Islamic banks risk losing ground

Islamic banks were hit by the credit crunch far later than conventional banks, and from the evidence of MEED’s ranking of the GCC’s 50 largest sharia-compliant banks, they continue to suffer less.

Gulf Islamic banks’ assets have grown by one third on average over the past year. At the same time, revenues are up 22 per cent.

When it comes to profits, however, life is far more challenging. The region’s Islamic banks’ are having to pay more to raise funds and having to accept far lower margins. Alongside the sharp falls in their real estate investments, their profits are up just 6 per cent on average over the past year.

Islamic banks were relatively isolated from the worst of the market’s excesses during the boom periods. This helps to explain the confidence within the sector that it will recover more quickly than the wider market. But once conventional banks emerge from their self-inflicted problems, sharia-compliant banks will struggle to keep up.

The self-imposed limitations of Islamic banking mean there will always be corners of the market where they cannot go, and where they cannot earn profits - or suffer losses. Being more conservative means the Islamic banking sector is more stable, which is good in bad times but a hindrance when times are good.

The challenge for Islamic banks will be to ensure they do not lose ground to their conventional rivals once those good times return.