Islamic Banks: Efficiency and Stability

There is substantial Islamic banking activity carried out by conventional banks through their so-called Islamic windows.
Such banking institutions have been excluded from this report for a simple reason that the growth and stability of Islamic banking activities in such institutions follow the growth and stability of the conventional part of such institutions. Mixing Islamic banking activities of such institutions with full-fledged Islamic banking activities may distort the conclusions on growth, efficiency and stability.
The banks in this report are those for which information is available in a standardized format from a sufficiently authentic source and hence makes the comparison of size and growth robust and reliable. These banks are commercial banks, deposit-taking institutions, and mostly controlled by regulatory authorities like any other commercial banks. These banks are distinguished from other commercial banks only on the ground that they operate on the basis of Islamic rules for financial dealing and not on the basis of interest. Some banks listed in some databases as Islamic banks have been excluded because they were obviously not commercial banks or deposit taking institutions. Thus institutions like development banks, holding companies etc. were not included in the analysis.
This report, therefore, refers to “Islamic banks” and “other commercial banks” for the purpose of comparison.
It may be claimed in some circles that there are more Islamic banks in countries other than discussed in this report. This will depend on how the ‘Islamic banks, are defined. This Report would not dispute the other claims and will stick to the definition and data source that has been selected for this report for the purpose of consistency of facts and figures.

In order to ensure statistical regularity and similarity and maintain analytical harmony of inter-country and inter-bank analysis, the source of all statistical analysis is the Bank scope data (July 2014). All tables in the report have been generated from Bank scope data only. This report covers the analysis at aggregate level, globally, country wise, and by size.

Current State in Brief

The market share of Islamic commercial banking is about 15 to 20 percent in almost all aspects of the total commercial banking in countries where Islamic banking exists and is recognized as a distinct form of commercial banking. The share in operations is close to 20 percent but share in income is close to 15 percent.
The parameters of Islamic banking are more or less comparable with the parameters of other commercial banking. Though parameters of efficiency (such as net income to equity, net income to assets and equity of total assets) are at a little lower level compared to those of other commercial banks giving competition to Islamic banks, yet the parameters of operations (such as ratio of financing to deposits, income from gross financing to gross financing and payments on deposits) are at a higher level than those of other commercial banks. It will not be an overstatement to say that Islamic banks are in general, more service oriented than profit motivated.

Short-Run Dynamics

The dynamics of Islamic banking in the first three-year period of this decade, in comparison to those of other commercial banking are indicative of the continuing efforts to dominate the scene of commercial banking at global level.

Current Size of Islamic Banking

No bank has yet reported its total assets figures for 2014. The figure closest to the exact figure would be the total assets of Islamic banks for last available year. On this basis the total assets of 150 Islamic banks stand at US $1130 billion.
There are several reports in the market giving figures on the size of Islamic finance often wrongly referred to as size of Islamic banking*. This report focuses on commercial Islamic banking which in fact is the real challenge faced by Islamic finance.
Institutions like the Islamic Development Bank, finance companies, specialized financial institutions are not included in ‘Islamic banking’ in this report because they work with modalities different from those of commercial banks and do not face the same challenges that commercial Islamic banks face in national and global financial systems.
This report does not also include the Islamic windows of conventional commercial banks for simple reason that these windows will be reflecting the growth, performance and stability features of their parent body rather than of institutions recognized as full-fledged Islamic banks. Size of Islamic banking in this report is the global size of full-fledged Islamic commercial banking activities, which is only a subset of the size of ‘Islamic finance’ that includes institutions beyond commercial banks. The figures on the size of Islamic banking in this report, therefore, may not be confused with the other figures floating in the market which are essentially the figures referring to some undefined (Islamic finance) market.
The number of Islamic banks reported in the database increased to 150 according to last year’s information. The number was 106 three years earlier. It can be said that 44 new banks were added to the industry of Islamic banking during the three years of this decade-the 2010-2013 period.
The increase was at 38 percent. The number of commercial banks in countries where Islamic banks faced substantial competition showed an increase of 29 percent. These are not the assets of the entire Islamic finance industry all over the world. It does not include the assets relating to the Islamic windows of the commercial banks not claiming to be Islamic banks. This also does not include the banks which are Islamic but are not commercial banks. There are a large number of investment banks, development banks, and specialized finance institutions, finance companies etc. that conduct their business on Islamic principles of finance. These institutions are holding large amounts of assets. This report, however, excludes them and focuses only on deposit taking commercial banks operating on Islamic basis.
Not all Islamic banks were competing with other commercial banks. About 80 percent of all Islamic banks faced competition with other commercial banks while co-existing with them under the same umbrella of regulations and supervision. The following table shows the number of banks in countries that have dual system of Islamic banking and commercial banking existing together. Fifty percent of Islamic banks in the dual system are small banks, operating with an asset base of less than $ 1 billion. This percentage is 36 percent in the case of other commercial banks.

Current Scenario of Growth in Islamic Banking

The figures of total assets on last available year bases, when compared with same figures of 3 years’ earlier, show that Islamic banks recorded an annual growth rate of 22 percent in their assets worldwide.
The last available figures on assets, in fact, reflect the asset position in 2012/2013 because of a lag in reported figures. This is not expected to create a significant bias in estimating the growth during the last three-year period, namely 2010-2013. Therefore, it may only have underestimated the annual growth rate during last three year period, because the two-year increase in the assets of some institutions got converted into annual growth rate as three-year increase. It was estimated that last available year’s figures on total assets reported by Bankscope in July 2014 contained only 50 percent of the Islamic banking institutions reporting ($594 billion or 53 percent) of assets for 2013.

The rest of the 47 percent banks reported assets for 2012 or earlier as their last year’s available figure. Back tracking the growth profile of those banks whose asset figures were available for 2013 gives supporting evidence for the current rate of growth mentioned above.The latest annual growth rate of 22 percent for all Islamic banks calculated on the basis of latest available figures on total assets is most likely an understatement of the growth rate. The current growth rate of assets in Islamic banking therefore can safely be placed at more than 22 percent per annum. Forward tracking the growth of the Islamic banks that existed in 2010 can reveal a further insight into the growth profile of Islamic banks.

Assuming that the banks that reported assets in 2013 but reported ‘not available’ for 2010 most probably did not exist in 2010, there were 24 such banks. The growth profile of remaining 60 banks, that existed in 2010 and reported data for 2013 as well, recorded an annual growth rate of 13 percent per annum.


We conclude that main source of growth in Islamic banking assets is from the new entry of Islamic banks. The banks established some years earlier use their low base advantage in the calculation of growth. A substantial part of the growth of 22 percent per annum is therefore contributed by the emergence of new Islamic banks. Most of the increase in assets, in absolute terms came from the Islamic banks having assets of $ 10 billion or more. These banks contributed $392 billion during 2010-2013 to the total assets of Islamic banking.

Copyright reserved to Zawya 2016 – Business Islamica

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