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Is Islamic banking here to stay?

Is Islamic banking here to stay?

Islamic banking has been growing fast, but could it break out of its niche position in the market?

As economies across Asia, Africa and the Middle East have grown, it is not surprising that demand for financial services in these markets has risen in the past few years.

But at the same time, the high proportion of Muslims living in these countries and other global economies has created the need for a different approach to financial services. Islamic banking, which is administered so that it complies with sharia law, has boomed as a result.

 

According to the latest World Islamic Banking Competitiveness report from EY, from 2008 to 2012 Islamic banks saw their assets grow at a rate of 17.6 per cent a year on average – more than twice as quickly as conventional banks. It predicted that by the end of 2013, Islamic banking assets with commercial banks would have topped $1.7 trillion (£1 trillion).

In particular, the study found that Bahrain and the six high-growth markets of Qatar, Indonesia, Saudi Arabia, Malaysia, Turkey and the United Arab Emirates (UAE) will be key in making the sector truly international.

Since each of these countries have a large Muslim population and Islamic banking tends only to account for a third of less of the market there, it seems the growth potential is huge. India’s central bank is reportedly reviewing the regulations governing Islamic banking there.

But the importance of Islamic banking is also becoming clearer in the west – just last month, the UK government issued a £200 million sovereign bond in the form of a sukuk, a type of Islamic bond.

 

Islamic Bank of Britain chief executive Sultan Choudhury said at the time that the bank was hoping to buy a considerable chunk of the bonds on offer and persuade the government to use a different structure for its next Islamic bond sale.

With ambitious plans to extend its commercial property business into European markets in the future, the bank is certainly expecting strong performance in the next few years.

There are still challenges to face, as Linda Yueh writes for the BBC. Ms Yueh points out that different banks interpret sharia law in different ways, so products are not always uniformly available across Islamic banks. She adds that profit margins are smaller than in conventional banks and products are more complex. Dealing with these issues will be vital if Islamic banks are to compete with their rivals.


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