Dubai: Islamic banks in Gulf Cooperation Council (GCC) countries are likely to grow faster than their conventional counterparts and will increase their share in the region's banking system, a Standard & Poor's Ratings Services report said.
The report, published yesterday, said Islamic banks' profitability rates are being hit harder due to lower interest rates and non-core banking revenues as they traditionally operate in this sector more than conventional banks.
However, low interest rates and lower capital market-related gains than 2008 pre-crisis levels are impairing revenue growth for most Islamic banks in the region, leading to profitability convergence with their conventional peers.
"We think Islamic banking will continue to increase its market share in the Gulf, and we expect the operating environment over the next two years to remain supportive for Islamic banks' credit quality," said Standard & Poor's credit analyst Timucin Engin.
Unless a cycle of higher interest rates that would help Islamic banks to expand their net interest margins emerges, it is expected that convergence between conventional and Islamic banking returns in the GCC region over the next few years will continue, the report said.
Islamic banks are used to rely on strong returns from non-banking activities, such as capital markets and real estate, owing to the inflationary asset valuation cycle in the region consisting of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.
"After their recent credit losses we now expect them to have similar provisioning levels to their conventional peers," Engin said.
"We believe the convergence of returns between the conventional and the Islamic banking models in the GCC region is here to stay," Engin said.