Islamic Banking: New Markets To Emerge

BMI View:  We maintain our bullish outlook on the global Islamic Banking sector over the coming years. We highlight Indonesia and Nigeria as two countries where Islamic Banking is set to take off in the coming years.

We forecast strong growth for the USD1.7trn global Islamic finance industry over the coming quarters as several new markets come to the fore. 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. Over the coming quarters we expect the development of regional hubs as the Islamic banking industry grows, but little coordination on a global level. Growth in Islamic Banking will remain strong, in part fuelled by a more promising global macroeconomic outlook, however, expansion rates are likely to be lower over the coming years on the back of higher base effects and several significant impediments.

New Markets On The Horizon

Upward Trend To Remain In Place
Global Islamic Bond & Loans Issuance

BMI View:  We maintain our bullish outlook on the global Islamic Banking sector over the coming years. We highlight Indonesia and Nigeria as two countries where Islamic Banking is set to take off in the coming years.

We forecast strong growth for the USD1.7trn global Islamic finance industry over the coming quarters as several new markets come to the fore. 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. Over the coming quarters we expect the development of regional hubs as the Islamic banking industry grows, but little coordination on a global level. Growth in Islamic Banking will remain strong, in part fuelled by a more promising global macroeconomic outlook, however, expansion rates are likely to be lower over the coming years on the back of higher base effects and several significant impediments.

Upward Trend To Remain In Place
Global Islamic Bond & Loans Issuance

New Markets On The Horizon

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.

Impediments To Limit Upside
Bloomberg Takaful Index

Shariah-compliant banking has seen remarkable growth in Indonesia in recent years as Islamic banking sector assets have been growing by an average of 9.4% since 2008, and surged by 24% to USD21bn in 2013. Still, while Indonesia may have the largest Muslim population in the world, its Islamic banking sector remains largely undeveloped, with Shariah-compliant banking assets accounting for just 4.9% of the local banking sector. This pales in comparison to ratios of 23% in Saudi Arabia and 21% in Malaysia.

Buttressed by a massive young and growing Muslim population, Indonesia has a substantial pool of natural demand for Islamic banking products. Furthermore, in the event that Indonesia manages to push through with a massive infrastructure drive that investors want and the country needs, the asset-backed nature of sukuk financing would be aptly suited to bankroll infrastructure projects.

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

Malaysia To Remain Global Leader

Malaysia clearly highlights the Islamic finance industry's potential when placed into a supportive regulatory environment. Despite having a population of only 30mn, 60% of which are Muslim, the Southeast Asian state is certainly the global leader, with a fifth of the domestic banking sector's assets being shari'a-compliant (compared to 12% for most other Muslim states), and the country dominates the global sukuk market. Several notable institutions set up by the central bank also play a role in the country's position as industry leader, including the International Centre for Education in Islamic Finance and the Islamic Banking and Finance Institute of Malaysia, both of which are broadly attempting to deepen the professionalization of the industry.

More importantly perhaps, Malaysia also hosts the Islamic Financial Services Board (IFSB), which is the closest institution the Islamic finance sector has to a global regulatory body. Indeed, the IFSB sets global guidelines for shari'a-compliant banking, having originally introduced guidelines on capital adequacy back in 2005. As one of the main weaknesses of the global industry is a lack of standardisation, with national financial regulators having the final say on the application of any legislation, the IFSB possesses a strong first-mover advantage. Although Bahrain's Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is likely to remain the most influential body in the Gulf, we expect the majority of national regulators that are considering introducing Islamic banking into their home markets to look to the Kuala Lumpur-based IFSB for guidance, which will only solidify Malaysia's stature further in the years to come.

Recent Developments

  • Kuwait - Commercial  Bank  of  Kuwait (CBK) has obtained regulatory approval to issue bonds worth up to KWD120mn (USD425.8mn) as it plans to convert into an Islamic bank. In April 2014, the bank's shareholders approved the issuance of subordinated bonds and plans for CBK's conversion into a full-fledged Islamic bank. The bonds will be in line with Basel-III rules. At end June 2014, the Central Bank of Kuwait issued final guidance on capital adequacy requirements. The country already has five Islamic banks - Boubyan Bank, Al Ahli United Bank, Kuwait Finance House, Kuwait International Bank and Warba Bank.

  • UAE - Sharjah-based United  Arab  Bank (UAB) has completed a USD100mn three-year syndicated Murabaha facility with four lenders based in the UAE, Bahrain, and Kuwait. The Murabaha deal is the first Islamic syndication completed by the bank. UAE-based Al  Hilal  Bank was the Mandated Lead Arranger and Bookrunner for the deal, whereas Bahrain's Arab  Banking  Corporation and Sharjah  Islamic  Bank were the other Mandated Lead Arrangers. The National  Bank  of  Kuwait was also the Lead Arranger for the deal. The facility was taken out for general corporate purposes and was nearly twice oversubscribed. This facility is the second for the bank in the past few months. At end 2013, UAB signed a two-year loan facility worth USD250mn with a syndicate of 12 global and regional lenders. This facility was also more than twice oversubscribed above its USD200mn target.

  • Morocco - The Moroccan parliament's first house has approved a governmental bill to set up and regulate Islamic banks. The new rules will regulate Islamic banking activity and Islamic debt issues for private firms. The bill was passed by 75 votes, with no one against, while 19 opposition deputies did not vote. The bill enables foreign banks and local lenders to establish Islamic banks in Morocco. Under the new bill, the Moroccan central bank will establish a committee with a government body of scholars to oversee the conformity of the Islamic lender's activity to shari'a law. Though the bill has been passed by the majority of the deputies in the first house, it still needs to pass the second house in a final vote in the coming weeks.

  • Pakistan - The State Bank Of Pakistan will sell Islamic bonds worth PKR49.5bn (USD503.8mn) in the coming weeks. The sukuk is likely to help the country's Islamic banks to manage short-term liquidity needs and support their financing activities. It will be the first sukuk to be issued in the past 15 months in the country and will infuse a much-needed liquidity into the domestic Islamic banking industry. The bank had sold the last local currency sukuk in March 2013, raising PKR43bn (USD437.64mn).

  • Bahrain - Bahrain Institute of Banking and Finance (BIBF) has launched a new course, which will focus on the 18 new standards issued by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI). The new AAOIFI standards were set in place to enhance standardisation and harmony in accounting for Islamic financial transactions, according to AAOIFI Standards Auditing Committee Member Shaikh Esaam Eshaq. BIBF is reportedly conducting the training course to clarify the applications of new standards in common Islamic banking tools and explain their legal implications.

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