Dubai: Decision by HSBC to halt offering Islamic products in many of its markets has not only raised question marks on the global progress of Islamic Finance in 2013 but also exposed problems being faced by even larger lenders in making profits. The decision has also sent jittery in the gulf region which is considered one of the global hubs for Islamic finance.
While the Islamic finance industry is expected to expand at a tremendous pace, a broader question is emerging as to how to make Islamic banking profitable.
“The industry is still in growth mode but where do you make money?” asked one Dubai-based Islamic finance banker.
Ernst & Young estimated that assets under Islamic banking – which rejects the acceptance of interest and demands that products are typically asset-backed – are set to top $1.8 trillion globally in 2013, up from the $1.3 trillion of assets held in 2011.
But, as the world’s biggest international investment banks are forced to downsize, cut jobs and change their business models, their Islamic finance arms are also facing the axe.
HSBC said in October that it would cease to offer Islamic products outside its wholesale banking operations in the UK, the UAE, Bahrain, Bangladesh, Singapore and Mauritius, as it reviewed its global business.
Now focused on Saudi Arabia and Malaysia, the bank said that the decision “demonstrates the group’s commitment to driving growth and improving returns by restructuring or exiting businesses that do not meet its investment criteria.”
Since then, Morgan Stanley in Dubai is the latest bank to lose its Islamic finance expert.
Barclays and Deutsche Bank have also lost the architects of their Gulf Islamic banking businesses since the onset of the global financial crisis.
Eyes are focused on Standard Chartered, which offers a large-scale Islamic banking unit like that of HSBC.
“You are not going to have specialists sitting in these banks,” the Dubai-based Islamic banker said while adding “You do not need a dedicated Islamic structuring team.”
Bankers say that retail Islamic banking is profitable for international banks but the landscape is already extremely competitive.
The Gulf’s local Islamic banks have so far been better placed to capture business.
The downsizing of international expertise in Islamic finance in the region is creating an even greater chance for local lenders to try to gain market share.
HSBC’s move “represents an opportunity for local, indigenous firms to progress the industry towards the next stage of its evolution”, said Iqbal Khan, one of the architects of HSBC’s original Islamic business. He is now CEO of Fajr Capital in Dubai.
Many of the region’s pioneers of Islamic finance, who helped to build the shariah practices at the world’s biggest investment banks, are working with boutique Islamic firms out of mainstream banks.
HSBC’s decision has reopened the debate over the credibility of conventional banks operating Islamic units.
In 2011, Qatar’s central bank forced the closure of Islamic banking units by ordering a separation of shariah-compliant lenders and conventional lenders.
“The credibility issue, is ‘are you an Islamic bank or a conventional bank?’ It is forcing people to make choices,” Tirad Mahmoud, CEO of Abu Dhabi Islamic Bank said.
“Customers will always vote with their money,” he added.