Global Islamic banking assets witnessed a CAGR of around 17 percent from 2009 to 2013. An EY report said approximately 95 percent of international Islamic banking assets of commercial banks are based out of nine core markets, five of which are in the GCC (Qatar, Saudi Arabia, UAE, Kuwait and Bahrain). The market share of Islamic banking assets in the five GCC states and Malaysia is now between 20 percent and 49 percent. Islamic banks in Saudi Arabia, Kuwait and Bahrain represent more than 48.9 percent, 44.6 percent and 27.7 percent market share, respectively.
EY MENA financial services leader Gordon Bennie stated: “The six rapid-growth markets – Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey – commanded 80 percent of international Islamic banking assets at USD 625 bn in 2013. Assets are expected to continue to grow at a five-year CAGR of 19 percent to reach USD 1.8 tr by 2019.”
Return on equity
The return on equity of Islamic banks remain approximately 20 percent lower than those of traditional banks in the same markets. This performance gap could cost its shareholders and to some extent, investment account holders, up to USD 17 bn in total forgone profit over the next five years. Structural transformation and scaling up is therefore becoming extremely critical to improve shareholder returns.
Trade finance, mobile payment solutions and managing the cost of regulatory compliance will drive the next phase of profitability. Most Islamic banks remain underweight when it comes to their role in trade finance business.
EY global Islamic finance leader Ashar Nazim stated: “The Islamic banking industry has gone mainstream in several core markets. This presents new opportunities as well as new challenges and demands a fundamentally different approach to profitable growth. In the future, growth will be most significant for banks that are able to strengthen customer experience through the use of digital technology.”
He added: “Banks that do not keep pace with technological advances are expected to face serious pushback from mainstream customers who will gravitate toward the larger conventional players who can deliver on digital.”
An EY analysis of over 2.2 million customers’ social media posts on their banking experiences with Islamic banks showed that customer satisfaction is mediocre for many Islamic banks. Nazim said: “Customers are increasingly active online and vocal about their experiences. Going mainstream and building a customer base that is based on added value to the customer has not been easy for Islamic banks.”
Evolving customer demands mean that Islamic banks should feel their pulse and bridge the performance gap. Understanding and analysing changing customer patterns can help anticipate needs and encourage desired behaviours. “Boards and executives need to efficiently shift their spending from running the bank to developing the bank,” Nazim said.