Market share for Islamic finance up in many countries
The Malaysian Reserve


The domestic market share for Islamic banking in relation to the total banking sector increased in a large number of countries, including Malaysia, Iran, Pakistan and Turkey, according to a recently released industry report.

Islamic Financial Services Industry Stability Report 2017, which tracks an expanded list of 35 jurisdictions, noted that Islamic banking experienced an increase in domestic market share in 18 countries, while remaining constant in eight others (including Iran and Sudan, which have 100% market shares).

The countries include Iran, Sudan, Brunei, Saudi Arabia, Kuwait, Yemen, Qatar, Malaysia, the United Arab Emirates (UAE), Bangladesh, Djibouti, Jordan, Bahrain, Pakistan, Palestine, Oman, Egypt, Afghanistan, Turkey, Tunisia, Indonesia, Maldives, Kenya, Azerbaijan, Algeria, South Africa, Iraq, Sri Lanka, Lebanon, Thailand, Nigeria, Kazakhstan, the UK and Singapore.

It said only five jurisdictions experienced very marginal declines, among them were two jurisdictions that are non-members of the Organisation of Islamic Cooperation (OIC). The four newly added jurisdictions in the Islamic banking market-share tracker were Afghanistan (5.9%), Maldives (4.3%), Iraq (1.5%) and Kazakhstan (0.1%).

This is despite the slowdown recorded in global Islamic banking assets between the first-half of 2015 (1H15) and 1H16, according to the report released by the Islamic Financial Services Board (IFSB).

IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital mar- kets and insurance sectors.

Based on the expanded list, the report noted that the number of jurisdictions where Islamic finance (IF) has achieved domestic systemic importance has expanded to 12 in 1H16, with the latest addition being Jordan, with a 15.2% market share for Islamic banking in its total domestic banking sector, up from 14% the year before.

The report noted that four jurisdictions now boast a more than 50% share for Islamic banking. Aside from Iran and Sudan, which have 100% shares, Brunei is the “most prominent” with Islamic banking now accounting for 57% (1H15: 49%) of its domestic market share, followed by Saudi Arabia with a 51.1% share in 1H16 (1H15: 48.9%).

It said improvements in market share were also made across other systemically important jurisdictions, including Kuwait at 39% (1H15: 38.8%), Qatar 26.6% (1H15: 26.1%), Malaysia 23.8%

(1H15: 23%), UAE 19.6% (1H16: 18.4%) and Djibouti 16.2% (1H16: 15%).

Collectively, it said the 12 systemically important IF jurisdictions are host to 88% of the global Islamic banking assets and to 84% of the global sukuk outstanding.

Meanwhile, the report also noted that the average return on assets (ROA) and return on equity (ROE) for standalone Islamic banks stood at 1.63% (2014: 1.61%) and 13.4% (2014: 13.27%) respectively in 2015, below their moving averages (1.68% and 14.27% respectively).

In the year to the second- quarter of 2016 (2Q16), it said Islamic banks averaged 13.8% ROE, and compared favourably to banks in the US and the European Union, whose ROE in the same period were 9.45% and 5.7% respectively.

However, it said the Indonesian Islamic banking sector continued to experience declining ROA and ROE, dropping to 2% and 22.5% respectively in 2015 (2014: 2.6% and 32.3%).

“This was in part due to capital injections, increased assets and an expanding branch network resulting in higher operating costs and lower returns (Bank Indonesia, 2016),” it said.

On the other hand, it said the ROA and ROE levels of Malaysian Islamic banks remained unchanged between 2015 and 2Q16, registering 1% and 14.2% respectively, despite having recovered in 1Q16.

“These figures appear to show a marginally declining profitability performance of Islamic banks in Malaysia when considered alongside the 2014 (ROA: 1.1%; ROE:

16%) and 2013 (ROA: 1.2%; ROE: 17.3%) financial results. In ROE terms, Islamic banks in Malaysia compared favour- ably to the overall Malaysian banking system (ROE: 12.4%) in 2015, but underperformed the overall ROA average of 1.3%,” the report said.

In terms of the top jurisdictions for Islamic banking assets, it said Iran has retained its position as the largest market, accounting for 33% of the global Islamic banking industry in 1H16. However, its market share has been materially declining over the past two years (1H15: 37.3%; 1H14: 40.2%) on account of a steep depreciation in its local currency.

In contrast, it said the Gulf Cooperating Council states had been steadily increasing their market share, with Saudi Arabia at 20.6% (1H15: 19%); UAE at 9% (1H15: 8.1%); Kuwait at 6.1% (1H15: 5.9%); and Qatar at 5.8% (1H15: 5.1%).

The shares of Malaysia and Turkey had experienced no change at 9.3% and 2.9% in 1H16 respectively.

Overall, it said the global IF services industry has experienced a second consecutive year where the assets in its three main component markets have failed to register any growth in the US dollar terms; the market remains near the psychological US$2 trillion (RM8.6 trillion) mark but has not yet been able to breach it.

It added that a similar situation is also observed in the global financial industry in general, where growth rates have remained depressed on account of various factors affecting the global economic environment.