GCC liquidity: Islamic advantage
Islamic banks in the GCC may have two advantages over their conventional counterparts at a time of weak liquidity: loyal retail money and the ability to tap two investor markets
At a time of growing difficulty for Gulf financial institutions, Fitch’s latest report on the UAE’s Islamic banking sector warrants a closer look.
The Islamic finance sector in the UAE outpaced conventional banks in 2015 – as it has done for some time – and not from a particularly low base, either, says Fitch. Islamic banks now account for more than 20% of gross loans and total assets in the UAE.
Better still, it said that the impaired loans/gross loans ratio has more than halved since the end of 2012. Furthermore, the problematic high concentration of real estate exposure has been redressed.
Are Islamic banks better positioned for the liquidity problems in the Gulf than the conventional? The big conventional banks have been struggling to deal with heavy outflows from institutions (specifically the state), while Islamic banks tend to be more heavily dominated by retail money. When the stability of deposits is increasingly important, as it now is, that reliable retail base may prove vital.
Then there’s the fund-raising environment. More and more of the most important bank debt issues in the Gulf are taking the sukuk route: Fitch highlights the $750 million Dubai Islamic Bank issue, and $500 million from Noor Bank. In the current period of market illiquidity, corporates like Arab Petroleum Investments and Majid Al Futtaim have had no problem raising funds through the Islamic route, while Qatar Islamic Bank got $1.75 billion of orders for its $750 million five-year deal in October. The ability to appeal to two separate investment pools, the conventional and the Islamic, is increasingly useful when liquidity is scarce.
Set against that, asset quality in Islamic banks in the UAE at least is not great, albeit improving, and Fitch thinks the high retail loan book “has resulted in vulnerability and potentially large losses compared with conventional banks when the cycle turns.” But in this environment, it is looking more attractive than ever to be an Islamic bank.