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| Source: EY. |
The Islamic banking industry has gone mainstream in several core markets. The combined profit of participation banks, or banks which adopt an interest-free model, crossed the US$10 billion mark in 2013 says EY. By 2019, the consultancy expects collective profits to touch US$37 billion as the industry continues its double-digit annual growth.
According to EY, global Islamic banking assets attained compounded annual growth rate (CAGR) of around 17% from 2009 to 2013. Approximately 95% of international Islamic banking assets of commercial banks are based out of nine core markets, five of which are in the GCC (Saudi Arabia, UAE, Qatar, Kuwait and Bahrain). The market share of Islamic banking assets in Saudi Arabia, UAE, Qatar, Kuwait, Bahrain and Malaysia is now between 20% and 49%*.
Islamic banks in Saudi Arabia, Kuwait and Bahrain represent more than 48.9%, 44.6% and 27.7% market share respectively. Positive progress has been has made in Indonesia, Pakistan and Turkey, with 43.5%, 22% and 18.7% CAGR respectively from 2009 to 2013.
Gordon Bennie, MENA Financial Services Leader at EY, said:
“The six rapid-growth markets (RGMs) – Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey (QISMUT) –commanded 80% of the international Islamic banking assets at US$625 billion in 2013. QISMUT Islamic banking assets are expected to continue to grow at a five-year CAGR of 19% to reach US$1.8 trillion by 2019.”
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| Source: EY. |
The 2014-15 World Islamic Banking Competitiveness Report – Participation Banking 2.0 from EY explores how digital innovation is set to positively disrupt traditional banking models. Key findings for the report include:
- International Islamic banking assets with commercial banks are expected to exceed US$778 billion in 2014.
- The global profit pool of Islamic banks is set to triple by 2019.
- Islamic banking assets in the six core markets of Qatar, Indonesia, Saudi Arabia, Malaysia, UAE, Turkey (QISMUT) are on course to touch US$1.8 trillion by 2019.
- Islamic banks in Saudi Arabia, Kuwait and Bahrain represent more than 48.9%, 44.6% and 27.7% market share respectively.
- Positive progress has been has made in Indonesia, Turkey and Pakistan, with 43.5%, 18.7% and 22.0% CAGR respectively from 2009-2013.
The report states that the time is ripe to transition to "Participation Banking 2.0", or technology-based, service-driven value propositions. EY analysed the sentiments of over 2.2 million customers’ social media posts on their banking experiences with Islamic banks in Saudi Arabia, Bahrain, Kuwait, UAE, Malaysia, Indonesia, Turkey, Qatar and Oman. The results showed that customer satisfaction is mediocre for many Islamic banks, which shows how critical it will be for Islamic banks to invest in raising quality of service and understand digital banking.
Ashar Nazim, Global Islamic Finance Leader at EY, observed during the launch of the report in late 2014 that the Islamic banking industry demands a fundamentally different approach to profitable growth.
"Customers have mixed emotions about their experiences of dealing with Islamic banks. In the future, growth will be most significant for the banks that are able to strengthen customer experience through the use of digital technology. 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,” he said.
In its research, EY found that:
Ashar Nazim, Global Islamic Finance Leader at EY, observed during the launch of the report in late 2014 that the Islamic banking industry demands a fundamentally different approach to profitable growth.
"Customers have mixed emotions about their experiences of dealing with Islamic banks. In the future, growth will be most significant for the banks that are able to strengthen customer experience through the use of digital technology. 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,” he said.
In its research, EY found that:
- Four out of every 10 participation banks are not “listening”.
- Better retail banking experiences could attract a sizeable majority to switch banks.
- Customers do not just want their bank to have a digital presence. They want it be tailored to their lifestyle relationships and connections.
- Migration from physical to digital channels requires more attention. Half of the banks surveyed did not have a Twitter account and only one in 18 banks offered full customer engagement on social media.
- Banks should invest in analytics to build rich insights into customers’ delights and pain points and personalise user experiences.
Ashar added:
“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.
Bridging the performance gap requires listening to customers. The
transformation of customers’ banking experience across channels and all
touch points is going to be crucial as digital and social banking and
customer expectations continue to evolve. Understanding and analysing
changing customer patterns can help anticipate needs, and encourage
desired behaviours. Most importantly, user experience conversations have
to be an ongoing activity and not a discrete project.
Institutionalisation of these core capabilities requires boards and
executives to efficiently shift their spending from running the bank to
developing the bank.”
EY also noted that the returns on equity (ROEs) of Islamic banks remain approximately one-fifth lower than those of traditional banks in the same markets. This performance gap could cost its shareholders, and to some extent the investment account holders, up to US$17 billion in total forgone profit over the next five years. Structural transformation and scaling up are therefore becoming critical to improve shareholder returns.
The consultancy predicts that 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.
Ashar said: “The key driving markets for Islamic banking will continue to be Saudi Arabia and Malaysia, with Turkey and Indonesia also establishing themselves as large Islamic banking centers. With increasing market size and greater propensity for the adoption of technology-based, customer-centric solutions, the industry can be expected to further reduce its profitability gap with respect to conventional benchmarks. The challenges of going mainstream will be eliminating operational silos and leveraging customer insights to improve risk management, pricing and channel performance.”
EY also noted that the returns on equity (ROEs) of Islamic banks remain approximately one-fifth lower than those of traditional banks in the same markets. This performance gap could cost its shareholders, and to some extent the investment account holders, up to US$17 billion in total forgone profit over the next five years. Structural transformation and scaling up are therefore becoming critical to improve shareholder returns.
The consultancy predicts that 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.
Ashar said: “The key driving markets for Islamic banking will continue to be Saudi Arabia and Malaysia, with Turkey and Indonesia also establishing themselves as large Islamic banking centers. With increasing market size and greater propensity for the adoption of technology-based, customer-centric solutions, the industry can be expected to further reduce its profitability gap with respect to conventional benchmarks. The challenges of going mainstream will be eliminating operational silos and leveraging customer insights to improve risk management, pricing and channel performance.”
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*The research and insights are primarily based on the EY Participation
Banking Universe (EY Universe), which is proprietary, based on samples and is not meant to be fully exhaustive. The EY Universe analysis covers 114 banks across participation banking markets. Insights are also based on interviews with banking executives and
industry observers, to identify key trends, risks and priorities. The analysis excludes Iran.