Islamic banking has been gaining worldwide popularity in recent years.
Assets in the sector have grown to US$1.5 trillion and are expected to reach US$2 trillion by 2015.
However, this is still less than one per cent of global banking assets and although its growth story continues to be a positive one, Islamic banking still faces considerable challenges in raising profitability.
With an annual growth rate of about 20 per cent in the past four years, the appeal of Islamic banking has not been lost on global commercial banks like Standard Chartered.
Standard Chartered’s Saadiq Islamic Banking chairman Shayne Nelson, said: “For example, in the consumer bank, we have been growing at a CAGR (compound annual growth rate) of 47 per cent over the last five years when it comes to revenue. In that period, our client base has also doubled so it is a very big business for us when it comes to growth. It is still globally a small part of Standard Chartered Bank, but growingly a more important part of our operation.”
Last year, a record US$144 billion worth of new Sukuk, or Islamic bonds, were issued worldwide and experts believe 2013 is likely to be another record year of issuances.
Besides wholesale banking, Standard Chartered said there are opportunities in Islamic wealth management, especially in centres like Singapore.
“We are seeing more and more of our Middle East private banking clients wanting to book into Singapore, rather than Switzerland which they would have gone to traditionally. So there’s a big opportunity to grow the wealth management area of Islamic banking in Singapore,” explained Mr Nelson.
Still, Singapore, which is hosting a World Islamic Banking Conference next week, represents a relatively small market.
According to Ernst & Young, the largest markets for Islamic banking in asset terms are Saudi Arabia, Malaysia, United Arab Emirates, Kuwait and Qatar.
Some experts said it is the Islamic banking centres in Southeast Asia that have been most successful in attracting non-Muslim clients.
Sani Hamid, director of economy and market strategy at Financial Alliance, said: “In Malaysia, the majority of the take up rate for the Islamic mortgages are non-Muslims. In Singapore, a lot of money from the Islamic term deposits actually comes from non-Muslims.”
However, most Islamic banks have not been as profitable as their conventional banking counterparts.
In 2011, Islamic banks averaged a return of equity of 12 per cent compared to 15 per cent for global conventional banks, according to the World Islamic Banking Competitiveness Report by Ernst & Young.
Experts said this could be because of a weak risk culture, lack of scalability and poorer asset quality.