Coverage: weekly note · Information to 16 December 2024
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TGB Weekly Research Note · 16 December 2024
Islamic banking assets grew 7.21% to USD 2.37 trillion in 2023, within a wider Islamic finance industry of USD 3.38 trillion, but gains against conventional banks were uneven across markets.
The desk view
The Islamic Financial Services Board (IFSB) puts total assets of the global Islamic financial services industry at USD 3.38 trillion in 2023, up 4% on the year. Banking is the core of that figure: Islamic banking assets grew 7.21% to USD 2.37 trillion, or 70.21% of the industry. The IFSB says demand for Shariah-compliant products and abundant funding in oil-exporting countries propelled Islamic banking assets to outpace the growth of conventional counterparts. The jurisdiction data show that the edge was real but narrow and uneven: Islamic banks' share of banking assets rose in Kuwait, Malaysia and the UAE, was broadly flat in Saudi Arabia, and fell in Bangladesh and Pakistan. Our reading is that 2023 was a year of steady, GCC-led expansion rather than a broad-based displacement of conventional banking.
A USD 2.37 trillion banking core in a USD 3.38 trillion industry
The headline number for Islamic finance is often the industry total, which the IFSB's latest stability report puts at USD 3.38 trillion for 2023, against USD 3.25 trillion in 2022. Growth slowed to 4% from 6.2% in 2022. Islamic banking accounted for 70.21% of the total, with sukuk outstanding and Islamic funds at 29.08% and Islamic insurance at 0.71%.
Islamic banking assets grew 7.21% year on year to USD 2.37 trillion by Q4 2023, slightly faster than the 6.9% growth the IFSB reported for 2022. Over the five years to December 2023, the compound annual growth rate was 10.72%. These figures need careful reading. The growth rates are calculated from the IFSB's prudential database, which covers Islamic banks and windows in nine jurisdictions and stand-alone Islamic banks in 14 others. The USD totals combine official data with third-party data where primary figures are unavailable. The latest USD total is about 5.3% above the USD 2.25 trillion reported for end-2022 in the previous edition, so the two measures are not interchangeable.
Growth was concentrated in the GCC
The Gulf Cooperation Council (GCC) dominates the asset base, with USD 1,463.91 billion of the USD 2,372.17 billion in Islamic banking assets. GCC Islamic banks grew assets by around 8.40% by the end of 2023, driven primarily by non-oil activities, a robust labour market and supportive fiscal policies. Europe and Central Asia grew almost 8.96%, helped by the entry of new Islamic banks. Across the wider industry, the GCC holds over 52.50% of Islamic finance assets, ahead of East Asia and the Pacific at 21.80% and MENA outside the GCC at 12.70%.
Elsewhere growth was slower. MENA outside the GCC grew 3.17%, and the IFSB notes that Islamic banks there grew at a pace similar to their conventional peers. East Asia and the Pacific grew 2.78% and South Asia 1.40%. Sub-Saharan Africa contracted 2.25%, to USD 13.36 billion, owing to local currency depreciation and higher non-performing financing. The 15 jurisdictions where Islamic banking is systemically important, meaning more than 15% of domestic banking assets, hold more than USD 2.18 trillion, around 92.14% of the global total.
Islamic banking assets by region, 2023, USD bn
Market share shows a narrow, uneven edge over conventional banks
A rising share of domestic banking assets is the clearest sign that Islamic banks are outgrowing conventional ones. On the IFSB's jurisdiction data, Kuwait's share rose from 51.0% in 2022 to 55.68% in Q4 2023, Malaysia's from 31.0% to 32.14% and the UAE's from 22.7% to 23.17%. Saudi Arabia, the largest market, was broadly flat at 74.96% against 74.9%. Bahrain's share rose from 16.1% to 20.86%, while Qatar's was little changed at 28.75% against 28.6%. Shares fell in Bangladesh, from 25.8% to 21.33%, and in Pakistan, from 20.2% to 19.60%. The two reports draw on data compiled in different years, so small changes should be read as indicative.
National data point the same way. Bank Negara Malaysia reports Islamic banking system assets of RM1,398.2 billion at end-2023, against RM1,316.1 billion a year earlier, a rise of about 6.2%. Their share of total banking system assets edged up from 36.3% to 36.6%, while Islamic financing rose from 44.5% to 45.6% of all loans and financing. The central bank's measure includes development financial institutions, so it is not directly comparable with the IFSB's 32.14%.
Islamic banking share of total banking assets
| Jurisdiction | 2022 | Q4 2023 |
|---|---|---|
| Saudi Arabia | 74.9% | 74.96% |
| Kuwait | 51.0% | 55.68% |
| Malaysia | 31.0% | 32.14% |
| Qatar | 28.6% | 28.75% |
| UAE | 22.7% | 23.17% |
| Bahrain | 16.1% | 20.86% |
| Bangladesh | 25.8% | 21.33% |
| Pakistan | 20.2% | 19.60% |
Source: Islamic Financial Services Board (IFSB), Islamic Financial Services Industry Stability Report 2024, 30 September 2024; Islamic Financial Services Board (IFSB), Islamic Financial Services Industry Stability Report 2023, 31 August 2023.
Sound balance sheets, but a slower 2024
The sector's balance sheets support continued growth. Average capital adequacy and Tier 1 ratios were around 19.10% and 17.83%, and the leverage ratio stayed above the 3% requirement in all regions. Return on assets was around 2.16% in Q4 2023, against 1.95% a year earlier, and return on equity around 26.27%, against 24.25%.
The IFSB nevertheless expected the outlook for Islamic banking to slow in 2024 because of economic and geopolitical challenges. It also lists competition from conventional banks, which are often more established and have larger capital bases, as a downside risk to Islamic banks' market share and margins. For bank executives and supervisors, the practical point is that Islamic banking's lead over conventional growth rests mainly on the GCC and a handful of other markets, and should not be assumed for the industry as a whole.
Primary sources: Islamic Financial Services Board (IFSB), Islamic Financial Services Industry Stability Report 2024, 30 September 2024; Islamic Financial Services Board (IFSB), Islamic Financial Services Industry Stability Report 2023, 31 August 2023; Bank Negara Malaysia (BNM), Financial Stability Review - Second Half 2023 (Annex, Table A.2: Key Financial Indicators: Islamic Banking and Takaful Sectors), 20 March 2024.