Looming slowdown to hurt GCC Islamic banks – S&P
Financial performance of Islamic banks in the GCC countries will be weighed on by the weak economic environment this year and 2017, according to S&P Global Ratings.
The rating agency in its latest report released on Tuesday (May 10) said it was expecting a more pronounced slowdown of the growth of both conventional and Islamic banks.
Asset growth for Islamic lenders fell to 7.0 per cent in 2015, compared to 12.3 per cent in the previous year, while it was 5.7 per cent for conventional banks, down from 9.6 per cent in 2014.
In 2015, Customer deposits in banks that operate according to the principles of sharia in the region, eased to 9.2 per cent, compared with 16.9 per cent in 2014.
The continued drop of oil prices since June 2014 has brought the region’s governments under fiscal pressure and it reduced growth opportunities for their banking systems.
“In our view, the economic slowdown will be more pronounced in Saudi Arabia and the United Arab Emirates (UAE),” S&P said.
S&P forecasts oil prices will reach $50 per barrel in 2018, with unweighted average economic growth of the six GCC countries of 2.1 per cent in 2016 and 2.5 per cent in 2017.
Growth opportunities for Islamic banks are expected to be impacted by Saudi Arabia’s expected spending cuts by nearly 15 per cent and the slowing real estate sector in the UAE.
However, the agency said the Islamic banks have built sufficient buffers to navigate through the new environment.
“The current environment creates an opportunity for regulators to inch closer to a more stringent application of Islamic finance’s profit- and loss-sharing principles,” said Mohamed Damak, Global Head of Islamic Finance at S&P Global Ratings.
“We have seen a few attempts in the industry to move in this direction through the issuance of Tier 1 and Tier 2 sukuk with loss absorption at the point of non-viability,” added Mr. Damak.