MANAMA, 12 December 2004 — Islamic banks have higher capitalization ratios than their conventional counterparts and their liquidity is more than that of conventional Gulf banks, a report stated yesterday.
A report brought out yesterday at this year’s World Islamic Banking Conference (WIBC) has quantified and evaluated the size and scope of the global Islamic finance industry for the first time ever.
International Islamic finance stretches back to the roots of Islam, but the formal banking industry has seen a rapid growth spurt in recent decades. The launching of this report benchmarks International Islamic finance at the point where the industry is coming of age, say WIBC who collaborated with international management consultancy McKinsey and Company on its production.
The report is a qualitative and quantitative analysis that, for the first time, provides original research to validate the actual performance of 10 key banks in the industry.
Analyzing financial information over a four-year period to end 2003, the quantitative section of the WIBC Competitiveness Report was created to fill a worldwide knowledge gap about the financial ratios affecting liquidity, profitability, efficiency, asset quality and capital adequacy of the industry.
The qualitative section identifies industry drivers and takes a look at development options for the future, suggesting key trends and a strategic direction for the future.
“There are many myths surrounding the Islamic finance industry and one of the main objectives of the report was to cut through some misconceptions about performance of Islamic banks,” said David Mclean, executive director of WIBC.
The report looked at average returns on assets and equity and found huge variations. Equity returns varied between three and 22 percent whereas returns on assets showed a variance of between 0.4 percent to 7.8 percent. Its conclusion was that, overall, Islamic financial profitability is governed by the same issues as conventional finance - the conditions of its market and the decisions of its management.
One of the greatest threats to individual banks’ continued strong performance, says the report, is the rapid growth in competition. The monopolies and duopolies enjoyed by many of the institutions to date are being rapidly eroded as new entrants - either wholly Islamic institutions or Shariah-compliant products of conventional banks - flood onto the market.
Product innovation and the development of new tools and instruments have gathered pace in recent years, with Islamic scholars taking an increasingly hands on role outside their traditional seats on Shariah boards and becoming actively involved in product development. But this area remains one of the key challenges for the future, given the relative size of the industry and the difficulties in transferring ideas from bank to bank, say the authors.
The WIBC report sees innovation and branding as the key drivers for Islamic financial competitiveness, with branding and corporate reputation important for this customer base.
The integrity, governance and conduct of the institution are the cornerstone of the Islamic bank’s reputation - and it is in this area where it is expected the industry will see the greatest rivalry in the future.
A day of pre-conference workshops was a first-time addition to the schedule for the conference - now in its 11th year.
It was deemed a huge success by delegates and organizers alike, as more than 250 people attended the event - some 150 percent more than expected.
The workshops dealt with the emerging trends in the growing Takaful industry, as well as the launching of a new report on competitiveness in the international Islamic banking industry.
The second of the two pre-conference workshops looked in-depth at Takaful trends and developments.
Well-known Shariah scholar Sheikh Nizam Yaqubi spoke about Shariah issues related to Takaful, giving a definition of Takaful and his own interpretation of its history and developments.
“We are very happy to participate in this conference and educate the public and scholars about the general importance of Takaful at a time when this business is gaining momentum,” said Sheikh Yaqubi.
The conference heard about the interrelationship between Islamic banking and the huge growth potential this creates for Takaful, especially in the Middle East where there is a relatively low penetration of both conventional insurance products and Takaful solutions.
The industry is benefiting from the innovation of Shariah scholars, who are strengthening Takaful offers by taking the best of conventional products and adapting them for Shariah compliance, the workshop delegates heard.
Delegates were told about the gaps in current Islamic wealth management offers, which include retirement, estate planning and inheritance on the life stage planning side, with other opportunities for product development on the investment side including private equity products.
