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Country reportsNovember 7 2012

The struggle to find the right Islamic banking model

The steady growth of sharia-compliant assets suggests banks believe in the future of the sector, but the dismantling of the largest cross-border Islamic window raises questions about whether global banking groups can make a success of the business.
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The steady growth of Islamic assets that The Banker's Top Islamic Financial Institutions survey has recorded since 2007 is testimony to the confidence that banks have in the future of the sector, and their willingness to invest capital in expanding it. But growth does not guarantee profitability. For local banks in Muslim-majority countries such as the Gulf states and Malaysia, Islamic banking has cultural and political imperatives. By contrast, international banking groups are likely to take a more calculating stance driven entirely by the bottom line.

In that context, recent developments at HSBC, the largest global player in Islamic finance, are inauspicious. In October 2012, HSBC effectively shut down its subsidiary HSBC Amanah, which had been the second largest Islamic window in the world, with sharia-compliant assets of $16.7bn. The bank will continue providing universal sharia-compliant banking for clients in Malaysia, Indonesia, and in Saudi Arabia through Saudi British Bank, in which HSBC owns a 40% stake. Global Islamic wholesale banking and sukuk capital markets, in which HSBC is the market leader, will still be offered through 49% subsidiary HSBC Saudi Arabia. HSBC will retain 83% of Islamic finance revenues at group level.

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