Global Islamic banking assets with commercial banks are on course to exceed $3.4 trillion by 2018, fueled by growing economic activity in core Islamic finance markets including Saudi Arabia, according to specialists at EY’s Global Islamic Banking Center.

Across the six markets of Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey (QISMUT), the combined profits of Islamic banks broke the $10 billion mark for the first time at the end of 2013. If the current growth rate continues, the Islamic banking profit pool across QISMUT markets is set to exceed $25 billion by 2018, experts said.

Ashar Nazim, global Islamic finance leader at EY, says: “While the profit numbers for Islamic banks are impressive, they are still, on average, 15-19 percentage points lower than traditional banks in these markets. Regionalization and operational transformation, which are currently underway in several leading Islamic banks, will help to close this gap.”

There is significant growth potential for the industry, he said.

There are an estimated 38 million customers who bank with Islamic retail banks globally, but only a small number of these customers have fully transitioned from a traditional to an Islamic banking relationship. 

The average number of Islamic banking products per customer is just over two, whereas leading traditional banks have an average of five products per customer.

“Building consumer confidence through service excellence, especially when it comes to customers opening accounts and cross-selling can increase the market share of Islamic banks by 40 percent from these customers,” said Nazim.

Speaking to Arab News, he said populous markets including Turkey, Indonesia, Pakistan and Egypt show promising potential for growth of Islamic banking. The industry, however, is yet to achieve its full potential primarily due to limited number of financial institutions offering Shariah compliant solutions.

“Existing Islamic banks in these markets are still young and with limited distribution outreach compared to traditional banks,” he said while answering a question. The young industry needs more decisive and visible support at sovereign level in the form of more Islamic banking licenses, linking with GCC and Malaysian Islamic banks, promoting customer awareness and developing Shariah banking talent pool,” he added.

Asked about steps to be taken to face challenges, Nazim said the industry has to demonstrate its value-addition to the larger economic system through socially responsible banking.

“This requires fundamentally rethinking the way we do business today across three priorities.

First, the performance metrics for Shariah compliant banks need to change from being only return-driven to a more balanced approach that measures economic, environmental and social returns. This does not mean that Islamic banks need to compromise on shareholder returns; it just means we have to make these returns more sustainable.”

Another major opportunity is for Islamic banks to assist the SME sector with their cross-border business growth.

“With increasing trade and capital flows between Turkey, Middle East and Asia Pacific, there is growing appetite to learn about Islamic financial solutions from clients and investors in these markets. Similarly, linking with world growth engines like China and India is becoming more important to help build business bridges between these high potential markets,” adds Gordon Bennie, EY’s MENA head of financial services.