When Dubai Islamic Bank (DIB) replaced its chief executive officer in July, it was to refocus and prepare for a renewed period of growth “given the positive local and regional economic outlook”, said the bank. At the time, the new head, Adnan Chilwan, described his job as developing the bank’s franchise, both in the UAE and internationally.

DIB likes to describe itself as the world’s first Islamic bank, having been set up in 1975, and although a few other lenders have since overtaken it in scale, it is still the fourth-largest in the GCC by assets, with a little over $30bn at the end of June this year.

Strong performance

Like most banks in the region, it has had to deal with difficult economic conditions in recent years, but these days the prospects look bright and its performance of late has been strong. The value of DIB’s assets grew by 9 per cent in 2012, while net profits were up almost 13 per cent. The figures for the first half of this year were even better. By the end of June, assets were up 12.6 per cent compared with December 2012, and profits were 25 per cent higher than in the first half of 2012.

These healthy growth figures are matched, to a greater or lesser extent, by almost all the large Islamic banks in the region. National Commercial Bank (NCB) and Al-Rajhi Banking & Investment Corporation, both of Saudi Arabia, as well as Abu Dhabi Islamic Bank and Qatar Islamic Bank (QIB) all posted double-digit rises in the value of assets in 2012. Overall, the assets of the 20 largest Islamic banks in the GCC grew by 16.4 per cent in 2012. Net profits and deposits were both up almost 19 per cent, and the value of loans climbed 21 per cent.

Net profits and deposits for the GCC’s 20 largest Islamic banks were up almost 19 per cent in 2012

This points to a vibrant, healthy market for Islamic finance in the Gulf, something that is also in line with the global picture. According to EY, the London-based professional services group previously known as Ernst & Young, the value of assets held by the 20 largest Islamic lenders in the world has grown by an average of 16.2 per cent a year for the past three years, easily outpacing the equivalent figure of 13.9 per cent for conventional banks. The Gulf market is the most important in the world for Islamic finance, with 14 of those 20 largest banks coming from the GCC. Malaysia accounts for a further five and one is from Turkey.

Most Islamic banks in the GCC have to compete not only with one another, but also with the Islamic windows of conventional banks – the only exception to that is in Qatar, where Islamic windows were banned in 2011. On this level too, Islamic banks appear to be doing well.

In the GCC, conventional banks’ assets grew by 8.1 per cent last year, according to EY, while their Islamic assets were up 14 per cent, from $390bn in 2011 to $445bn in 2012. As well as being a slightly lower growth rate than for the 20 largest Islamic banks in MEED’s ranking this year, conventional banks’ sharia-compliant assets are also only slightly ahead of those held by the 20 largest Islamic banks, which stood at $425bn at the end of 2012.

The majority of those assets are held by just a few banks. The three largest Islamic banks in the GCC – NCB, Al-Rajhi and Kuwait Finance House – account for almost as many assets between them as the other 17 banks put together. The same is true when it comes to deposits and loans. Profits, meanwhile, are even more concentrated, with the two large Saudi banks making more in 2012 than the combined total of the other 18 banks.

Synchronised growth

For mid-sized banks in the table, some consolation may be gained from the fact that most of the lenders seem to be growing in synchronisation with each other. The 11 largest banks in last year’s ranking remain the largest this year in the same order. Below them, there has been some change in position, however. Emirates Islamic Bank has moved up from 15 to 12, while five other banks have lost ground: Saudi Arabia’s Bank Albilad; Bahrain’s Ithmaar Bank; Kuwait’s Boubyan Bank; Sharjah Islamic Bank; and Kuwait International Bank.

Three banks are new entrants to the table: the UAE’s Al-Hilal Bank and two Qatari institutions, Qatar International Islamic Bank (QIIB) and Barwa Bank. The ones that dropped out were from Bahrain, including Arcapita, which agreed a court-approved reorganisation plan in June this year, after filing for bankruptcy in the US in March 2012. Of the other two banks, Al-Salam Bank is merging with a local conventional institution, BMI Bank, and no longer qualifies, while Bahrain Islamic Bank did not make the ranking based on the size of its assets.

Overall, the geographic representation of the GCC’s top 20 Islamic banks is fairly evenly spread. There are five banks each from Saudi Arabia and the UAE, four each from Kuwait and Qatar and two from Bahrain. There was a time when Bahrain would have expected to have a stronger showing on such a list, but its Islamic finance industry is now consolidating rather than expanding, as the Al-Salam deal attests. This is a symptom of the wider economic problems facing Bahrain as it struggles to deal with continued public opposition to the ruling regime, as well as the growing strength of other financial hubs in the region. Consolidation is an emerging theme in some other markets too. In May, DIB finalised the acquisition of UAE home finance provider Tamweel, and Dubai investment bank Arqaam Capital expects DIB or Emirates NBD to purchase the UAE’s Noor Islamic Bank. It also suggests that a Qatari bank, such as QIB, QIIB or Masraf al-Rayan, may bid for Bahrain’s Al-Baraka Banking Group or Egypt’s Faisal Islamic Bank.

Even as the number of independent Islamic banks in some countries shrinks, the market is growing in others. Over the past two years, Oman has been issuing licences for Islamic banks, in the process becoming the last of the six GCC states to develop this sector. Most conventional banks there have now opened Islamic windows and two standalone Islamic banks have been set up; namely Bank Nizwa and Alizz Islamic Bank. They are still too small to feature in the top 20 ranking for the region, but that may change in the years ahead.

Arqaam predicts that Oman’s two new Islamic banks will take 34 per cent and 18 per cent respectively of the Islamic finance market by 2015, representing 4 per cent and 2 per cent of the national banking market. It estimates Islamic finance could generate 15 per cent of Oman’s outstanding loans in the next five years.

Saudi dominance

The prospects also appear bright for the Saudi Islamic banking sector, which looks well-placed to take advantage of the evolving mortgage market. The kingdom is already home to the greatest concentration of Islamic banking assets as well as Al-Rajhi, the most profitable Islamic bank. According to Arqaam, 11.6 per cent of Al-Rajhi’s loan book is already tied up in mortgages. The equivalent figures for other banks include 9.3 per cent for Bank Aljazira, 8.3 per cent for Alinma Bank and 7.6 per cent for Bank Albilad.

If the local mortgage market does take off as many predict, then Saudi banks should be able to consolidate their leading position in the region. As it is, they posted the strongest average growth in assets last year at 24 per cent, compared with 23 per cent for Qatari lenders and 21 per cent for UAE banks. By contrast, Kuwaiti banks boosted their assets by about 10 per cent and Bahraini institutions by 8 per cent.

While overall growth levels are impressive for GCC Islamic banks, there is room for improvement. Compared with regional conventional banks and Islamic banks around the world, Gulf institutions make a relatively poor return on equity. According to EY, GCC Islamic banks posted a 10 per cent return in 2011, compared with 14 per cent for Islamic banks in southeast Asia and 12 per cent in the rest of the world. That year, conventional banks in the GCC posted a 13 per cent return on equity.

As Islamic banks get bigger, they will also have to become more professional. Asset quality remains an issue and risk management processes need to be improved. In 2011, provisions amounted to 22 per cent of operating income for Gulf Islamic banks, according to EY, compared with 19 per cent for conventional banks.