarter there have been significant moves by the UK and Libya to develop their Islamic banking sector. The UK's decision to enter the Islamic banking sector bodes well for the country becoming a major centre of the US$1.5bn industry. The UK chancellor, George Osborne, announced plans for Britain to issue a GBP200mn sukuk - the first country outside the Muslim world to issue an Islamic bond. Whilst precise details on the sukuk have yet to be clarified, it is likely to be backed by rent on government property. Benefitting from first mover advantage, as well as its position as a global financial centre, it is likely that the UK will be a key growth driver in Islamic Banking over the coming years. The UK has already witnessed several high-profile shari'a-compliant deals such as the GBP150mn Qatari investment in the Shard building and the £1.5bn Dubai investment in the London Gateway, the UK's first deep-sea container port. In addition, the UK has more sharia-compliant banks than any other western European country. Whilst Paris and Amsterdam are also looking to develop Islamic Banking sectors, it is likely that London will gain pre-eminence. Given the lack of coherence on a global level, London is therefore well placed to meet the growing demands for Islamic Banking in Europe.

Finance To Remain Dominant
Global - Share Of Islamic Bonds (2013)

As well as the UK, Libya is moving towards shari'a compliance with the Central Bank planning to open three Islamic Banks over the coming year. Libya could see one of the fastest growth rates in Islamic Banking in the Middle East given its huge oil wealth and the presence of the country's sovereign wealth fund, the Libyan Investment Agency (LIA), which is worth an estimated US$65bn. Furthermore, domestic demand for Islamic banking in the country has significant potential given that 99% of the population is Muslim. On a political level, an Islamic finance industry would mark a significant break with the former regime of Muammar Gaddafi, which did not allow such an industry to develop.

That said, the potential for Islamic Banking in the country is matched by the risks. The under developed nature of the banking sector as well as political and social instability will deter much foreign investment into the country. Furthermore the authority of the Central government in Tripoli is limited outside of the capital and thus a coherent Islamic Banking strategy appears unlikely for the time being.

Islamic Bonds & Loans (2013)
Underwriter Market Share % Amount (US$mn) Issues
HSBC Bank PLC 17.7 3,587 97
Deutsche Bank AG 8.0 1,612 4
Standard Chartered Bank 7.7 1,554 17
Emirates NBD PJSC 5.4 1,096 10
RHB 5.1 1,032 32
Maybank 4.9 990 74
CIMB 4.9 986 62
AmInvestment Bank Bhd 4.5 901 28
Dubai Islamic Bank 3.9 793 5
Citi 3.8 768 6
Source: BMI, Bloomberg

Malaysia To Remain World Leader

Despite growth elsewhere in the world, we expect Malaysia to remain the pre-eminent centre of the global Islamic banking industry. The push by Malaysian banks to aggressively expand their Islamic banking operations overseas in recent years has proven to be a sound strategy in boosting Islamic banking revenues and allowing them to gain a first mover advantage in the region. Indeed, local banks including Malayan Banking Berhad, RHB Capital Berhad and BIMB Holdings Berhd have enjoyed double-digit revenue growth from their Islamic banking divisions in recent quarters. This is closely in line with our long-held view that Malaysia's leading status as the largest issuer of Islamic banking products globally would give local banks a significant advantage over their foreign competitors in terms of expanding into new and untapped foreign markets.

Untapped Markets
Population of Select Muslim-Majority Countries, mn (2012)

Impediments Remain

As we have noted on several occasions in the past, the lack of a standardised global framework for the industry remains one of the most pressing challenges confronting Islamic banks which wish to expand overseas into new markets. A lack of cross-border cooperation between key hubs of Islamic banking in Asia and the Middle East, in addition to policy uncertainty and political risk in several future growth markets, will undermine the industry's expansion in 2013 and potentially beyond.

As has been seen all too often however, in many cases there is often considerable opposition to the introduction of Islamic finance, even in markets with a large majority-Muslim population. Central Asia and the Caucasus are a case in point, where governments are often hesitant about developing the sector due to their belief that this could encourage Islamist politics (not including Kazakhstan, which is aiming to become the regional hub for shari'a-compliant banking). Indeed, in Azerbaijan, where Muslims account for 93% of the population, the fear of political Islam has prevented any of the necessary legislation from being put into place, with the only bank attempting to offer a full line of Islamic banking products, Kovsarbank, having seen its license revoked after the central bank said banking laws had been violated.

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