It’s an exciting time for Islamic retail banking. Established markets are pioneering ways to achieve market growth and emerging markets are looking at ways to fuel rapid expansion. This is reflected in the opinion offered by industry experts. TIM SINCLAIR writes.
The trend so far for impressive growth is set to continue, according to estimates by Ernst & Young, the global professional services firm. The firm estimates that global Islamic banking assets grew at an annual rate of 17.6% between 2009 and 2013, and will grow by an average of 19.7% each year until 2018.
Overall, growth has been driven by a variety of factors, with Sukuk issuances in non-Muslim markets including the UK, South Africa, Hong Kong and Luxembourg dominating the headlines in 2014. However, a closer look shows that the impressive achievements of the retail Islamic banking sector has also played a significant role in helping the industry.
Review of 2014
While Malaysia, Indonesia and the Gulf region are the main centers of the global Islamic finance industry, significant developments have been taking place elsewhere.
In the UK, for example, the government launched the Help to Buy: Home Purchase Plan Guarantee scheme, aimed at widening consumers’ accessibility to Shariah compliant retail financial products.
This was an extension of the existing state-backed Help to Buy mortgage guarantee scheme for home buyers, to include Shariah compliant home finance. Launched in February 2014, the scheme was developed by the Treasury with support from the UK’s Al Rayan Bank, formerly known as Islamic Bank of Britain (IBB).
This was an important milestone for the Islamic finance industry and, in particular, Muslim consumers. It allowed them to benefit from the same government support offered to customers of interest-based mortgages, giving access to low-deposit home finance based on Shariah principles.
Al Rayan Bank launched the UK’s first, and currently only, Home Purchase Plan to be backed by the government’s scheme in September 2014.
Important gains were also made in markets further afield including Pakistan, Turkey, Africa and Australia.
In Turkey, where Islamic banking is also called ‘participation banking’, the government stated its intention to establish three Islamic banks, as subsidiaries of state-run conventional banks, by the end of 2015. Given that, until now, state lenders have stayed away from the Islamic finance arena, the move was a bold one, designed to grow the market share held by the Islamic finance sector from 5% to 15% by 2023.
In Pakistan where Islamic banking is more established, Islamic banks enjoyed a boost in profitability underpinned by an ambitious five-year plan that regulators hope will double the industry’s share of the banking sector to 20% by 2020. A growing client base and improving asset quality helped Islamic banks post profits before tax of PKR12 billion (US$116.7 million) in the third quarter of last year, almost double the amount posted 12 months earlier, according to data from the central bank.
Preview of 2015
The developments of 2014 signal a clear trend. It shows that there is a conscious effort being made by local regulators to facilitate the development of Islamic finance, setting the scene for what is to come in 2015 and beyond.
In the UK for example, product development is key to maintaining the industry’s growth. This is an area in which Al Rayan Bank, the UK’s only wholly Shariah compliant retail bank, has excelled by offering the country’s largest range of Shariah compliant retail financial products.
However, in order for the Islamic sector to flourish even more, liquidity, and the ability for Islamic banks to increase the number of tools they can access to improve this, is one of the key areas that needs improvement.
The GBP200 million (US$308.9 million) sovereign Sukuk issued by the UK government in June 2014 gave the industry a major boost. Similarly, a government policy statement known as PS4/14, announced in May 2014, is expected to deliver a huge advantage to British Islamic banks. By allowing them to widen the range of assets they hold in their liquidity buffers, it will enable them to grow their financing business and offer even more competitive rates to their customers.
Another trend is for the increasing utilization of digital media to improve the market penetration of Islamic banking. This has been identified as a key issue for established markets in the GCC region by Ernst & Young in its report, ‘World Islamic Banking Competitiveness Report 2014-15 – Participation Banking 2.0’. According to this report, the overall market penetration of Islamic banking ranges from nearly 50% in Saudi Arabia to over 20% in the UAE. However, the concern is that customer satisfaction remains low due to ineffective online and offline interaction. The firm suggests that this needs to be tackled by employing customer-centric engagement strategies, which focus on their lifestyle and priorities.
Conclusion
The retail Islamic finance sector is the ‘public face’ of the overall industry, and despite its strong performance, it is regularly subject to comparisons to the conventional finance sector. For this reason, those within the industry need to focus on both growth and supporting the industry to help it position itself more convincingly against its interest-based counterparts.
Critical factors include focusing on the ethical nature of Islamic finance, securing government support in order to strengthen the infrastructure on which it is built, and investing in product development and customer experience.
These factors are the basis for the initiatives that have been discussed in this article. It will be interesting, therefore, to see how these developments unfold over the coming year and how they help the industry to achieve the ambitious growth targets it is aiming for.
Tim Sinclair is the senior head of marketing and retail sales at Al Rayan Bank (formerly known as Islamic Bank of Britain).