Shafiqul Islam Jibon
Between 100 and 150 new financial institutions could be launched in the next five to seven years to serve the Muslim countries including Bangladesh that are new in Islamic banking or have low rates of penetration, according to a report by consultancy firm, Ernst & Young, released Monday.
"Ten of the 25 fastest growing emerging countries like Bangladesh have large Muslim populations. Islamic banks are set to expand to compete with conventional lenders in attracting mainstream customers," the report noted.
However, the local experts have agreed with the Ernst & Young study as there are ample opportunities to promote Islamic banking services in the country.
"Islamic banking has been emerged as lucrative business in Bangladesh and has the potential to expand further. We also need to focus on its standard," Dr Hossain Zillur Rahman, former caretaker government adviser, told the FE Thursday.
The development partners are also now coming forward to promote Islamic banking as it has immense potential, Mr Rahman said.
The aggregate value of all Islamic assets are estimated to reach $1.55 trillion this year, $1.8 trillion in 2013. Gulf-based Islamic banks now have $450 billion in assets, about 30 per cent of the total, the report showed.
Return on equity of both Islamic and conventional banks has deteriorated since 2008 in the wake of the global financial crisis, dropping to 12 per cent in 2011 for Islamic banks, compared with 15 per cent for conventional ones, it showed.
However, this 3.0 per cent gap is much wider than the 1.0 per cent difference that was reported in 2008-2010.
The return on assets for Islamic banks dropped to 1.3 per cent in 2011 from 1.7 per cent in 2008, while for conventional banks it rose to 1.7 per cent in 2011 from 1.5 per cent in 2008.
Islamic banks will grow as they focus on customers who expect more than just Shariah-compliance, in terms of products and services of conventional banks, decording to Ernst & Young.
The role of Islamic banks, it added, will also become important by comparison with banks that deliver products just through Islamic windows at their existing branch networks.
Operating expenses are 50 per cent higher for Islamic banks, while their cost of funds still remain more competitive than conventional ones, the report added.
"There is no truly full-fledged Islamic bank (that stretches) across international markets or even regional," Mr Ashar Nazim, Islamic financial services leader at Ernst & Young, said.
He identified a group of 20 Islamic banks as likely candidates to become significant regional institutions. They now account for 55 per cent of total Islamic banking assets after having grown over the past three years at an average rate of 16.2 per cent a year.
"It is a lopsided industry at this point ... only 13 Islamic banks have $1.0 billion or more in equity," Mr Nazim said, adding that the difference between small and large Islamic banks will widen.
Even while growing, Islamic banks have experienced a decline in profitability, and their average return on equity lags behind that of conventional banks by 20 per cent, Mr Nazim estimated. Some banks have started to focus on improving efficiency and reducing costs, which could boost their profit margins by about 25 per cent within two to three years.
However, the Asian Development Bank (ADB) sanctioned $750,000 grant Tuesday to promote Islamic banking in Bangladesh, Indonesia, Pakistan and Afghanistan.
The money will be shared between those countries' governments to help their banking systems to meet regulatory standards set by the Islamic Financial Services Board, the ADB mentioned.
The ADB, which promotes economic and social progress in the Asia-Pacific region, said the expansion of Islamic finance in other countries in the region will provide large numbers of people with banking services for the first time.