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29 March 2024

MidEast Islamic banks not fully capitalised

The survey said the Islamic finance industry in the Middle East does not provide a wide spectrum of investment products. (FILE)

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By Staff

Only 35 per cent of Islamic finance executives in the Middle East believe that Islamic banks are properly or adequately capitalised, while 55 per cent opine they are not fully capitalised. The remaining 10 per cent said they are not at all adequately capitalised, according to a survey conducted by Deloitte.

A majority of industry leaders believe that the Islamic Financial Institutions (IFIs) are not fully capitalised, Deloitte said its first Middle East Islamic Finance Leaders Survey.

Titled ‘Benchmarking Practices’, the survey is the first Deloitte Islamic Finance leaders survey in a biannual series targeted at industry practitioners and leaders of IFIs in the Middle East.

The survey said the Islamic finance industry in the Middle East does not provide a wide spectrum of investment products that caters to different sectors of the economy.

As much as 67 per cent of the IFIs in the region have 0 to 20 per cent of their current investment exposed to the real estate sector, the survey finds.

The lack of Sharia’a-compliant investment products reinforces the need for a wide range of investment instruments, which adequately allows both IFIs and investors to set their investment allocation strategy, it said.

Additionally, nearly half (42 per cent) of the IFIs are locked into investment in the GCC region – with between 41 per cent and 100 per cent exposure to the region.

This undoubtedly increases the risk of their investment portfolios, the survey said.

Almost 50 per cent of IFIs believe there will be no change in their investment exposure to GCC markets, while 35 per cent said they will increase the investment and 15 per cent said they will decrease the investment, it added.

Deloitte surveyed over 40 IFIs and Islamic finance executives across the Middle East to understand the market sentiment and how Islamic finance leaders perceive the current economic slowdown, business performance, and practice issues as well as what activities they are focusing on and what their priorities are.

30 per cent of the Islamic finance leaders surveyed said that the current level of Islamic finance supervision in the GCC region is high. In contrast, 24 per cent said it is low while the remaining 46 per cent said it is neither low nor high.

This finding shows a wide range of views, which reflects the inconsistency of regulation in the industry in different parts of the region. It demonstrates the need for an effective coherent oversight of Islamic financial services in he region, the report said.

However, the survey revealed that 84 per cent of respondents believe that the level of Islamic finance regulation will increase in the GCC. This view clearly demonstrates that industry leaders anticipate regulatory reforms in the post global financial crisis climate, the survey added.
 
Further, two out of three Islamic finance leaders expect a change in the existing business models of Islamic finance in the foreseeable future.  

Islamic accounting standards and risk management were identified as the top two areas requiring new regulatory measures, and the industry leaders surveyed view corporate governance and Sharia’a governance as prerequisites for best practices, the survey noted.

Half of the industry leaders responded that they do not have a risk management system to address Islamic financial product requirements.

This is largely attributed to high exposure to local stock markets and real estate has increased the level of risk in IFIs. It is also a concern for rating agencies who had to downgrade the rating of several organisations in the region, the survey said.