A Future Perspective of Islamic Banking

Islamic finance“Islamic Banking: Efficiency, Growth and Stability”, is an annual report published by the Dubai Center for Islamic Banking & Finance , which is organizing the Islamic Banking and Finance track at Innovation Arabia 8. The report’s 2014 edition identified several factors pointing to a better growth scenario for Islamic banking in the rest of the current decade. Signs of revival of the global economy, which reflect a good possibility of global acceleration in the growth in banking sector in general, is one factor. Islamic banks, too, will benefit from the recovery of the global economy, and hence their growth may be even higher than the current 22.5 percent. While the global economic outlook certainly influences growth in the Islamic banking sector, Asia’s economic expansion is an even more relevant factor in projecting the development of Islamic banking. There are indications that growth in Asia during the rest of the decade is likely to be higher than the growth in the “developed” world.

According to the 2013 annual report of the Jeddah-based Islamic Development Bank, the population of OIC countries is growing at the rate of two percent per annum on average. It is certainly not unreasonable to assume that the world’s Muslim population will also increase by (at least) two percent per annum, which will be reflected in the growth of Islamic banks’ potential clientele.

The economic conditions of the world’s Muslim population are improving: According to the IDB annual report, 25 member countries of the Organization of the Islamic Conference (OIC) will achieve the UN’s Millennium Development Goal (MDG) of halving the population who live below the poverty line. Though the growth of OIC countries slowed during the first three years of this decade, annual GDP growth in all 56 OIC countries has been around five percent per annum, which is substantially higher than the growth in the Europe and North America. This reflects the general improvement of economic conditions of the Muslim populations in those countries with large proportions of Muslims. This is expected to have a positive effect on the growth of the banking sector – both Islamic and non-Islamic – in these countries.

Another factor that needs to be kept in mind when assessing the future growth of Islamic banking is the unused Islamic banking potential in the countries with a large proportion of Muslims.

Currently, in terms of assets, Islamic banking represents only 11.5 percent of the value of total commercial banking in the countries where it competes with other commercial banking in a dual system. These countries offer great potential for Islamic banks to grow. If Islamic banking makes strategic moves to enhance its current clientele base, the above-mentioned countries can witness accelerated growth in the Islamic banking industry.

One of the most important requirements for enhanced growth would be providing a level playing field for Islamic banking to compete with “conventional” banking. Interestingly, this type of market environment also offers another type of value because if Islamic banks are able to compete with conventional banks on a level playing field, it will also improve the efficiency of conventional banking.

With these factors in view, it is not unreasonable to forecast that the annual global growth of Islamic banking may reach the level of 25 percent or more, compared to the present rate of 22 percent. Thus, it may not be too optimistic to claim that the assets of Islamic banks may reach US$5.5 trillion by 2020. If we assume that conventional banking will maintain its current growth, and factor in the population-growth effect, it can be projected that in the thirty countries where Islamic banking already exists, its share of total commercial banking assets is likely to reach 20-25 percent by 2020, compared to the current figure of 11.5 percent.

This is upside of the forecast. On the down side, it must be kept in mind that there are limits to growth. If Islamic banks do not undertake essential changes in their method of working to enhance their potential clientele base, they may witness a drop in growth; in fact, Islamic banks are already showing some signs of slowing down. Another potential constraining factor is related to the rather optimistic assumption of fifteen percent annual growth. With this is mind, a more modest projection of the value of Islamic banking by 2020 can be placed at four trillion US dollars.

The above forecasts (upside as well as downside) are based on the existing network of more than 150 commercial Islamic banks in thirty countries, from Tunisia to Indonesia. In the vicinity of these lands, there is another group of more than thirty countries that have large Muslim populations whose members would potentially welcome Islamic banking, but of course, a change in national policy would be required to accede to this desire.

It is also important to remember that in the countries where Islamic banking exists, there is still room for new institutions. Thus, there are two potential sources that can contribute to the growth of Islamic banking worldwide: the expansion of institutions in countries where it already exists and its introduction in countries that currently do not have Islamic banks exist but which have substantial Muslim populations.

Taking these considerations into account, there is good likelihood that the prospective level of Islamic banking might actually be considerably higher than that predicted in the more negative forecasts mentioned above.

Further details can be gleaned from The Islamic Banking: Efficiency, Growth and Stability Report, which is available in English for free by clicking the following link:
http://www.dcibf.ae/system/files/DCIBF_Report_English.pdf (16mb)

For more information on the Dubai Center for Islamic Banking & Finance, please click the following link:

This topic will be discussed at Innovation Arabia 8, 16-18 February 2015 at The Address Hotel – Dubai Mall, Dubai, UAE

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