Share of Islamic banks in Kuwait of total assets of banking sector 42.3%
KFH-Research issued a report that stated that total assets of Islamic banking in the GCC region is 34% of assets of Islamic banks worldwide, where Islamic banking sector in Kuwait possesses 42% of total assets of banking sector in Kuwait in 2012. This is the highest rate in the gulf region, and Islamic banks in Kuwait rank second in total assets and rati of financing to deposits in the gulf region.
The report expected that Islamic banking will continue to grow in the GCC region during this year, and that it will manage to enter new markets worldwide, driven by growth factors and increasing demand. Islamic banking assets are expected to reach USD 1.5 trillion by end of this year with an accumulative growth rate of up to 20%.
Islamic banking represents the largest market share (80.3%) in the Islamic finance total assets. The industry has grown rapidly over the past few years and growth is expected to continue in the foreseeable future. Based on our estimate, Iran's Islamic banking assets contributed 42.7% of the total global Islamic banking assets in 2012, followed by GCC (34.1%) and Malaysia (10.0%). The Islamic banking industry is not only confined to Muslim-majority countries such as the GCC and Malaysia but also into new territories such as the Far East and Europe, many of which are currently in the midst of implementing appropriate regulatory and legal reforms that would facilitate the provision of Islamic finance products.
At present, Islamic banking has become the fastest growing segment in the international financial system. The internationalisation of Islamic finance offers the potential for further means by which cross border financial flows are intermediated between economies worldwide. Since its inception, Islamic banking has been the main driving force of the global Islamic finance industry, with an estimated asset size of USD1.1tln in 2011 representing 80.9% of Islamic finance assets worldwide. Based on a compounded annual growth rate (CAGR) of 21.1% between 2007 and 2011, Islamic banking assets reached USD1.3tln as at end-2012.
Although Islamic banking industry currently constitutes a meagre 1.0% of the global banking assets, we expect to witness further developments in the Islamic banking industry in particular to the development of new products and services as well as the opening up of new markets and jurisdictions in light of the industry's resilience during the global financial crisis.
As such, we believe Islamic banking industry will continue to grow driven by both demand and supply factors. Growing demand for Shariah compliant products rather than its supply is driving the development of Islamic banking industry. The demand for Shariah-compliant investments and financing products was fuelled by a new geopolitical backdrop in the GCC region and abundant liquidity flows from the recycling of oil money in the regions' economies. With demand rebuilding in the post Arab spring, Islamic finance is set to grow in its wider appeal.
The changing of demographics of the Muslim countries will also drive the growth of the Islamic banking industry. Regions with sizeable Muslim populations continue to offer the best opportunities for Islamic banks. Although the regions are under-banked in terms of Islamic banking, the potential for growth remains given the customers' growing awareness of the benefits offered by Islamic banks. According to market consensus, Muslim population is expected to increase by approximately 35% in the next 17 years, rising from 1.6bln in 2010 to 2.2bln by 2030.The youthful consumers in these countries are increasingly sophisticated about financial services. As such, the twin effects of population growth and increasing sophistication are likely to result in large number of savvy consumers who require sophisticated and competitive Shariah-compliant financial solutions.
On the supply side, the main driver of growth in Islamic banking is the increasing number of financial institutions offering the Shariah-compliant solutions. Growth of the global halal food industry is expected to have positive implications for the Islamic banking and finance industry in offering Shariah-compliant financial solutions, given that the source of financing for the halal food industry should be from a Shariah-based structure to ensure that the whole production process complies with Shariah rules and regulations. In addition, the low penetration level of Islamic banking in countries with large Muslim populations such as Indonesia, Pakistan and Egypt presents considerable opportunities for further growth and development of Islamic banking.
Government and regulatory push for Islamic financial model have also become one of the factors driving the growth of Islamic banking industry. In some prominent markets such as Malaysia, early growth in the sector was largely regulatory driven, given that the governments introduced initiatives and put in place the necessary infrastructure to hasten the sector's growth. Support provided by these governments has helped foster favourable views of Islamic finance by regulators and supervisory agencies across the world.
The GCC Islamic banking sector has experienced remarkable growth in the business/ financing activities and significant demand for Shariah-compliant products and services. The growth of the Islamic banking industry in the region was mainly driven by Saudi Arabia and Qatar. Islamic banks in these two countries are generally well capitalised and profitable with high capital adequacy and low NPF ratios. The Islamic banking industry in the GCC is expected to continue growing, underpinned by their strong economic fundamentals, economic stimulants via government sponsored infrastructure projects, consolidation of the Islamic banks in certain jurisdictions (Bahrain and the UAE), growing numbers of Islamic banks (Saudi Arabia and Oman) and changes in regulations (Qatar and the UAE) which will benefit the Islamic banking industry moving forward. Profits will continue to be positive, however growth rates are expected to moderate given uncertainties on the global economic front, potentially impacting domestic economies, trade and business activities, consumer spending and the banking sector in general.
As at September 2012, Islamic banking assets in the GCC rose by 16.5% y-o-y to USD307.2bln from USD263.6bln as at September 2011. Growth was led by Qatar (+25.9% y-o-y), followed by Saudi Arabia (+22.0% y-o-y), the UAE (+16.9% y-o-y), Kuwait (+7.8% y-o-y) and Bahrain (+5.5% y-o-y). In terms of market share of the Islamic banking industry by country, Kuwait's Islamic banking sector accounted for 42.3% of the country's total banking sector total assets, the highest in the region. This was followed by Qatar (22.9%), Saudi Arabia (22.9%), the UAE (12.9%) and Bahrain (12.8%). However, in terms of absolute value, Saudi Arabia's Islamic banking sector has the largest total assets of USD99.9bln, followed by Kuwait (USD70.4bln), the UAE (USD61.5bln), Qatar (USD49.7bln) and Bahrain (USD25.7bln).
An analysis of financing and deposits showed that Islamic financing outpaced Islamic deposits across the GCC region, underpinned by positive economic growth and much improved operating environment in selected countries. As a result, the financing-to-deposit (FD) ratio of the GCC region rose from 84.2% as at September 2011 to 86.6% as at September 2012. Qatar has the highest FD ratio of 97.3%, followed by Kuwait (92.1%) and Saudi Arabia (85.8%), as financing growth was supported by positive economic growth and government-led infrastructure projects in respective countries. Meanwhile, the FD ratio for Bahrain and the UAE was slightly lower at 80.9% and 76.1% respectively, in line with lower financing growth in both countries. On the back of positive financing growth, excess liquidity of the GCC Islamic banking industry eased to USD27.8bln as at September 2012 from USD28.1bln as at September 2011.
In the first nine months of 2012, the Islamic banking sector financing growth in the GCC states grew by 19.4%, representing an annualised growth rate of 20.4% for 2012, an increase of 11.4% y-o-y in 2011. The pace of financing growth was uneven across GCC countries, with Qatar and Saudi Arabia being the main growth drivers, with Islamic financing growth estimated at 29.0% and 28.5% respectively in 2012 for the two countries (2011: 23.4% and 21.7% respectively). Kuwait's Islamic financing growth is estimated to have increased to 14.7% in 2012 from 6.6% in 2011, due to improved operating environment in the country. Meanwhile, Islamic financing growth in Bahrain and the UAE is estimated at 13.5% and 8.6% respectively in 2012 (2011: -3.5%, -1.1%), supported by low base effects in the previous year.
The outlook for the GCC Islamic banking sector remains stable for 2013, underpinned by their strong economic fundamentals, economic stimulants via government sponsored infrastructure projects and sustained demand for Shariah-compliant financing. Similarly in 2013, growth pace of the Islamic banking sector will remain uneven across GCC countries, with Saudi Arabia and Qatar driving growth.
The Malaysian Islamic banking sector has experienced robust growth, with Islamic banking assets market share in terms of the overall banking sector total assets increased to 20.0% as at November 2012 from 18.8% as at end-2011. The 16 Islamic banks in the country continue to benefit from the growing demand for Shariah-compliant products and services among the Muslim and non-Muslim population, underpinned by growing competitiveness of Islamic banks vs. conventional peers as well as an increasing array of viable alternative instruments.
While growth remains robust, Islamic banking statistics in Malaysia show a slight slowdown from the considerable growth rates witnessed over the previous years. Nevertheless, growth remains higher than that of the conventional banking institutions in the country, which highlights the industry's resiliency from slower economic growth amid renewed demand for Shariah-compliant banking products. Based on annualised growth rates for 2012, we project Islamic financing facilities to grow to RM277.2bln in 2013.
One of the significant developments of Turkey's banking industry is the evolution of the participation banking sector, which rooted in 1980, with the setting up of some participation banks which offered Shariah-compliant banking services. As at November 2012, total assets of participation banks stood at TRY69.0bln, a growth rate of 24.6% y-o-y. In the first eleven months of 2012, participation banking assets grew by 22.8% from TRY56.2bln as at end-2011, representing an annualised growth rate of 24.9% for 2012 (2011: 29.6%). As such, at TRY69.0bln, participation banking assets accounted for 5.2% of total banking assets in Turkey as at November 2012, up from 4.6% as at end-2011.
Continuous measures and initiatives taken by the Turkish government will drive the participation banking sector to new heights in the longer term. By 2018, Turkey is expected to grow by more than double the total assets of participation banking to 10% of the overall banking sector total assets (November 2012: 5.2%).
Since its inception, Islamic banking has been the driving force of the global Islamic finance industry, with an estimated asset size of USD1.3tln as at end-2012 or at 80.3% of Islamic finance asset worldwide. Based on CAGR of 20.5% between 2008 and 2012, Islamic banking assets are expected to reach USD1.5tln by end-2013. The Islamic banking industry is expected to witness positive growth as emerging economies such as Turkey, Indonesia and China promote Islamic intermediation, underpinned by the increasing demand for alternative banking products and services.
Encouraging developments in Africa are expected to bring positive results looking ahead given the region's growing demand for Shariah-compliant and ethical products and services, a growing number of the middle class populations and proactive measures undertaken by some of the governments to review and reform their respective banking laws to allow the establishment of Islamic finance institutions. Other jurisdictions in Central Asia such as Kazakhstan, Turkmenistan and Tajikistan are also deemed as potential newcomers in the Islamic banking radar given the demographics and support from the government agencies. We expect further developments in the Islamic banking industry moving forward, particularly in terms of the development of new products and services as well as the opening up of new markets/ jurisdictions, in light of the industry's resilience during the global financial crisis and increasing popularity of Islamic finance as alternative to conventional financing in recent years.
The rapid growth of Islamic banking across the globe gives weight to the commercial viability of the industry in providing business returns as well as positively impacting its stakeholders. The viability of Islamic finance has been derived from its ability to meet the changing demands of the economy and from its cost competitiveness. The development of Islamic banking industry has also been supported by well-developed legal, regulatory and supervisory frameworks (especially in countries where Islamic banking thrives), which has been important in ensuring the industry's soundness and stability. The industry's growth has also created avenues for specialised employment in the Islamic banking practices which in turn has helped to enhance employment within the various jurisdictions.
In summary, we expect the Islamic banking industry continue to chart positive growth in 2013, underpinned by the following factors:
· Sustained economic growth in 2013 across emerging markets, supported by stimulus measures.
· Abundant liquidity flows on the back of high oil prices.
· Active role played by some jurisdictions around the world to promote the development of Islamic financial markets in their respective countries.
· Encouraging demographics profile and greater awareness which contributed towards an increase in demand for Shariah-compliant and ethical products. The world's Muslim population currently stands at 1.6bln and around 62.0% of them are located in Asia.
· Growth of the global halal food industry is expected to have positive implications for the Islamic banking and finance industry as the source of funding for the halal food industry should be from Shariah-based sources. 
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© Press Release 2013
