Islamic banks urged to diversify to overcome scale disadvantage

They will have to venture in asset management and wealth management to sustain the growth of Islamic finance.

ABF: What in your opinion will be the key drivers for continuing the very rapid current growth (15-20% p.a.) in Islamic finance?

Adil Ahmad, Former CEO of Kuwait International Bank
The sterling growth in Islamic banking over the last decade has been primarily due to growth in select segments of the market. A primary example is the consumer banking segment, where the rapid growth has been fuelled by new products such as Shariah compliant credit cards, auto finance, housing finance etc.

To continue this growth, Islamic banks will have to offer a progressively broader suite of products and services, such as asset management and wealth management, and deliver these in an efficient and cost effective manner.

Islamic banks face a severe scale disadvantage vis-a-vis conventional banks, and this inhibits their efforts to provide a bigger range of banking products and services in a cost effective manner. For example, the largest Islamic bank in the world has total assets of approximately USD 60 billion, while there are over 25 conventional banks each with assets in excess of USD 1 trillion. Most Islamic banks also operate primarily in a single country, whereas many conventional banks have broad and deep operations in multiple countries.

To overcome the disadvantages and continue the high growth trajectory, Islamic banks will need to scale up. This can be achieved by consolidation in the industry whereby small banks combine to form a larger entity, leading to economies of scale.

Islamic banks will also need to invest further in operational efficiencies, sales effectiveness, risk management and best practice human capital management.

Badlisyah Abdul Ghani, Executive Director and Chief Executive Officer, CIMB Islamic
The key driver would be the existence of an enabling and effective legislative, regulatory, legal and Shariah governance framework for Islamic finance. Without this, all other drivers become irrelevant.