Islamic Banking Loopholes Shown By IMF Study Lessen Growth

Islamic banks have yet to make strategies for attracting large groups of the global Muslim population, limiting the industry’s prospects, according to IMF researchers.

Growth of Islamic finance has done little to boost inclusion for individuals and businesses without bank accounts, a research paper from IMF staff said this month. Banks should emphasize on small- as well as medium- sized businesses and proceed private equity and dare to invest capital initiatives, according to the said paper.

The research underlines some of the challenges facing the industry that Ernst & Young LLP says may be more than double to $3.4 trillion between the next 4 years. While lenders including Dubai Islamic Bank , Standard Chartered and Abu Dhabi Islamic Bank are targeting Muslim-majority nations such as Kenya and Iraq, where formal bank accounts are little, the IMF study said Islamic Finance lenders need to improve their operating model to attract their customers.

“If there is a clear profit for the clients, then the industry would grow faster, develop and increase its assets,” Mohamed Damak, global head of Islamic finance at Standard & Poor’s, said. “If there is no economic value, then they will most probably cease to flow.”

Microfinance

The IMF study surveyed the 57 member states of the OIC, where it said the share of individuals citing religious reasons for not using bank accounts is “higher than in other neighboring countries.” It found the use of financial services has grown more slowly than physical access to the services.

“Islamic finance, in its current form, has not significantly contributed to improving inclusion,” Sami Ben Naceur, the lead author of the study, said in the report. It proposed private and public sector initiatives such as developing Islamic microfinance and reform of financial regulation, as well as changes to the operating model of Islamic banks to increase the inflow.

Rapid Growth

Dubai Islamic Bank, the largest Islamic lender in the United Arab Emirates, plans to open a unit in Kenya this year as it seeks to expand outside its home market, where credit growth is forecast to slow in 2015. Standard Chartered started offering Islamic services in Kenya in March 2014.

In Kenya, about 42 per cent of the adult population had accounts at formal banks as of 2011, compared to about 60 % in the UAE. In Iraq, where Abu Dhabi Islamic Bank opened a unit in 2012, the penetration was about 11 per cent.

“Islamic banking is growing at between 15 per cent to 20 per cent, so it must be reaching somebody,” Afaq Khan, ceo of Standard Chartered Saadiq, said by phone from Ras Al-Khaimah.

While the IMF’s researchers found that Islamic banking within OIC countries was associated with greater use of bank credit by households and by firms for investment, it said there was no clear effect on other indicators of credit use.

The Islamic finance industry expanded beyond authority Muslim states in the Middle East and Asia last year, with the UK, Luxembourg, Hong Kong and South Africa all selling debut Islamic bonds.

“Islamic finance is certainly important for some customers,” S&P’s Damak said. “The economic added value of Islamic finance is more important.”