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Islamic Finance news Guide 2008
S&P Foresees Mounting Demand for Islamic Products (continued...)
Islamic banks in the Gulf have demonstrated, and should
continue to show, strong profi tability so long as oil revenues
pour into their economies, maintaining economic momentum
through a powerful multiplier effect. The Gulf banks rated
by S&P (Islamic and conventional) continued to post strong
fi nancial performance in 2007. The ratio of RoA (Return on
Assets) for these banks reached about 3.0%, compared with
3.2% in 2006. Cumulated core earnings continued to grow
during the same period, although at a slower pace — about
10% compared with more than 20% in 2006.
Islamic issues and issuers rated by Standard & Poor’s (30th November, 2007)
Issuer credit ratings
Issuer Date of rating Country
Long-term foreign
currency rating
Albaraka Banking
Group
21st March, 2007 Bahrain BBB-
Al Rajhi Bank 5th October, 2005 Saudi Arabia A
Arcapita Bank 16th November, 2006 Bahrain BBB
BEST Reinsurance 2nd September, 1997 Tunisia BBB
Dubai Islamic
Bank
18th October, 2006 UAE A
Gulf Finance
House
7th Islamic
August, 2006 Bahrain BBB-
Development
Bank
19th December, 2002 Saudi Arabia AAA
Kuwait Finance
House
24th August, 2004 Kuwait A-
Salama/Islamic
Arab Insurance
24th May, 2007 UAE BBB+
Shamil Bank of
Bahrain
6th November, 2006 Bahrain BBB-
Sharjah Islamic
Bank
6th September, 2006 UAE BBB
Takaful Re 31st October, 2006 UAE BBB
*TBD — to be determined.
This slowdown stems not only from the slump in stock marketrelated
gains, but also from a decline in net interest margins
as a direct result of increasing competition. Islamic banks in
the Gulf are at least as profi table as their conventional peers,
putting them among the most profi table across the globe. It
is important, however, that the Islamic banking industry does
not become complacent or rest on its laurels.
Islamic banks still have a long journey ahead to build stronger
recognition, longer track records and greater scale. Some
critical issues need to be tackled, among which small size
and high concentration (including geographic) are some of
the most important. Islamic banks, even the largest ones,
remain small by international standards, and their portfolios
continue to focus on a limited number of asset classes and
segments. We expect geographic diversifi cation to continue to
progress in 2008.
For the fi rst time in the industry’s history, several Islamic
banks headquartered in the Gulf have set up business
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operations in Malaysia, while making clear that on their radar
are Indonesia and China — large and deep markets only a
short hop away from their Malaysian platform. New horizons
are also emerging for Islamic fi nance within the Arab universe:
Lebanon, Syria, Egypt, Turkey and North Africa have been
identifi ed as potential engines for unlocking franchise value.
“Although ‘historical’ leaders such
as Al Rajhi Bank, Kuwait Finance
House, Albaraka Banking Group
and Dubai Islamic Bank still have
bright prospects within their own
marketplaces, new entrants are
looming”
Beyond the natural borders of the Muslim world, the advanced
markets of both Europe and North America promise niche
segments in which Islamic fi nance can profi tably gain
momentum, as shown by the fi nancial community’s bullish
welcoming of the Islamic Bank of Britain and the European
Islamic Investment Bank. This is internationalization, but not
yet globalization, for which some challenges remain.
Like their conventional peers, the current market position of
existing Islamic banks is subject to signifi cant competitive
pressure. Although “historical” leaders such as Al Rajhi
Bank, Kuwait Finance House, Albaraka Banking Group and
Dubai Islamic Bank still have bright prospects within their
own marketplaces, new entrants are looming. As already
mentioned, Shariah compliant investment banks are shaking
the old rules of Islamic fi nance with more aggressive business
models. In addition, new heavyweight contenders are making
their debut, pushed by the proactive ambitions of Gulf
entrepreneurs and governments: Al Rayyan Bank, Al Masref,
Boubyan Bank and Bank Albilad are examples of institutions
that will increasingly add pressure to the industry.
Stability ratings tailored for PSIAs
Islamic fi nance has many qualities that could lend
some institutions to securitization as a means of raising
funds. Shariah compliant fi nance tools must have assetdriven
returns, for example, which is a notable feature of
securitization. Although Sukuk are based on assets and
usually issued via a special purpose vehicle, they should
not be confused with a true sale securitization. That said,
theoretically one could issue a Sukuk out of a securitization.
Numerous asset-based Sukuk have been issued recently.
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