GCC Islamic banking sector grows at 20% per annum representing 17% of banking system total assets, reveals KFH Research report

The report pointed out that Kuwait ranked first among the GCC countries in terms Islamic banks assets to total banking assets, while Saudi Arabia and the UAE have risen among the countries that promote Islamic finance products and services. It added that there are many opportunities still available for Islamic finance solutions in the region where real estate finance tops other areas of interest prevalent in the UAE and Saudi Arabia. Details of the report follow:

GCC Islamic Banking

Over the years, the GCC's Islamic banking sector has witnessed remarkable growth in business and tremendous demand for its products and services. The share of Islamic banking sector continued to increase to account for around 16.6% of the region's banking system's total assets as at end-March 2010. Saudi Arabia and the UAE emerged as the two largest markets for Islamic banking in the GCC, with total assets of full-fledged Islamic banks accounting for 27.4% and 27.0%, respectively, of the region's total Islamic banking assets.

The GCC's Islamic banking is currently at the heart of the Islamic banking industry, with some of the world's largest Islamic banks originating from the region. This includes Al Rajhi Bank in Saudi Arabia and Kuwait Finance House in Kuwait with total assets amounting to a staggering $46.0bn and $40.4bn, respectively, as at end-1Q10. In terms of the share of Islamic banking industry by country, Kuwait's Islamic banking sector accounted for 34.3% of the country's total banking assets, followed by Qatar (19.3%), Saudi Arabia (15.9%), the UAE (14.0%), and Bahrain (10.9%).

The Banker Top 500 Islamic Institutions reported that the GCC's Islamic banks' total assets contributed over $350bn or 43.0% of total global Islamic banking assets in 2009, and this is expected to trend higher on the back of increased demand for Islamic banking products and services in the region. To meet the growing needs of Shariah-compliant financing in the region, most conventional banks have either opened a new subsidiary or introduced an Islamic window within the existing infrastructure. A few banks have also converted themselves into Islamic banks such as Dubai Bank in the UAE and Saudi Bank in Bahrain. In 2009, the Central Bank of Kuwait gave the green light for the Bank of Kuwait and the Middle East to fully convert into an Islamic bank.

In terms of financing, opportunities for Islamic banks in the GCC include residential mortgages, underpinned by a high level of demand for home mortgages within the local market. In the UAE, around 70% of UAE investors require a mortgage to finance their property purchase. Elsewhere in Saudi Arabia, the passing of a new mortgage law is expected to encourage commercial bank mortgage lending. Several banks have already started to offer Shariah-compliant home financing with tenures extending up to 25 years.

In general, the Islamic banking industry in the GCC is expected to remain strong moving forward, growing by 15%-20% y-o-y in 2010, underpinned by the following factors:

• Robust supervisory and regulatory framework, and stable banking system with comparatively strong funding and capital positions.

• The region's high GDP (PPP) per capita at $27,937, coupled with its young population (30% of the population falls under 15 years and 66.7% of the population is between 15-64 years of age), will help to support consumer spending and investment which would in turn increase the demand for Islamic financial products and services moving forward.

• The governments' various development plans to diversify their respective economy. This will create growth opportunities for Islamic banks to further expand their project financing portfolios.

The existence of financial centers in Bahrain, Qatar and the UAE, as well as a number of Islamic finance organizations such as the Accounting and Auditing Organization for Islamic Financial Institutions, Liquidity Management Centre, and the International Islamic Financial Market will continue to attract new players to the region and further propel the Islamic banking industry to greater heights.