Gulf Islamic banks continue to outperform conventional peers 


Darren Stubing  on Sunday, April 27, 2008

Gulf Islamic banks continue to grow at a strong pace in excess of conventional banks in the GCC countries.

Islamic financial institutions are maintaining their rapid expansion in product breadth and sophistication. Against what has been seen at non-Shariah compliant banks, Islamic banks in the Gulf are releasing good results. New Islamic financial entities entering the market are finding there is plenty of opportunity for growth.

Islamic banks generated a return on assets of 3.6 per cent in 2007, significantly higher than the 2.4 per cent achieved by conventional banks. Islamic banks’ return on equity was 24 per cent, again much higher than the 19 per cent for conventional institutions. Overall net profit for Islamic banks grew by 11 per cent in 2007, which was higher than the five per cent for conventional banks.

More crucially, Islamic banks are registering good interim results so far in 2008, which contrasts with the often weaker results being released by conventional banks in the region.

For example, leading Islamic bank Al Rajhi Bank, achieved net earnings of SAR1.6 billion (Dh1.56bn) in the first quarter of 2008, representing growth of two per cent from the same period last year. Although the growth is not high, it contrasts with declining net profit figures at a number of the conventional banks in Saudi Arabia. Al Rajhi is witnessing higher net investment income and income from banking services. Assets grew by 26 per cent. Al Rajhi continues to generate growth through diversification of income resources and development of the investment and corporate sectors together with retail banking.

Islamic banks need also to identify and target the most valuable customer segments with differentiated and higher-quality offerings. As with conventional institutions, Islamic banks that focus on retail perform better, on average, than those that target only corporate banking.

Al Rajhi and the Kuwait Finance House concentrate mainly on retail and small-business customers.

Kuwait Finance House achieved total profit for the first quarter of 2008 of KWD151.326m (Dh2.09bn), compared to total profit of the first quarter of 2007 of KWD114.628m, representing 32 per cent growth. Net profit to shareholders reached KWD73.410m, a 43 per cent increase over the corresponding period. Assets reached KWD9.408bn with a 38 per cent growth. KFH is aiming to enter new markets and is looking at investment opportunities in Southeast Asia, including Hong Kong, China, Singapore and Indonesia. As well as continuing to target the GCC market, KFH is about to expand its presence in North Africa.

Qatar Islamic Bank’s (QIB) first quarter results saw record profits of QAR456m (Dh461m) compared to QAR270m for the same period in 2007, a rise of 69 per cent. QIB recorded QAR30bn in assets in the first quarter, up by 104 per cent from the same quarter last year. The bank’s financing portfolio increased by 73 per cent. The return on average equity reached 37.9 per cent. QIB has recently obtained authorisation for the European Finance House from the UK Financial Services Authority to operate as an Islamic investment bank in the United Kingdom.

A new Islamic bank will soon be set up by the world’s largest Islamic banking group AlBaraka Banking Group (ABG). Sheikh Saleh Kamel, chairman of ABG, said initially the bank’s capital would be $11bn (Dh40.1bn) against which the bank would raise significant money from own funds and a substantial amount from Islamic bonds. Founding shareholders would include ABG, the Jeddah-based Islamic Development Bank, the Kuwait Real Estate Bank, the Saudi Investment Bank, the Bahrain Islamic Bank and other prominent Islamic institutions.

Gulf Islamic banks have in excess of $300bn of Shariah-compliant assets and are expected to record double-digit growth over the next decade. The buoyant GCC economy, new Islamic banking products, higher infrastructure spending and continued diversification from oil economies are driving Islamic assets. Islamic assets in the Gulf are expected to grow to 20 per cent of sector assets by 2012 from the current 14 per cent. Government backing for the development and promotion of Islamic banking, low penetration and competition among conventional banks make Islamic banking more attractive.

More conventional banks are also looking at converting to Islamic bank status. The Commercial Bank of Kuwait (CBK) is awaiting approval from the central bank to transform into an Islamic lender. CBK made the request to transform all its activities to comply with Islamic law after the central bank gave conventional banks the chance to transform within a limited period.

To succeed, Islamic banks require economies of scale in order to drive down cost-income ratios. Cross-border expansion, including mergers and acquisitions, is one option in increasing scale.


The numbers

$300bn: Worth of assets held by the Gulf’s Shariah- compliant banks, which are expected to record double-digit growth

3.6%: The return on assets generated by Islamic banks compared to 2.4 per cent by mainstream banks in 2007

24%: Shariah-compliant banks’ return on equity, higher than the 19 per cent achieved by conventional banks

11%: Net profit growth in 2007 posted by Islamic institutions compared to five per cent by traditional banks


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