Islamic assets to reach $1,600bn with revenues of $120bn by 2012 despite short term market volatility

The next chapter in Islamic finance: Higher rewards but higher risks estimates that by 2012 Islamic assets will reach $1,600bn with revenues of $120bn and that Islamic wholesale banking - the biggest market for Islamic finance - will continue its strong growth to reach $1 trillion with revenues of more than $60bn.

"From the in-depth review conducted in Higher rewards but higher risks, we've seen that the opportunity is commanding attention beyond Islamic incumbents, as witnessed by the spurt in Islamic start-ups and conventional players opening Islamic windows. Interest has spread beyond Islamic countries and leading financial centres like London are pushing to position themselves as major Islamic finance hubs," says Mathieu Vasseux, UAE based Partner and co-author of the report.

"Despite tremendous interest and phenomenal growth rates, most institutions are far from taking full advantage of that enormous growth. This partly stems from a lack of deep understanding of the opportunities that Islamic finance offers and also because most financial institutions have not developed the required operational capabilities. This represents a major risk since success along these dimensions will distinguish the acquirers from the acquisition targets in the likely medium-term consolidation of the sector," Vasseux added.

The next chapter in Islamic finance is a two-part examination of the Islamic finance market, based on research conducted by Oliver Wyman and their practical experience and insight derived from working with major financial institutions around the world.

The report is aimed at helping decision makers in the financial services community decide where and how to compete in this promising and fast moving, but opaque, market.

The first volume Higher rewards but higher risks, released today, provides an in-depth and quantitative forward looking review of the global Islamic financial services market across segments and geographies with a focus on retail and wholesale banking, and providing insights on emerging trends and success factors within each segment.

Superior growth and economics

Islamic finance represents 1% of global assets. However, surveys suggest that half of the 1.4bn Muslims worldwide would opt for Islamic finance if given a competitive alternative to conventional services. The market has been growing at over 30% annually since 2000 and is set for continued strong growth.

At the end of 2007, Islamic finance totalled $660bn of assets and $53bn of revenues. Islamic finance profit pools total $15bn and will increase more than two-fold to $32bn over the next five years. Oliver Wyman estimates that by 2012, Islamic assets will reach almost $1,600bn with revenues of $120bn.

Wholesale banking, moving beyond plain financing and introducing more innovation

Banks need to diversify their activities from what is mostly real estate and plain lending to offer a comprehensive service suite including advanced treasury services, innovative asset management, balance sheet management and securitisation services.

This will allow them to address the needs of underserved market segments such as Islamic financial institutions, corporates, sovereign wealth funds and private wealth clients. Wholesale banking is the biggest market for Islamic finance with over $420bn of assets and revenues of $28bn. Wholesale assets have been growing at 34% annually and Oliver Wyman estimates that by 2012, total assets will reach $1 trillion with revenues of more than $60bn.

The Sukuk market has experienced dramatic growth recently, especially for longer duration Sukuk, and the market is expected to reach $130bn within the next five years. This development will continue for both corporate, where large issuances are becoming more common especially in the UAE, and for sovereigns, as governments try to diversify their funding source.

Retail banking, towards differentiated offerings and streamlined delivery

Islamic retail banking is very profitable thanks to access to cheap deposits and high-margin financing activities. It has a significant upside given strong demographics and rising product penetration.

However, most banks have an undifferentiated product offering, poor client servicing and sales efficiency problems. Success in this market will require developing differentiated and segmented offerings, streamlining product development to boost innovation and designing efficient processes. In addition, care must be taken in adapting marketing and the consumer proposition to Shariah imperatives and rethinking current business models.

The retail market has $175bn of assets and $20bn of revenues. With an annual asset growth of 22% going forward, by 2012 total assets should reach over $470bn with revenues of $50bn.

Oliver Wyman will publish the second volume, The next chapter in Islamic finance: Redefining the operating model later this year which will explore the key challenges in risk management, balance sheet management and IT and operations that incumbents and newcomers to this market will face as the business evolves.