An era of double-digit expansion in Islamic banking assets is set to end as the low oil price and looming US interest rate rises curtail credit growth in Arabian Gulf countries.
Sharia-compliant commercial banking assets are still set to increase at a compound annual growth rate of 9.8 per cent between 2014 and 2020, according to data from the Dubai Islamic Economic Development Centre (DIEDC).
But that is slower than the estimated 17 per cent annual growth rate experienced between 2008 and 2013, according to the consultancy EY.
There are about US$1.35 trillion of Sharia-compliant commercial banking assets outstanding globally, roughly equivalent to 1.3 per cent of global banking assets, according to the DIEDC’s State of the Global Islamic Economy Report, released yesterday. That is set to grow to $2.6tn by 2020 – a compound annual growth rate of 9.8 per cent annually, which is a considerably faster rate of loan growth than that in the conventional banking industry in the UAE.
Aarthi Chandrasekaran, a senior researcher at NBK Capital, estimates that banking asset growth in conventional UAE banks will be in the “high single digits”.
The UAE’s Islamic banking sector accounts for 17 per cent of assets and 19 per cent of consumer deposits in the country, according to the IMF.
Economic headwinds are likely to slow both Islamic and conventional credit growth in the Gulf, which is the largest global market for Islamic finance when considered as a single region.
Bashar Al Natoor, the global head of Islamic Finance at the ratings agency Fitch, said: “Lower oil prices, [imminent increases in] the federal funds rate and weaker global growth all have an impact on the banking industry in general – and Islamic banking does not exist in isolation.”
“These factors will ease the growth that we see in Islamic banking in the long term. Although we can expect reasonably high growth in Islamic finance, the percentage growth rate has started to slow down.”
Alp Eke, a senior economist at National Bank of Abu Dhabi, said that “if present macroeconomic trends continue, then even [9.8 per cent annual asset growth] can be considered optimistic”.
The DIEDC report yesterday also ranked the Emirates second globally behind Malaysia as one of the world’s “healthiest Islamic economy environments”.
“The UAE today is taking on greater global importance in the Islamic economy as one of the fastest-growing sectors in the world,” said Mohammed Al Gergawi, the chairman of the DIEDC board.
“Our strategy for developing the Islamic economy is not limited to Islamic banking and finance, which constitutes an important part of this economy, but spans seven key sectors, forming the true pillars of an economy that is expanding while the world’s Muslim population continues to outgrow others.”
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