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Lenders in the Gulf Co-operation Council continue to drive the rise in Islamic finance, as shown by The Banker's most recent ranking, with government spending and mortgage growth set to further boost growth in 2022.

The Gulf Co-operation Council (GCC) remains the main growth engine for the global Islamic finance sector, unchecked by the global coronavirus pandemic. Despite weakened profitability, lenders’ sharia-compliant assets increased by 12.7% to $913.5bn in 2020, slightly outpacing the growth witnessed in the previous year.

Saudi Arabia, the six-nation bloc’s largest economy, is being buoyed by a domestic mortgage boom and its growth shows no signs of slowing. Sharia-compliant asset growth remains healthy across the region, outperforming the region’s banking sector as a whole for the year (see figure).

Lenders’ profitability fell in line with their conventional peers in 2020, as impairments for bad loans rose in the midst of the pandemic. Of the 45 GCC Islamic lenders in this year’s survey, less than half recorded an improvement in net income for 2020. Most lenders — particularly those in the top half of this year’s rankings — have seen a return to profitability in 2021 amid lower provisioning levels, even as concerns over asset quality persist in the UAE in particular.

Yet the outlook for the sector remains overwhelmingly positive in 2022, with buoyant oil revenues set to support government spending in the year ahead.

“We do expect mortgage lending to continue to grow, although at a lower pace as the market matures, and it is likely to continue to contribute significantly to the growth of the Islamic financing in the GCC,” says Mohamed Damak, a senior director at S&P Ratings in Dubai. “The other area of growth could come from the implementation of government-sponsored projects or national transformation plans, such as Saudi Vision 2030.”

Saudi dominates

Lenders in Saudi Arabia once again dominate the region’s Islamic bank rankings, accounting for 10 of the GCC’s 20 largest lenders and just under half of the region’s sharia-compliant assets total. At the top of the cohort for the fourth consecutive year sits Al Rajhi Bank, the country’s second largest lender by assets (both conventional and Islamic), which continues to lead the region’s Islamic lenders in terms of return-on-assets and return-on-capital. National Commercial Bank (NCB), the country’s largest lender overall, climbs one place in this year’s rankings to come in second for sharia-compliant assets.

Despite crossing the threshold of $100bn of sharia-compliant assets in 2019, Al Rajhi Bank’s mortgage-fuelled growth showed little sign of slowing in 2020, with a 22.1% increase in assets and a 4.3% increase in profits — more than any other lender in this year’s top 10. The bank’s impressive performance continued into 2021, its asset base rising 24.3% in the first nine months of the year. Of particular note is a 45.3% year-on-year growth in net financing income for the bank, including a 73.3% growth in its retail mortgage book.

Al Rajhi and NCB (subsequently rebranded as Saudi National Bank (SNB) following its take over of 12th place Samba Financial Group in April 2021) continue to be the main beneficiaries of the Saudi government’s drive to increase home ownership from 50% in 2018 to 70% of the population by 2030. S&P estimates Saudi Arabia’s mortgage market grew by around 40% in 2021, based on third-quarter numbers, while Arqaam Capital notes that Al Rajhi and SNB control about 75% of that market.

Despite flat profits for 2020, NCB reported the best asset growth of any major Islamic lender in this year’s GCC rankings, its base rising 27.2% to $80.9bn during the year. Following its merger with Samba, the bank is set to become only the second Islamic lender in the world to have a sharia-compliant asset base of more than $100bn.

Saudi lenders saw their assets grow by 15.8% during 2020, second only to the 22.6% growth recorded by lenders in Oman, the smallest Islamic finance market in the region by some distance. While dominated by Al Rajhi and NCB, growth was widespread among Saudi lenders, with five banks out of 11 recording asset growth in excess of 15% for 2020.

In an interesting reversal of last year’s trend, the country’s Islamic-only institutions registered higher growth in 2020 than their conventional counterparts. Fully sharia-compliant lenders recorded an 18.2% growth in assets for the year, thanks to impressive growth by Alinma Bank and Bank Albilad, compared with 13.5% for conventional lenders with Islamic windows.

The reversal is also apparent at the regional level, with sharia-compliant lenders recording a 13.7% rise in assets, compared with 10.8% for conventional lenders with Islamic windows.

GCC rankings chart 0322

UAE’s mixed year

Beyond Al Rajhi and NCB, the main gainer in this year’s GCC ranking is Dubai Islamic Bank, having completed a merger with local rival Noor Bank in January 2020. The combined entity posted a 24.9% rise in assets to $78.8bn for 2020, seeing it jump one place to third position in this year’s rankings, even as its profits fell by more than a third during the year.

Dubai Islamic Bank’s asset growth was the highlight of another lacklustre year for the UAE’s Islamic finance sector, with the country’s remaining lenders posting no increase in assets for the year. Impressive growth by Emirates NBD and Sharjah Islamic Bank was cancelled out by falls by First Abu Dhabi Bank and others.

NCB and Dubai Islamic Bank’s gains in this year’s rankings come at the expense of Kuwait Finance House, which slips from second to fourth place. The fall comes despite faster growth recorded by the country’s largest and oldest Islamic lender, its sharia-compliant asset base rising by 10.9% in 2020 compared with 9.1% the previous year. Kuwaiti lenders reported an overall increase of 12.1% in their sharia-compliant asset base. The country’s second-largest Islamic lender, Boubyan Bank, was the pick of the bunch, its 21.4% rise bettered only in the region by Al Rajhi, NCB and Dubai Islamic Bank.

Qatar Islamic Bank (QIB), whose 2020 asset increase of 6.6% was roughly in line with the previous year’s increase, remains in in fifth position overall.

QIB’s domestic rival Masraf Al Rayyan recorded the country’s most impressive growth in the 2020 rankings, its sharia-compliant asset base increasing 13.8% during the year. The lender, which completed its acquisition of domestic rival Al Khalij Commercial Bank in December 2021, remains in ninth place in this year’s rankings. Dukhan Bank — created in late 2019 from the merger of Barwa Bank and International Bank of Qatar — recorded an 11.9% rise in its sharia-compliant asset base.

Of the six GCC member states, sharia-compliant asset growth was weakest in Bahrain, the bloc’s smallest economy and former banking centre. The country’s nine banks offering Islamic banking services together recorded a 3.5% rise in sharia-compliant assets for 2020, with just two lenders — Al Salam Bank and ABC Islamic Bank — recording a growth of more than 10% for the year.

The country’s Islamic finance sector remains comfortably larger than that of Oman, whose asset base represents just 1.5% of the region’s total. Yet it is Oman Arab Bank that records the largest growth of any lender in this year’s GCC rankings, its sharia-compliant asset base rising 423.5% to $2.3bn in 2020, thanks to its acquisition of Alizz Islamic Bank in 2019.

GCC rankings top 45

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