Islamic banks pose threat to conventional lenders
Islamic banks in the UAE will continue to take away a sizeable share of business from conventional and foreign banks in the coming years, a new study said.
A Dubai Chamber of Commerce and Industry report said yesterday the trend for Shariah-compliant banks to capture significant shares of real loans and real deposits business from conventional banks is likely to continue as interest in Islamic financial products “looks promising”.
“This is reinforced by surveys by McKinsey Consultants, which suggest that 25 per cent of investors are strongly committed to seeking out and using financial services fully compatible with Shariah principles,” Dubai Chamber said. The report added another 50 per cent of investors said they prefer to put their money into Islamic funds where possible, “as long as they do not have poorer returns or service compared with conventional products”.
The research note used a BankScope database from 2001 to 2005 to study the structure and efficiency of the UAE banking sector.
According to the findings, the growth of real assets and real loans of Islamic banks was larger than conventional banks during that time period. However, the growth of real equity of Islamic lenders was much lower than conventional banks between 2001 and 2005, despite a more aggressive growth of real deposits and real liabilities in Islamic banks.
The report also revealed conventional banks in the UAE are outperforming their counterparts in the GCC with higher compounded annual growth rates (CAGR).
UAE conventional banks showed CAGR of 14 per cent in real assets, 18 per cent in real loans and 17 per cent in real deposits, compared to the GCC’s CAGR of nine per cent, eight per cent and five per cent, respectively.
“The potential strengths in these key performance areas imply that the UAE banks have clear competitive edge among GCC banks to prudently expand from the deposits mobilised from the private sector in the UAE,” Dubai Chamber said.
According to the report, only Abu Dhabi Commercial Bank, National Bank of Abu Dhabi and the National Bank of Dubai were among the efficient conventional banks in the UAE, managing to maintain their efficiency level throughout the 2001-2005 period. The report added the average efficiency score of the banks in the UAE is quite competitive with the rest of the GCC banks, whether conventional or Islamic, with the exception of Kuwait and Oman.
“The competitiveness among the other GCC countries seems predictable as the possibility of the movement of capital from one country to the other makes the decision-makers, including those of the banks, aware of the importance of their efficiency and hence profitability,” Dubai Chamber said.
Kuwait is the most efficient country in terms of running its banks, with an average of just above 95 per cent efficiency, significantly higher than that of the other countries, including the UAE. Oman on the other hand hosts the least efficient banks in the GCC region, according to the report.
However, the country comes second with respect to branching, with 15 bank branches per 100,000 persons. Bahrain topped the list with 53 branches per 100,000 persons, while the UAE came in third with 12 branches. The UAE with 49 banks overall also came second to Bahrain, which boasts 114 banks.
The study results also found no evidence of market power in the UAE and the GCC banking markets, whether conventional or Islamic. “This signifies that there is no market collusion in these banking markets,” it stated, adding results indicate there is evidence of market efficiency in the UAE and GCC banking markets.
Based on its findings, the report urged central banks in the region to support bank mergers. “Given the findings there is no evidence of market power or collusive behaviour across banks and the performance of these banks is driven by efficiency consideration, it is advised central banks in the UAE and GCC should advocate banks mergers on efficiency consideration to equip the banking sector to face the international competition in the region,” Dubai Chamber said.
The Chamber cited the recent merger of Emirates Bank and National Bank of Dubai as an example, which brought “the synergies of both banks’ operations”.
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