Tuesday, March 31, 2009

Top 500 Islamic Financial Institutions

Joe Divanna, managing director, Maris Strategies

As the banking industry descends into ever-deeper gloom, the more ethical, risk-sharing approach offered by the Islamic finance industry is attracting an increasing amount of attention. The Banker's Top 500 Islamic Financial Institutions ranking lists the sector's key players.

By Stephen Timewell & Joseph DiVanna

During the past four decades Islamic financial institutions have evolved from mere concepts into fully fledged realities. And in recent years there has been a new dynamism as this fledgling financial industry has proved increasingly attractive, not only to the world's 1.6 billion Muslims but also to many others who are beginning to understand the unique aspects of Islamic finance.

While the credit crunch creates turmoil throughout the global banking industry, the impact of certain risks and risk management strategies have been highlighted. The effects of taking excessive risks have led to horrendous banking losses for many and have also emphasised the different philosophical approaches between Islamic and traditional or conventional Western finance.

This does not mean that Islamic institutions do not take risks, they certainly do. But with risk sharing being a fundamental tenet of Islamic finance, the credit crunch has highlighted core differences in financial philosophy, leading many to suggest that Islamic finance represents not only a flight to quality but also a more ethical approach to banking.

How to gauge the impact of this new style of banking, especially in this extraordinary financial period, is complex. But basic data is essential and a clear understanding of the Islamic financial spectrum is necessary to provide a reliable global overview of this growing industry.

This month The Banker publishes its second comprehensive analysis of the Islamic financial industry, incorporating 500 Islamic institutions, including banks, finance companies and insurance (takaful) companies from 47 countries. In order to provide a verifiable benchmark, The Banker has sought, with the help of Cambridge consultancy Maris Strategies, to establish the size of sharia-compliant assets across all institutions worldwide which provide Islamic financial services (see Methodology Box ).

This second Top 500 Islamic Financial Institutions (TIFI) listing demonstrates both the robust size and strong growth of sharia-compliant assets (SCAs). This 2008 report shows that the sharia-compliant assets of the Top 500 have grown by 27.6% since the report of November 2007 to reach $639.1bn, continuing the healthy expansion of Islamic institutions of recent years. The 2007 report showed 29.7% annual growth in SCAs, reaching $500.5bn.

Critical growth

This second listing reflects not only critical growth in assets but also important improvement in the level of disclosure. While disclosure still has a long way to go across all types of Islamic financial institutions, the number of firms reporting sharia-compliant assets rose by 57 to 280 this year, from 221 in last year's report. But, no matter how welcome this increase may be, there are clearly still 334 institutions not reporting SCAs and a number of international banks with Islamic subsidiaries, such as Standard Chartered Saadiq, not willing to provide basic information. Nevertheless, while the listing stays at 500, the number of registered institutions continues to grow, reaching 614 this year, compared with 524 last year.

The key developments in Islamic finance over the past year have been the growth in new institutions, especially Islamic investment banks, in the Gulf and also in London. Institutions such as Noor Islamic Bank in Dubai and Al Hilal Bank in Abu Dhabi, both opening with large capital bases, are providing the new face of Islamic finance. But the influence of this new financial form is spreading well beyond the Middle East and Muslim countries. Not only are there new institutions, such as European Finance House and Gatehouse Bank, setting up in London but HSBC Amanah, the Islamic subsidiary of global giant HSBC, has jumped to 10th place in The Banker's table, from 14th last year, after a significant 56.2% rise in SCAs.

The attraction of Islamic finance is growing in the non-Islamic as well as the Islamic world, and the global credit crunch has helped to stress its advantages in terms of lowering risk and creating alternative financing structures. Mohammed Amin, UK head of Islamic finance at PricewaterhouseCoopers, says: "I am aware of several UK companies, which would otherwise borrow conventionally, who are talking to Islamic banks regarding funding. The credit crunch has had much less impact on Islamic banks' ability to lend compared with conventional banks."

Into the mainstream

Also, the interest in Islamic finance by the major global financial institutions has helped bring it into the mainstream. This can be easily seen in the Bloomberg league tables for Islamic finance (including both Islamic bonds and loans) where almost half of the leading 20 players are major international institutions. And while this year's Top 500 $639.1bn total in SCAs is miniscule compared with the $90,256bn amassed by The Banker's Top 1000 World Banks, there are huge opportunities in this young market.

"The rise of Islamic banking may indeed be one of the most important developments in the global financial services business this decade," says Douglas Johnson, CEO of New York-based Calyx Financial. "Certainly these institutions help to integrate and expand worldwide economic development, which is never a zero-sum game." Part of these global developments could come in the form of sovereign sukuks (Islamic bonds) from countries such as the UK, which is studying their issue. It could also boost London's role as an Islamic financial centre. "Sovereign sterling sukuk, issued with short maturities of up to 12 months, will meet a real need that London Islamic banks and takaful have for managing liquidity, and my expectation is that the study will ­eventually reach a positive conclusion," says PwC's Mohammed Amin. "If so, the first issue may take place in 2009, after legislation to eliminate the stamp duty land tax cost that would presently arise on issuing sukuk based upon leases of UK land and buildings, which was consulted on over the summer."

Close analysis

In analysing the $639.1bn Top 500 market, the six states of the Gulf Co-operation ­Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates – provide the largest regional segment and also the largest growth in the 2008 report. Institutions from the GCC grew by a staggering 47.5% to reach $262.7bn. The non-GCC states of the Middle East and north Africa (MENA) region, which are dominated by Iran, also expanded significantly, rising by 40.4% to reach $248.3bn.

Together, the GCC and non-GCC MENA states account for an increasingly dominant share of the Islamic financial institutions market with 80% in the 2008 report compared to 70.9% in the 2007 report.

Asia, led by Malaysia, which grew by 32.3% to reach $67.1bn and the third biggest country with regards to Islamic finance, is the third largest region in the world again but its level of SCAs has declined significantly this year. This was due partially to restating of assets in Pakistan and Brunei. Asia's share of the market fell to 13.5% but analysts expect strong growth from Pakistan and Indonesia, which have relatively low SCA levels given their high Muslim populations.

The Australia/Europe/America grouping expanded by 60.6% to $35.1bn, 5.4% of the market, but growing through the UK's rapid expansion in Islamic finance partially via HSBC Amanah.

In country terms, Iran again has the largest level of sharia-compliant assets, at $235.3bn, more than double that of the next nearest country in the rankings, Saudi Arabia at $92bn. The Iranian banks and authorities claim their institutions are 100% Islamic, a view that is not generally shared in the industry. Saudi Arabia and Malaysia say their SCAs make up only 31.1% and 22.9% respectively of their total assets, hence their SCA figures are much smaller than those of Iran. The leading countries remain broadly the same as last year: Kuwait, UAE, Bahrain, Qatar and the UK are the next five in the listing.

Examining the Top 500 listing, unsurprisingly, the Iranian banks dominate the leading positions, accounting for 10 out of the leading 25 institutions, which are led again by Bank Melli Iran, with SCAs of $48.5bn. The big mover among the top players in the report is Kuwait Finance House, which increased its SCAs by a huge 70.3% to $37.2bn to move into second position. Saudi Arabia's Al Rajhi Bank moves up into third place with growth of 18.7% to $33.3bn.

Geographical analysis

Of the leading 10 banks, six, led by Bank Melli, come from Iran; the others are Bank Saderat, Bank Mellat, Bank Tejarat, Bank Sepah and Bank Keshavarzi. Dubai Islamic Bank moved up to eighth from ninth place and the UK's HSBC Amanah moved from 14th to 10th.

Looking ahead, the growth in banking and finance in the MENA region, along with the absence of serious damage from the global credit crunch, provides some assurance that recent high growth rates of sharia-compliant assets approaching 30% will be maintained. But even with lower projected growth rates of 25%, which seems justified by the listing data, SCAs of about $800bn in 2009 and $1000bn in 2010 look likely. And this growth only reflects modest expansion in the industry – the upside could be considerably more.

METHODOLOGY

Last year's Top 500 Islamic Financial Institutions' listing was a bold first step to set a benchmark for the world's Islamic financial industry. This year, the list has been re-examined and supplemented through various credible sources, including central banks, public and private agencies providing advisory services to the Islamic financial institutions. All the financial details of the listed institutions have been updated to the best of our knowledge.

The Banker regards sharia-compliant assets as the primary index in compiling the Top 500 listing. We are aware that not all challenges in developing a universal and comprehensive platform to demonstrate the industry's state will be overcome by applying sharia-compliant assets as the guiding principle. To some extent, it will undermine our understanding of the contribution made by non-bank financial institutions, such as investment banks and insurance companies in the market. However, we believe that this is the best available approach to illustrating the entirety of the market at this early stage. Efforts have been made to maintain consistency of financial details. Annualised foreign currency rates provided by the International Monetary Fund's international financial statistics are used when converting local currencies to US dollars. Going forward, our intent is to work with those involved in the Islamic financial market to provide a platform to improve our Top 500 listing.

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