Risk management, SME financing top Islamic banks agendas: survey

[MANAMA] Islamic banks around the globe view risk management, equity financing and deepening their client base as the most pressing issues facing the sector in coming years, a survey released on Friday showed.

The survey drew input from the heads of 83 Islamic finance institutions, the first comprehensive attempt to measure business sentiment in a growing-yet-diverse industry which holds around US$2 trillion in assets globally.

The General Council for Islamic Banks and Financial Institutions (Cibafi), a non-profit organisation headquartered in Manama, conducted the survey between April and June. Two-thirds of the respondents were full-fledged Islamic banks.

Commercial financing remains the top revenue driver, but financing to small and medium sized enterprises (SMEs) ranked second-highest, the survey showed.

SMEs are seen as leading revenue for Islamic banks in Asia, with trade finance ranking highest in sub-Saharan Africa.

In the Gulf region SMEs are also in focus, partly due to concerns about over concentration of business from large firms.

SME's could help expand the sector's customer base but they are also linked to its main challenges: strengthening risk management practices and a need to shift from debt-based to equity-based financing.

Islamic banks can struggle to manage certain risks, such as liquidity and default risks, because of the way they are designed, with elements of deposit-taking institutions, investment companies or collective investment schemes.

The survey reflects the industry's core centres, with 39 respondents from the Middle East, 16 from Asia and 21 from Africa, yet the industry remains fragmented and there are few signs of this changing.

Merger and acquisition activity was ranked as the second-lowest growth driver by respondents.

In terms of business prospects, Islamic banks in Africa are the most optimistic about future growth in Algeria, Sudan and Tunisia.

This is despite regulation being a main concern due to the emerging status of the industry in Africa.

In contrast, banks in more mature markets such as the Gulf region are mainly concerned with competitive pressures and financial metrics such as capital adequacy and liquidity.

Political instability meant the least optimistic banks came from the wider Middle East, reflecting concerns from lenders in Iraq, Syria and Yemen.

Cibafi, founded in 1999 by the Jeddah-based Islamic Development Bank, plans to conduct the survey annually to help measure future changes in business sentiment and strategy.

It also plans to expand the scope of the survey to include the views from Islamic insurance firms and capital markets.

REUTERS