How fast is the Islamic finance industry growing? The Banker attempts to answer this question with the launch of a new listing: Top 500 Islamic Financial Institutions. The pioneering role of the listing is to provide a benchmark for the future, which can be improved on for the good of the industry. Better disclosure is expected to flow from the publication of listings such as this as greater competition puts pressure on institutions to increase transparency in this area. Stephen Timewell and Joe DiVanna report.

The history of modern Islamic financial institutions is relatively short but quite dynamic. Since the establishment of the Islamic Development Bank and Dubai Islamic Bank in 1975, the idea of interest-free banking and Islamic financial services has become increasingly attractive to the 1.6 billion Muslims across the world. But this decade there has been an explosion of activity in Islamic finance, not only in traditional Muslim regions, but also stretching well beyond. Islamic finance and Islamic financial institutions are fast becoming a major global force and their impact is only just beginning.

How fast is this infant industry growing? What proportion of the global finance industry will be turning to Islamic instruments in the future? Where will the industry be in 2010 and beyond? The key to understanding where Islamic finance will be tomorrow is grasping where it is today. But in a highly fragmented, young market that is emerging within the infrastructure of a western interest-bearing banking system, clear and meaningful figures are difficult to obtain.

Until now, accurate figures across the entire Islamic financial spectrum, covering the range of Islamic financial institutions, banks, investment banks, finance companies and takaful (insurance), and the entire range of geographies, have been sparse at best. Estimates of market size have varied considerably and no verifiable source could provide a reliable global overview of this growing industry.

This month, The Banker publishes the first comprehensive analysis of the Islamic financial industry on a global scale, incorporating 500 Islamic financial institutions from 47 countries. To provide a verifiable benchmark for the entire industry, The Banker has sought to establish the size of sharia-compliant assets across all institutions around the world purporting to provide Islamic financial services (see Methodology below).

The Banker, with the help of Cambridge consultancy Maris Strategies, shows that Islamic finance, which is often largely under-reported, is growing at almost twice the rate of western (interest-related) financial services, and more disclosure is expected to reveal even higher rates of expansion.

Sharia-compliant assets grow fast

This first Top 500 Islamic Financial Institutions (TIFI) listing shows that the global total of sharia-compliant assets, based on the latest official figures, grew by 29.7% over the past year to reach $500,482m. Although this is relatively small compared with the $74,232.2bn in total assets amassed by the Top 1000 World Banks in The Banker’s latest global listing (see 7/07, p172), the massive growth taking place in Islamic institutions is unassailable and can be expected to accelerate. The 29.7% growth shown in the TIFI listing, while well above the Top 1000 latest asset growth of 16.3%, appears to vastly under-report the true figure, as a result of many institutions operating in the sector failing to provide even basic data.

This new groundbreaking Islamic listing is based on sharia-compliant assets because at this stage it is the only measurement that is readily available across different financial institutions. In addition to 292 banks, both fully Islamic and those offering Islamic windows or selling Islamic products, there are 115 Islamic investment banks and finance companies, and 118 insurance companies, adding up to a total of 525 institutions from which the Top 500 was drawn.

The key to this listing is the level of disclosure, which reflects the infant nature of the industry. Of the 500 institutions listed, only 318 reported assets and only 221 reported sharia assets, representing 63.6% and 44.3% respectively of the overall listing. These limited figures reflect the current market conditions but analysts believe that the level of disclosure will increase as the industry takes shape and acquires increasing global significance.

While places such as Bahrain, Malaysia and London are putting emphasis on the importance of Islamic finance, reporting practices are evolving slowly and different approaches are being taken. Although there is a clear trend towards uniform, universal reporting standards, the industry still has a long way to go. Institutions such as the Kuala Lumpur-based IFSB (Islamic Financial Services Board) and Manama-based AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) are making progress but more needs to be done.

Nevertheless, this initial listing contains 359 institutions that are operating under full sharia-compliant principles and 141 conventional institutions operating with sharia-compliant windows. It is important to add that The Banker is not evaluating the quality of sharia compliance; if an institution reports that its assets are sharia compliant, we accept it at face value.

Sharia windows on the world

The importance of institutions with sharia windows is growing as some of the world’s largest financial institutions, such as Citi, HSBC and Standard Chartered Bank, are focusing on Islamic finance in both the wholesale and retail areas. As sharia-compliant assets have grown within these so-called windows, traditional banks have had to assess how these assets are reported or in many cases not divulged.

A key element of The Banker’s new listing is that ‘windows’ are included as a critical component of the industry. But unfortunately, as our research shows, only one major conventional bank was prepared to disclose its level of sharia-compliant assets. While other major players declined for a variety of competitive and reporting reasons, the UK-based HSBC Holdings was the only major player prepared to disclose its global sharia-compliant assets. Held under the banner of HSBC Amanah, its assets reached $9.7bn at end-June 2007, up 17.2% from $8.3bn at end-June 2006, making HSBC Amanah the 14th largest Islamic financial institution in the world.

Analysing the $500.5bn global market, the six states of the Gulf Cooperation Council (GCC – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) provide the largest chunk of the total but the non-GCC Middle East and north Africa (MENA) states are not far behind. While the overall total grew by 29.7% to $500.5bn in the listing, the GCC institutions expanded the most by 39.4% to $178.1bn and the non-GCC MENA institutions grew by 29.9% to reach $176.8bn.

Asia, led by Malaysia, Brunei and Pakistan, is the third largest region in the world for sharia-compliant assets, growing by 20.9% to $119.3bn. The grouping of institutions from Australia, Europe and North America account for $21.5bn with sub-Saharan African institutions accounting for $4.7bn in assets.

Looking at the overall global total, the MENA region accounts for a huge 70.9% of the $500.5bn total, split almost evenly between the GCC states with 35.6% and the non-GCC MENA states with 35.3%. Asia comes in third with 22.7% of the market.

Iran leads on asset levels

Analysing the listing, the country with the highest level of sharia-compliant assets is undoubtedly Iran, which tops the country ranking with assets of $154.6bn (see table, page 4). Iran, which claims that its financial institutions are 100% sharia compliant, has more than double the amount of its nearest competitors, Saudi Arabia with $69.4bn and Malaysia with $65.1bn. Although both Saudi Arabia and Malaysia may have bigger banking sectors than Iran (see page 22), our research shows that in terms of sharia-compliant assets they are considerably smaller. This is because Saudi and Malaysian sharia-compliant assets as a percentage of total assets are only 31.6% and 25.1% respectively. Although Islamic products are growing fast in the Saudi and Malaysian markets, especially in retail – as they are in other leading markets such as Kuwait, UAE and Bahrain – the sharia-compliant component is still relatively low by comparison with Iran, Brunei and Turkey, which define themselves as 100% sharia compliant.

In the future, as sharia-compliant assets (SCAs) become a larger percentage of the overall financial sectors in a number of countries, as expected, Iran’s dominance of the Islamic market will be lessened. Also, these figures demonstrate the huge growth potential that is yet to be realised. For example, if the percentage of Saudi and Malaysian SCAs is tripled to 91.8% and 75.3% respectively, as is thought possible in the years ahead, there would be more than a 50% increase in the current $500.5bn aggregate total. As the trend towards Islamic finance grows, there will be an exponential growth in SCAs worldwide, especially as Muslim countries increase their proportion of sharia-compliant assets held.

UK makes its mark

The Top 15 countries table includes the UK, a non-Muslim nation, in 10th place with sharia-compliant assets of $10.4bn. This is mostly HSBC Amanah, the vehicle for HSBC Holdings’ global SCAs, which total $9.7bn. The UK’s extensive financial services capability and government support for Islamic finance is moving London towards becoming a major hub for Islamic financing on a global scale. There is also growing competition between Malaysia, Bahrain and Dubai, which are also promoting their credentials as Islamic finance hubs.

Examining the Top 500 institutional listing closely, the Iranian banks dominate the top positions, accounting for six of the Top 20 places. Bank Melli Iran and Bank Saderat Iran head the ranking with SCAs of $35.5bn and $34.8bn respectively. Brunei-based insurance company Takaful IBB Berhad comes third on $31.5bn followed by Saudi Arabia’s largest Islamic institution, Al Rajhi Bank, on $28.1bn. The rest of the Top 20 consists of three other banks from Saudi Arabia, three from Malaysia, two from UAE and the UK’s HSBC Amanah in 14th place.

Reporting is limited

According to the Top 500 listing, 221 institutions have reported sharia assets, which is only 42.1% of the industry. Although it is easy to criticise the fact that many institutions listed do not have data available, the key pioneering role of the listing is to provide a benchmark for the future. The Banker believes that the Top 500 contains the most comprehensive listing of Islamic institutions yet to be published. The lack of data available is part of the general teething problems associated with the industry and the lack of disclosure overall is taking place among both pure Islamic institutions and so-called ‘windows’ of conventional institutions.

Improved disclosure is expected to flow from the publication of listings such as the Top 500 as greater competition puts pressure on institutions to increase transparency. In the wholesale markets, for example, Bloomberg’s underwriting league tables of Islamic bonds and loans provides a good example of the growth and range of market players in this key Islamic sector. The 58.5% growth in volume in the first 10 months of 2007 (see table) demonstrates the growing appeal of Islamic financing to non-Muslim institutions and investors.

This first Top 500 Islamic financial institutions listing could have contained much richer data if the data was made available. Nevertheless, a key benchmark has been set and can only be improved upon in the future for the good of the industry.

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TOP 20 INSTITUTIONS BY SHARIA-COMPLIANT ASSETS

TOP 15 COUNTRIES BY SHARIA-COMPLIANT ASSETS

METHODOLOGY

The methodology begins with compiling a list of the world’s financial institutions offering some type of sharia-compliant financial services from various sources. Central banks and government financial supervisory agencies have been the initial points to identify those institutions. For the countries where the central banks and government agencies do not categorise the Islamic financial institutions separately, we were able to find institutions providing sharia-compliant financial services through a number of associations that provide accounting and auditing services for the Islamic financial institutions.

The next step was to collect all the possible data of the institutions on the list. Institutions that indicated they were sharia-compliant financial services, from basic bank accounts to insurance products, were contacted and asked for their latest financial data. Many responded with annual reports and quarterly statements. An equal number did not and their result are reflected on the listing as not available (n/a), however, we have elected to include them on this list to illustrate the diversity of the market. Wherever possible, the collected data has been verified from multiple sources.

Making comparisons

One inherent problem with developing a topology of an emerging industry is the lack of a formalised structure that will allow comparing the underlying value of institutions and their relative contribution to the industry. Financial institutions such as commercial banks and other institutions of similar structure provide basic mechanisms for comparisons, such as assets, profits and paid-up capital. Institutions such as investment banks, insurance companies and other organisations that are engaged in financial services present a problem for inclusion in an industry benchmark because the use of a measurement such as sharia assets does not accurately reflect the business activity or the overall contribution they make to the industry as a whole. Therefore, we acknowledge that including these types of institutions with their full-service banking counterparts is akin to comparing apples to oranges.

However, at this early stage of the industry, for codification purposes they are included (perhaps unfairly represented in value) to illustrate the totality and variety of the market, simply for the purpose of depicting the entire market – they may be apples and oranges but they are also both fruit. Our intent in the forthcoming year is to work with investment banks and insurance companies to develop a better descriptive measure to reflect the role they play and value they generate in the market.

As we developed the benchmark, it became clear that there is a need for greater clarity in quantitative and qualitative reporting of sharia activities by institutions, and that this information should be supplied to central banks for national summation. To improve the quality of data for next year’s listing we will be contacting central banks to propose a more uniformed reporting schema and a higher degree of clarity in institutional classification.

C D ‘Jay’ Jung is an associate researcher at Maris Strategies specialising in African and Middle East economics and a PhD candidate at the University of Cambridge.

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