The negative growth recorded in the aggregate assets of Islamic financial institutions in this year's survey can almost entirely be attributed to a collapse in the value of the Iranian rial. When delving further into the data, a much more healthy picture emerges.

As noted in the introduction to this year’s Top Islamic Financial Institutions report, this is the first edition in its nine-year history in which the industry’s total asset growth has moved into negative territory. Yet, a closer look at the data reveals a more positive story than this downward shift might suggest. Though the Islamic finance industry’s global growth is beginning to moderate, the impact of exchange rate differentials in a number of markets, notably Iran, has substantially altered the overall picture this year. 

Lenders in the country recorded a -38.79% fall in total assets in this year’s report. As the world’s largest Islamic banking market – due to the fully sharia-compliant nature of its financial system – any sizeable change in Iran’s total assets has significant implications for the global total. 

Accordingly, the collapse in the value of the Iranian rial, which has plummeted by more than 50% since 2013, has eroded the value of the Iranian market’s contributions to global sharia assets. Since the Iranian financial year concludes on March 20, the results of last year’s Top Islamic Financial Institutions report included data that was sourced before a major devaluation occurred in September of that year. Accordingly, the data used for the 2015 report now fully accounts for the impact of this exchange rate movement.   

Despite these changes, in local currency terms most of Iran’s lenders performed well. Twenty of the country's 28 banks featured in this year’s report registered year-on-year increases in rial terms to their total assets. Moreover, Iranian lenders continued to perform well in terms of their return on assets, with three banks in the top 10 in the 2015 report. In the return on capital (ROC) stakes, they dominated the regional rankings in this year’s Top 1000 World Banks, though their lower capitalisation levels go some way to explaining this.

Away from Iran 

Elsewhere, the Islamic finance industry’s strong, if not stellar, growth continued. The global industry’s compound annual asset growth (CAGR) between 2007 and the end of 2014 sits at an impressive 12.68%. This performance has largely been driven by the dominant markets of the Gulf Co-operation Council (GCC) and Malaysia. For its part, the GCC registered a CAGR of 17.49% over this period, while in Asia this number hit 10.55%, followed by sub-Saharan Africa coming in at 10.46%. 

The growth of Islamic finance in the Gulf region was underpinned by the gains of fully sharia-compliant Qatari banks. Between 2009 and 2014 these lenders posted a CAGR of 21.09%, vastly outperforming their regional peers. Qatar’s Islamic banks have also been putting these assets to good use. Over the same period, they achieved an aggregate return on assets (ROA) of 2.28%. Meanwhile, aggregate ROC hit 16.93%, a notable figure given the high capitalisation levels of Qatari lenders. 

These achievements were mirrored, to a lesser extent, elsewhere in the Gulf. Fully sharia-compliant lenders in the United Arab Emirates achieved a CAGR of 10.64% over this period, while aggregate ROA came in at 1.5%. In particular, the performance of Dubai Islamic Bank, which entered the top 10 commercial banks by ROA in this year’s report, was the standout contribution from the UAE. Meanwhile, the return on capital for fully sharia-compliant banks was 11.39%. 

The GCC region’s other key market, Saudi Arabia, enjoyed a CAGR of 13.39%, accompanied by the highest ROA – 2.4% – of any market over the 2009 to 2014 period. Saudi Islamic banks also achieved an ROC of 16.16%, behind Iran, Malaysia and Qatar. Meanwhile, of the 10 fastest growing financial institutions with Islamic windows with more than $500m in assets, five hail from Saudi Arabia.

GCC stars 

To give these figures some context, it is worth considering the performance of the GCC’s Islamic lenders in The Banker’s Top 100 Arab Banks ranking for 2015. Of the top 10 banks by asset growth, six were fully sharia compliant. Islamic banks also featured prominently in the top 10 ranking by Tier 1 capital growth, with six institutions present, while a further three Islamic lenders were among the top five Arab banks by pre-tax profit growth. 

This success has also translated to country level. Standalone sharia-compliant banks in Bahrain saw their total assets jump by 21% between 2013 and 2014, easily outperforming the sector-wide aggregate of 8.51%. It was a similar story for Qatar, the UAE and Saudi Arabia, where standalone lenders increased their assets by 38%, 20% and 14%, respectively, against broader system-wide growth of 12.17%, 10.85% and 12.04%. 

The strength of the GCC’s Islamic banks, coupled with the exchange rate difficulties facing Iranian lenders, has caused a shake-up in the main ranking of commercial banks in this year’s report. Nine of the top 15 Islamic banks in the 2015 ranking now hail from the Gulf region, compared with just five in 2014. Meanwhile, four of the top 10 commercial banks by ROA in this year’s report are Gulf lenders compared with three last year. 

The dominance of the Gulf’s Islamic financial institutions is made clear by the year-on-year asset growth from 2013 to 2014 between regions. The GCC saw assets increase by 14.9%, while its closest regional competitor, Asia, saw an increase of just 3%. Elsewhere, including the combined total for Australia, Europe and the US, declines in asset growth were recorded in the 2015 edition, though exchange rate movements may account for much of this. 

Beyond the GCC, the performance of Malaysia’s Islamic banks has been sound in this year’s report. While their five-year CAGR was slower relative to their GCC peers, at 7.75%, their aggregate ROA was the third highest over a five-year period at 1.82%. More encouragingly, the country’s fully sharia-compliant banks registered an aggregate ROC of 18.34%, just shy of Iran’s 18.8%, despite a sizeable difference in capitalisation levels.

A slowing pace 

Nevertheless, in line with the results of last year’s report, there are signs that the Islamic finance industry’s years of breakneck growth are ending. For one, standalone sharia-compliant banks’ average ROA now sits at 1.1%, down from the 1.68% recorded in the 2014 edition. This slowdown is reflected in the average ROA of the top 10 standalone banks in this year’s report, which at 2.7% has dipped from 3.08% last year. 

To some extent this decline, both in terms of asset growth and profitability, points to the saturation of established markets as well as the growing competition with conventional peers in others. In Malaysia in particular, competition among the country’s Islamic lenders has reached a critical phase. Widely regarded as the foremost market for Islamic finance globally, Malaysia’s Islamic finance marketplace has matured swiftly in recent years. 

Looking ahead, promising regulatory reforms in Malaysia, including the introduction of the Islamic Financial Services Act in July 2014, as well as the potential for the country’s state pension fund to offer sharia-compliant investment options in the future, align well with the government’s target of pushing Islamic financing to 40% of the domestic total by 2020. 

In the meantime, however, opportunities for domestic growth have become limited for most lenders. Innovative strategies, particularly in the area of digital banking and financial technology, are now being pursued to overcome this challenge. Similarly, most of the country’s sharia-compliant banks are paying more attention to the longer term potential of the south-east Asia region. 

Barring a few exceptions, these trends have also been observed in the Gulf. Both Saudi Arabia's and Qatar’s five-year ROA, while still impressive, have declined in this year’s report. Abundant liquidity over the review period, coupled with growing competition from conventional peers who frequently enjoy a scale advantage over their Islamic contenders, may account for this trend. 

Moving forward, lenders in the region will need to adapt their strategies to contend with this competitive environment. Mirroring their Malaysian counterparts, most are now looking to higher growth opportunities further afield.


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