Islamic banking assets with commercial banks globally will reach $1.1trn in 2012, a jump of 33 percent from their 2010 level of $826bn, Ernst & Young has said.
According to Ernst & Young’s World Islamic Banking Competitiveness Report 2011, Islamic banking assets in the Middle East and North Africa (MENA) region increased to $416bn in 2010, representing a five year annual growth of 20 percent compared to less than 9 percent for conventional banks.
As new geographies open up to Islamic banking, the MENA Islamic banking industry is expected to more than double to $990bn by 2015, the report added.
Ashar Nazim, MENA Islamic financial services leader, Ernst & Young, said: “The global Islamic finance industry continues its quest to boost international competitiveness and to build a sustainably profitable business model.
“Both the challenge and the opportunity currently facing leading industry players is how will Islamic banks succeed in making the historical growth curve sustainable.”
Islamic banking market share of all banking assets in the MENA region has reached 14 percent, while in the GCC it crossed the all important 25 percent threshold in 2011, Ernst & Young added.
The report said it expects that there will be a change of play going forward as Islamic banks compete for mainstream customers who are open to Islamic or conventional banking.
Nazim added: “A worrying concern is the limitations in the enabling legislative, regulatory, tax and legal environment in most OIC markets, which add to the cost and complexity of Islamic banking operations.
“Where there are guidelines and standards issued by industry infrastructure institutions, their reach and enforceability remains a concern. These must be addressed as priority.”
The report cautioned that the Islamic banking industry is still fragmented with most Islamic banks holding less than $13bn in assets and are yet to achieve scale as they face pressure on profitability.
In addition, exposure to downgraded real estate markets remains a concern for Islamic banks and this may also affect future growth, the report added.
Business repositioning, mergers and acquisitions and conversions appear set to dominate MENA Islamic banking in 2012, according to Ernst & Young.
“Higher provisions and operating costs have contributed to the steep decline in profitability of Islamic banks. Returns on assets have dropped from 4 percent in 2006 to 1.5 percent in 2010, due to deteriorating asset quality,” added Nazim.