May 29 2011
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Who's in the money?
The headlines proclaiming record profits year after year were staple fare, and it's true that in the heady pre-crisis days double-digit profit increases were the norm as opposed to the exception to the rule.
However, over the past few years there has been an increase in headlines painting a not-so-rosy picture. In just the last two months we have seen majority shareholders wade in and bailout the Islamic Bank of Britain and, as of last week, Dubai Bank .
It is unfair though to lump all Islamic banks together, as Sohail Akram, COO of Umex Securities, told The Islamic Globe: "Profitability is affected by a number of factors. Primarily whether the bank is a retail Islamic bank or an investment bank, both are needed in Islamic finance, and as we know from the conventional market, are interdependent.
Taking the nascent and niche UK market for example you could partially justify Akram's hypothesis. IBB was the market's only retail player and as mentioned above collapsed in March after 2010 losses of $13.3m and $15.6m for the year before. On the other side of the spectrum one of the UK's newer Islamic banks, Bank of London and The Middle East reported profits in the region of $8.1m for 2010, a stellar improvement on the previous year's loss of $30.6m.
But BLME 's slightly more mature competitor, the European Islamic Investment Bank, the UK's first Islamic investment bank was still making back-to-back losses of $9.6m and $35.9m in 2010 and 2009 respectively.
Mike Kennedy, head of risk management for BLME , said to The Islamic Globe: "In the developing UK Islamic banking industry there is evidence that some of the five Shari'ah-based banks are growing their businesses.
The potential for these banks to make a profit is as good as for any conventional bank as long as the offering is competitive and good service is provided."
Arguably the chances of profitability are greater if the bank is based in a Muslim-majority country, but not always. Akram argued: "I would argue that banks based in Muslim majority countries have a higher probability of turning a profit then if they are based in Europe and North America. There's two reasons for this, the obvious one being a larger number of potential clients and in Muslim majority countries you'd expect fatter margins as in North America and Europe there is strong, entrenched competition from the conventional sector, a lack of IF regulation and more consumer rights, all which makes the profit margins much lower."
Dubai Bank , Amlak and Tamweel are all Islamic financial institutions based in a Muslim-majority country, the UAE, but these institutions were systematically haemorrhaging money. DB , for example recorded losses of nearly $80m in 2010, whereas Tamweel turned its fortunes around with a $7m profit in 2010, following a $14.8m loss for the year before, but could never be described as a strong institution. Its domestic home finance competitor, Amlak did not fare as well. As 2010 came to an end it looked like it was turning the corner with much reduced fourth quarter losses and an annual 2010 loss of $59.6m, however it slumped back into the red again with $14.67m losses for the first quarter of this year.
The non-Dubai Islamic banks in the UAE had strong performance. The stellar performer in the UAE was Abu Dhabi Islamic Bank, which reported a leap in profits of 1216% between 2009 and 2010, barely making a profit in 2009, to racking up profits of nearly $280m in 2010.
In Qatar, the Islamic banks remained on an even keel between 2009 and 2010, with no one making losses, but then again hardly growing their profits year-on-year. In 2011, the Qatari Islamic banks took a bit of a reversal in fortunes, and whilst they remained in the black, their profitability fell when compared to the year earlier.
In Pakistan, Meezan Bank acted as a barometer for the Islamic banking industry. It saw its profits increased 61% between 2009 and 2010, increasing from $12m to $19.3m. Coincidently first quarter 2011 profits also increases 61% year-on-year.
This snapshot would support Kennedy's view. He said: "I think on a proportional basis more Islamic banks globally are making a profit then conventional banks.
Over the past few years a number have had to take provisions due to exposures, mainly to the Dubai property market, but net many have still made a profit."
Unsurprisingly, Malaysia saw consistent performance and profitability. CIMB Islamic's profit before tax jumped 137% between 2010 and 2009, seeing the bank contribute $132m profit to CIMB Group in 2010 up from $56m in 2009. CIMB's much smaller domestically-focused competitor, Affin Islamic Bank saw pre-tax profits rise from $14.5m in 2009 to $15.2m in 2010. Across the board Malaysian institutions with both a domestic retail and international investment banking focus maintained strong profitability in 2009, 2010 and into 2011. Akram concluded: "The support and willingness from the political elite is very important. Malaysia has a very strong Islamic finance sector, but this has come about over a period of 30 years of concerted effort from the government of Malaysia. It first laid down the regulatory framework, set up only one bank with an interest free government loan and it operated as the sole provider of Islamic banking for 10 years, before Malaysia opened the market to other players like Standard Chartered and HSBC."
© The Islamic Globe 2011
© Copyright Zawya. All Rights Reserved.
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