Islamic finance industry posts 40% yearly growth
The Islamic finance has emerged as one of the most rapidly growing segments of the global economy with a projection of the total volume reaching $1 trillion by 2010. In the backdrop of this unprecedented growth, the industry is facing many daunting challenges in many areas, an expert warned yesterday.
Ozgur Tanrikulu, partner McKinsey & Company, who was one of the panelists at the pre-World Islamic Banking Conference 2007 workshop, said that the Islamic financial industry has become one of the most rapidly growing segments of the global economy with 20 to 40 per cent growth a year. But the big challenge is, he said, will this industry maintain the growth pace in a competitive and tough business environment?
“The areas are risk management, need for a sustainable growth, uniform or standardised Shariah guidelines, innovation as well as operational side of the business. Islamic finance has reached new heights as Islamic banking assets and assets under management are estimated at around $750 billion in 2006. This sector, excluding Iran, has reached $400 to $450 billion and is on track to exceed $1 trillion by 2010.”
He said: “Islamic banks are growing at phenomenal levels and faster than the average banking sector across the world. There should be some strategy to map out the plan how to handle the global Islamic banking industry worldwide through set benchmarks.
“Their profit performance also improved to levels at par or better to their conventional peers’ in the GCC,” he said, adding that the risk management would continue to serve as a major requirement for both conventional and Islamic banks.
“I must say that the Islamic banking industry is maturing with the passage of time,” he said, adding that if we just think of 2006, today the industry has changed in many respects.
“Going forward, the macroeconomic fundamentals create favourable outlook for the banking sector in the target markets of Islamic finance, with high potential for economic growth, a young and growing population and a largely under-penetrated banking sector.
“The rising interest in Islamic finance is reflected by the corresponding increase in the number of players, raising the competitiveness bar within the market.
Capturing the opportunity will require tapping into the main growth areas while developing distinctive capabilities.
While most of the current growth and performance is coming from mainstream business such as retail and corporate banking, three areas for growth stand out going forward i.e. Islamic bonds of sukuks, asset management and Islamic banking market in Asia.
“Sukuks will continue on fast growth curve driven by large infrastructure and real estate projects and investors’ search for diversification and fixed income instruments.
“Asset management, which is expected to boom as a result of the increasing wealth of both individuals and institutions as well as increasing innovation in the offering “Asian Islamic market, which is growing fast, is largely driven by government support and product innovation and yet remains largely untapped in most countries.
He added: “On internal capabilities, there are two critical areas that need to be consistently kept top of the mind risk management, especially given specific risks that Islamic banks are exposed to because of their different product structure and processes. And operations, which are becoming a major driver of competitiveness with a direct impact on service quality and business growth.”