Comparative analysis of GCC Islamic banks reveals three distinct banking business models

Up to the mid-1990s, Islamic banking institutions in the six countries constituting the GCC -- namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates -- were mainly handling plain-vanilla financial intermediation, raising deposit-like liabilities (in the form of current accounts and profit-sharing investment accounts) to recycle them into Shari'ah-compliant credit exposures. Moody's notes that this commercial-banking business model, dominated by both the corporate and retail business lines, is now being enhanced by the emergence of two new activities.

"On the one hand, Shari'ah-compliant investment banking has grown as a viable, profitable and successful way to manage alternative Islamic asset classes,"

says Anouar Hassoune, a Moody's analyst and author of the report.

"On the other hand, specialised financial institutions focusing on mortgage, housing and consumer banking have been providing financing solutions to households facing unprecedented needs in terms of accession to consumption and property."

Islamic banking in the GCC has been expanding at double-digit annual growth rates over the past decade. Today, Islamic banks in the Gulf control a market share close to 15% of the regional banking system's assets, and have become part of mainstream financial intermediation in this part of the world. At the same time, Moody's notes that Islamic banks in the GCC have also become more diverse: large pioneers established in the 1970s co-exist with new entrants, former conventional financial institutions recently converted into fully fledged Shari'ah-compliant banking entities and the Islamic windows of still-conventional banking providers.

Competition has been heating up, forcing Islamic banks to enhance their commercial entrenchment, develop relevant business models, strengthen their brands and reputation and provide innovative solutions to a growing number of clients attracted by the concept of interest-free banking.

In the report, the rating agency draws a comparative analysis of 23 leading Islamic banks operating in the GCC, seven of which are rated by Moody's. Together, these banks account for total assets in excess of $125bn or 25% of Shari'ah-compliant banking assets globally. The
purpose of this report is fourfold:

-To identify the various business models that are emerging and enriching the Islamic financial industry in terms of product supply;

-To deconstruct the financial performance of GCC-based Islamic banks;

-To determine the structural constraints Islamic banks face in terms of risk positioning; and

- Ultimately, to clarify the main drivers of Islamic banks' credit ratings, where applicable.

As well as determining the three distinct Islamic banking business models, the report concludes that Islamic banks' ratings in the Gulf are usually driven by robust financial fundamentals, and benefit from high levels of external support.

Moody's also identifies the maturing operating environments and imperfect risk positioning as factors that tend to weigh on Islamic banks' risk profiles, and ultimately on their stand-alone credit ratings.