World Islamic Banking Competitiveness Report 2012-13

19th Annual
A critical reference source for decision makers in the global Islamic finance industry, providing strategic insights from Ernst & Young Dear Banking & Finance Leader, It is with great pleasure that we present to you the 9th annual edition of the World Islamic Banking Competitiveness Report 2012/13, developed in collaboration with leading global professional services and advisory firm Ernst & Young, and exclusively launched onsite at the 19th Annual World Islamic Banking Conference (WIBC 2012) during a specially convened WIBC plenary session held on the 10th of December 2012 in the Kingdom of Bahrain. More than 1,200 industry leaders from over 50 countries attended WIBC 2012 to chart new directions for the global Islamic finance industry, continuing WIBCs longstanding tradition of shaping the future of Islamic finance. Despite the challenging global economic environment, leading Islamic financial institutions have been able to sustain their growth ambitions. The industry, with its increasingly international footprint, continues to demonstrate its resilience and competitiveness, while the range of Shariah-compliant products and services available globally has significantly widened and deepened. The rapid growth and the intensification of the industrys internationalisation highlight the dynamic nature of the industry and underscore the increasing efforts of Islamic financial institutions to meet the growing demands of a global economy. However, in order to sustain growth over the long term, there is a need to put in place prudent legal and regulatory policies together with sound and efficient business frameworks that will further boost the resilience and success of the Islamic financial sector. We would like to express our sincere gratitude to Ernst & Young and their world renowned Islamic Financial Services Team for investing their considerable talent and resources in developing the World Islamic Banking Competitiveness Report 2012/13. The Report, titled Growing Beyond: DNA of Successful Transformation, analyzes key strategies that leading Islamic financial institutions must adopt in order to ensure continued stability and success amidst the challenges of slowing growth and declining profitability. Established as a critical reference resource for key industry players, thought leaders and policy makers in the global Islamic banking and finance industry, we hope that the analysis in this years Report will provide practical, constructive and valuable insights which will be useful in your own strategic planning activities and will assist your organization in its quest for success as the Islamic banking and finance industry seeks to adapt to the new dynamics of global finance. To find out more on how your organization can play a part in this important research initiative in the future, please e-mail sophie@megaevents.net Yours sincerely,
David McLean Chief Executive The World Islamic Banking Conference A MEGA Brand
A MEGA Brand: Shaping the Future of the Global Islamic Finance Industry Since 1993 P.O. Box 72045, Dubai, UAE | t. +9714 343 1200 | f+971 4 343 6003 MEGA Brands. MEGA Clients. Market Leaders. www.megaevents.net
World Islamic Banking Competitiveness Report 2012-2013

Growing Beyond DNA of Successful Transformation
December 2012
Report structure
Opening
Executive brief Competitive positioning
Global industry insights
Performance analysis CEO agenda Bahrain Egypt Pakistan Qatar Saudi Arabia Turkey United Arab Emirates
Country spotlight
Indonesia Kuwait Malaysia
COMPETITIVENESS REPORT 2012-2013
Report structure
Opening
Country spotlight
Executive brief
Islamic banking assets with commercial banks globally grew to $1.3 trillion in 2011, suggesting an average annual growth of 19% over past four years (2011: 24%). The top four markets account for 84% of industry assets. The Islamic banking growth story continues to be positive, growing 50% faster than the overall banking sector. High potential international markets each in different stages of development and therefore requiring different penetration strategies - include Saudi Arabia, Malaysia, Qatar, Turkey and Indonesia. This year, we launch the EY Islamic Banking Universe that tracks industry performance across core Islamic finance markets with a combined GDP of $5 trillion in 2011. Islamic banking assets are forecast to grow beyond the milestone of $2 trillion by 2014. It is however a different story when it comes to profitability. The industrys average ROE was 12% compared to 15% for conve ntional in 2011. Islamic banks continue to grapple with multiple challenges relating to sub-scale operation, asset quality, negative operating income from core activities and a weak risk culture. The severity of performance challenge has prompted several institutions to initiate wide-ranging transformation programs. We call it the new 3 Rs for the industry: Regulatory transformation involving compliance risk, capital optimization, integrated balance sheet management and liquidity management Risk transformation around Sharia governance, single data management framework, segment specific risk models and fund transfer pricing capabilities Retail banking transformation strengthening customer centric operating model, channel integration and technology enablement The turnaround could take 2-3 years and shareholders and management need to be making commitments now to capitalize on the positive outlook. Successful transformation around 3 Rs could potentially increase the profit pool of Islamic banks by 25% by 2015. Beyond numbers, Sharia governance and responsible innovation require urgent attention, and sukuk is developing to be an effe ctive instrument for capital management and growth. The industry is still in transitory stage and a lot more needs to be done to demonstrate the impact of Sharia compliant system on businesses and economies. The coming up of populous and diverse markets like Indonesia, Egypt and Pakistan would help and regulatory authorities and multilateral institutions will need to play a more central role to facilitate this transition.
Ashar Nazim Partner, Islamic Banking Excellence Center Ernst & Young , MENA
4
Gordon Bennie Partner, Financial Services Leader Ernst & Young , MENA
Report structure
Opening
Country spotlight
One potential scenario shows global Islamic banking assets with commercial banks to reach $1.8 trillion in 2013 (2011: $1.3 trillion), representing average annual growth of 17%
Islamic banking asset growth (US$b)
257 89 131
1,811
1,334
Global Islamic Banking Assets 2011
South East Asia
GCC
Rest of the World
Global Islamic Banking Assets 2013e
Source: IMF, The Banker, Central Bank Reports, EY Universe
Islamic banking growth outlook continues to be positive, growing 50% faster than overall banking sector in several core markets. In Saudi Arabia, market share of Islamic banking assets is now over 50%
Banking asset penetration (% of Nominal GDP) and Islamic banking market share of total assets (%) in 2011
60%
Saudi Arabia
Islamic banking share of total assets (2011) 50%
40% Kuwait 30% Bahrain Qatar 20% Bangladesh 10% Turkey Egypt Jordan UAE Malaysia
Pakistan Indonesia
0% 30%
80%
130%
180%
230%
Banking asset penetration (% of Nominal GDP, 2011)

Source: Central Bank Reports, Ernst & Young Analysis
Size of circles denote the relative size of Islamic banking assets in 2011
Top 20 Islamic banks make up 55% of the total Islamic banking assets and are concentrated in 7 countries, including GCC, Malaysia and Turkey
Total Assets 2011 (US$b)
60 48 24 22 20 17 16 15 14 11 11 10 10 10 9 8
Banks Home Market

Saudi Arabia Kuwait United Arab Emirates Malaysia United Arab Emirates
Average ROE (2008 2011)

23.1% 8.9% 12.1% 13.1% 10.6% 11.5% 15.2% 16.2% 18.3% 16.2% 3.2%
Bahrain
Qatar Qatar Malaysia Malaysia Saudi Arabia Saudi Arabia Malaysia Turkey
0.7%
19.2% 13.7%
Kuwait
United Arab Emirates Saudi Arabia Malaysia Bahrain Qatar
Leading Islamic Average Comparable Conventional Average 11.6% 15.3%
10.5%
3.6% 2.4% 7.7% -11.7% 14.5%
7
7
(3Y CAGR)
16.2 % 13.9%
Growth
7 6
US$ 17b US$ 65b
Source: Company Reports, EY Universe (Note: analysis excludes Iran assets & institutions)
13 Islamic banks have an equity base of more than $1 billion. Building regional institutions and participating in larger transactions requires the industry to scale up
Equity US$ m
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Saudi Arabia Kuwait Saudi Arabia
Qatar
UAE UAE Banks Home Market Qatar Bahrain Qatar Malaysia Saudi Arabia Turkey UAE Kuwait Saudi Arabia Turkey Malaysia Kuwait Kuwait UAE
Source: Company Reports, Ernst & Young Analysis, EY Universe
Conventional Banks
Qatar Malaysia Saudi Arabia UAE Kuwait Saudi Arabia Saudi Arabia UAE UAE Turkey Indonesia Malaysia UAE Indonesia Jordan Turkey Malaysia Saudi Arabia Indonesia Saudi Arabia
Equity US$ m 0
13
4,000
8,000
12,000
Many Islamic banks still face legacy startup issues with higher fixed operating costs as a proportion of their overall income, lower leverage and are behind the curve in technology enablement
Equity vs. ROE
25.0%
Indonesia Islamic Conventional
20.0% Average ROE (2008 2011)

Pakistan Qatar Qatar Malaysia Kuwait Saudi Arabia Malaysia Saudi Arabia UAE Turkey
15.0%
Egypt Turkey Indonesia Bangladesh
10.0%
Egypt Jordan Jordan UAE Bahrain
5.0%
Kuwait Pakistan
Bahrain
0.0%
5,000
10,000
15,000
20,000 Equity US$ m (2011)
25,000
30,000
35,000
40,000
10
Performance challenge is further exacerbated due to small size, high proportion of non yielding assets and rather basic risk culture at standalone Islamic banks
Assets vs. ROA
3.5%
Qatar Islamic Conventional
3.0%
Saudi Arabia
Average ROA (2008 2011)
2.5%
Pakistan Turkey Kuwait
Qatar
Indonesia Turkey
2.0%
Saudi Arabia
1.5%
Brunei Jordan Jordan Bangladesh UAE Kuwait Bahrain Malaysia UAE Malaysia
1.0%
Indonesia
0.5%
Egypt Egypt
Pakistan
Bahrain
0.0%
50,000
100,000
150,000
200,000 Assets US$ m (2011)
250,000
300,000
350,000
400,000
11
Higher growth in personal financing assets is made up from a number of factors: pricing differential has been reduced or eliminated, customers are more accepting of Islamic finance, and distribution capability has improved
Conventional Islamic
Financing growth (CAGR, 2008 - 2011)
30.4%
23.5% 12.9% 10.0% 8.3% 4.2% 12.8% 12.8%
10.2% 8.5%
Corporate
Government
Personal
Real Estate
Services
12
Islamic banks, on the whole, no longer trade at higher valuations despite having better prospects. Regaining investor confidence will require fundamental transformation of business practices
Price to book and price to earning
30 Conventional Islamic
25
Price to earnings (November 22, 2012)
20
15
10
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Price to book (November 22, 2012)

13
There remains considerable potential for growth with some strategic quick wins possible; retail specialization, regional diversification, transformation of middle-tier conventional banks to Islamic...
Strategic growth matrix
45%
Indonesia Islamic Conventional
40% Growth in Islamic assets CAGR 2008 - 2011 35%

Turkey
Higher growth markets with potential for large retail play

Qatar
30% 25% 20%

Pakistan Bangladesh
Significant variation between similar countries imply different strategies for banks in those markets
Malaysia
15%
10% 5% 0%
Egypt
Jordan
Syria
UAE
Saudi Arabia
Bahrain Kuwait
0%
10% Low market share
20%
30% Market share 2011
40% High market share
50%
60%
Market Share = Islamic Assets / Total Banking Assets
14
Several core Islamic finance markets lack regulatory clarity. Recent initiatives by Islamic Development Bank could see more jurisdictions introducing Islamic banking legislation and regulatory framework
Relatively developed infrastructure
Some infrastructure
Weak or no infrastructure
In a bold step forward, the draft Islamic banking regulations in Oman disallow commodity murabaha for liquidity management. For a long time now, the (mis)use of synthetic instruments has disillusioned the proponents of Islamic banking
15
Since its inception last year, the Islamic Interbank Benchmark Rate (IIBR) has been evolving through a process of regular reviews from the Islamic Benchmark Committee and the Sharia Committee
Key Facts
Published for nine price points from overnight to 1 year USD reference rate applicable based on underlying Murabaha, Mudaraba and Wakala contracts Calculated by taking price of 18 contributors, excluding top and bottom quartiles and calculating mean of remaining data points
Key Parties
Governed by Islamic Benchmark Committee (which oversees contributions, process and governance) and the Sharia Committee (which oversees compliance) Established by 18 major Islamic banks and windows IDB and Islamic infrastructure institutions are part of the Islamic Benchmark Committee, including AAOIFI, CIBAFI, Bahrain Association of Bank and Association of Islamic Banking Institutions Central banks of Bahrain, Kuwait, UAE and Qatar are observer members
Road Ahead
Continue enhancing governance Permit more contributions beyond Malaysia and GCC (subject to Islamic Benchmark Committee approval) Develop benchmarks in more local currencies, SAR, QAR, BAH, EGP Develop dealt rate benchmarks that are derived from actual trades
Key Milestone
LIBOR governance to be transferred from BBA to the FSA with more stringent reporting requirements IB Committee first deliberates on changing rate from Bid to Ask and strengthening rules for admitting new contributors
Major global bank fined more than $420 million by US and UK regulators
IIBR launched on 22 November 2011, after several closed door meetings of the Islamic Benchmark (IB) Committee and Sharia Committee
0.9
IB Committee welcome 3 Malaysian banks
0.8 0.7 0.6 0.5 0.4
Code of Conduct reviewed by IB Committee Chairman
New rules for admitting new banks including a minimum level of Sharia compliant assets and trades. Mandatory Code of Conduct for all contributors proposed
IIBR is moved from Bid to Ask contributor field 41030 41000
LIBOR scandal breaks: US Department of Justice launches criminal investigation 40969 40940 40909 40878
0.3 0.2 0.1

40848
41214
41183
41153
41122
41091
41061
0.0
IIBR 3 Months
Source: Thomson Reuters
LIBOR 3 Months
16
10 of the worlds 25 Rapid Growth Markets (RGMs) have large Muslim population and offer strong growth prospects for Islamic banking sector (retail, SME, trade finance, wealth management)
Rapid Growth Markets
Qatar China Kazakhstan India Vietnam Nigeria Ghana Russian Federation Indonesia Malaysia UAE Egypt Ukraine Korea, Rep. Thailand Turkey Colombia Argentina Poland Chile Brazil South Africa Saudi Arabia Mexico
GDP CAGR 2000-2010

12.8% 10.3% 8.5% 7.4% 7.2% 6.4% 5.6% 5.3% 5.2% 5.0% 4.9% 4.9% 4.7% 4.6% 4.4% 4.2% 4.1% 4.1% 3.9% 3.8% 3.7% 3.6% 3.4% 2.3%
Leading Islamic finance centers
Kuala Lumpurs audacious financial sector plan could see Islamic financing assets growing to 40% of the total industry by 2020. A vibrant sukuk market, anticipated consolidation among Islamic banks, Sharia transformation of developmental institutions, private pension scheme, and tax and regulatory reforms are all steps in the same direction.
Bahrains unique Islamic banking proposition is guided by four strategic priorities: 1) Regulatory clarity across major existing and emerging Islamic finance areas 2) Empowering institutions through skills development 3) Consolidation amongst market players 4) Standard setting initiatives facilitated through industry infrastructure institutions
17
Several Arab Spring markets are expected to launch Islamic banking initiatives although progress to-date has been slow
Regulatory framework for Islamic
Egypt
Turkey
Sovereign sukuk planned Launch of Sharia compliant products
banks being considered by several banks
Tunisia
UAE
Tunisia Morocco Algeria Libya
Syria Lebanon Iraq Jordan Egypt
Kuwait
Regulatory framework for Islamic
Sovereign sukuk planned for 2013
banks being considered
Bahrain Qatar Saudi Arabia
Hydrocarbon reserves center Population center
Yemen
Libya Iraq
Oman
Approval of Islamic banking legislation Regulatory framework for Islamic
banks being considered
Islamic banking legislation being Several existing and new banks
considered
considering Islamic banking operations
18
Demand for sukuk instruments will continue to grow, outpacing global supply and providing opportunities for banks to establish and grow their Islamic fixed income advisory platforms
Outstanding Sukuk maturity profile and estimated demand by Islamic banks
400
US$ b 400
Based on current growth forecast,
350
300
GAP
Islamic financial institutions will require at least US$ 400b of short term, credible, liquid securities for liquidity and capital management purposes, by 2015 sukuk demand could be in excess of US$ 600b by 2015 in new issuance a record year but still short of industry demand
250
Including other investor classes, global

39 20 15 35 15 179
200
150
2012 would see in excess of US$ 110b
100 55
50
Market opportunity will drive more

2013 2014 2015 2016 2017+ TOTAL Est Dem. O/S '11 '15
2012
Islamic banks to set up international platforms to offer Islamic fixed income advisory services
Source: IFIS, Standard & Poors , Bloomberg, ThomsonReuters, EY Analysis
19
Report structure
Opening
Country spotlight
20
ROE decomposition assists in understanding the key performance indicators of banks
Leverage
Deposits Cost of funding
ROE
X
Return on assets
Operating expenses
Provisions
21
Islamic banks continue to develop their non-retail banking assets. With the sukuk market development continuing, we expect to see a rapid increase in both Corporate and Treasury & Investments assets
Islamic banks Conventional banks
41%
32%
28%
18% 38% 44%
20% 40%
Treasury & investment
23%
32%
43%
61%
18%
57%
39% 37%
Corporate
36%
36%
45% 30% 21% 17%

Malaysia Saudi Arabia
22%
22%
Retail
Malaysia
Saudi Arabia
UAE
Turkey
UAE
Turkey
Segment assets
Includes selected banks from each country based on the availability of data
22
After a difficult few years, banking profitability looks to be stabilizing in major Islamic banking markets. However, Islamic banks have experienced a mixed recovery across markets
Conventional Islamic 20% 15% 10% 18% 5% 14%
GCC
Return on equity
19% 17% 15%
13%
10%
2008
2009
2010
2011
17% 15%
South East Asia

20% 15% 18% 19% 14%
13%
12% 11% 9% 7% 5%
10%
15%
5%
2008
2009
2010
2011
20%
15% 2008 2009 2010 2011 10% 5% 16%
Rest of the world

14% 13% 12%
2008
2009
2010
2011
Based on weighted average
23
With underperforming assets being disposed and capital replenished, banks have seen ROA stabilize or improve. However, Islamic banks must address others factors too
GCC
Return on assets (ROA)

2.6% 2.4% 2.2%
2.5% 2.0% 1.5% 1.0%
2.4% 1.6% 1.8% 1.5%
2008
2009
2010
2011
South East Asia

2.0% 1.8% 1.6% 1.5% 1.4% 1.2% 1.0% 1.3% 2.5% 2008 2009 2010 2011 2.0% 1.5% 1.0%
2.5% 2.0% 1.7% 1.7% 1.5% 1.4% 1.2% 2008 2009 2010
1.8% 1.1% 2011
1.0%
Rest of the world
1.6% 1.6% 1.2% 2008 2009 2010 2011
24
a more detailed analysis shows operating expenses as a proportion of assets are 50% higher for Islamic banks. For mid to smaller sized banks, this proportion would be higher still
Islamic banks
ROA
6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -2.1% -1.8% -1.8% 2.7% 2.7% 2.9% 1% 0% -0.8% -1% -2% -3% -0.2% -1.0% -0.7% -1.2% -0.6% 2.6% 1.4%
Conventional banks
1.3%
6% 5% 4%
2.9%
1.4%
2.2%
1.8%
1.7%
1.0%
3% 2% 2.1% 2.4%
1.4%
1.2%
1.1%
Other income
2.6%
Net financing income
Operating expenses
Provisions
-0.3%
-0.9% 2010
-0.8%
2007
2011
2007
2010
2011
Return on assets
Numbers may not add up due to rounding Source: Company Reports, Ernst & Young Analysis, EY Universe
25
Cost of funds remains lower for Islamic banks overall, although smaller banks and those in distressed markets have seen this advantage erode sharply post financial crises
Conventional Islamic 9.0% 7.0% 5.0% 3.0% 1.0% 3.5% 2.8% 2008 2009 2010
GCC
Cost of funds
9.0% 8.0% 7.0%
1.6%
2011
1.2%
South East Asia

6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 5.1% 9.0% 7.0% 5.0% 3.0% 3.5% 3.1% 2.8% 9.0% 7.0% 1.0% 2.1% 2008 2009 2010 3.2% 2.3% 2011
Rest of the world

8.8%
5.6% 4.5%
2008
2009
2010
2011
5.0% 3.0% 1.0%
5.5%
2008
2009
2010
2011
26
The largest operational cost tends to be for human capital. Inefficient operating models need urgent reform to increase technology enablement
GCC
60% 50% 40% 30% 20% 10% 45% 43% 47% 60% 50% 40% 30% 39% 33% 2008 2009 2010 42% 32%
Operating cost / operating income

60%
50%
2011
South East Asia

46% 45% 48% 45%
40%
40%
30%
20% 10% 2008 2009 2010 2011
20%
Rest of the world

60%
57% 45% 50% 43% 50% 2008 2009 2010 2011 40% 30% 20% 10% 2008 2009 2010 2011
10%
27
Asset quality still needs better management with risk and governance often a complex and sensitive factor in deciding revaluations or disposals
GCC
30%
Provisions / operating income
30%
25% 20% 15% 10% 15% 13% 2008 2009 2010 2011 22% 19%
25%
5%
20% 17% 15% 14% 12% 10% 19%
South East Asia

30% 25% 20% 15% 18% 18% 13% 2008 2009 2010 8% 2011
10%
5%
Rest of the world

30%
5% 2008 2009 2010 2011 25% 20% 15% 10% 5%
17% 15% 2008 2009 2010 16% 10% 2011
28
Report structure
Opening
Country spotlight
29
The severity of performance challenge demands wide-ranging transformation of business practices around the 3 Rs
Regulatory
Transformation
Transformation
Risk
Retail
Transformation
Faced with mounting pressure to improve sub-par ROE, many institutions are tempted to cut or delay the much needed change agenda.The danger is that banks will miss the limited window they have to implement their future blueprint
30
Regulatory transformation will deepen the divide between weaker and stronger banks. The impact of reforms will force the industry to adapt to radically different ROE expectations
Impact on Business Model
Transformation Agenda
Basel III & IFSB Capital
Basel III & IFSB Liquidity
Risk weighted assets & revenue levers
1 2
Capital optimization Dynamic liquidity forecasting Integrated balance sheet management Data management
Capital and funding pressure Unique Islamic banking framework
3 4 5
Cost of funds and operational cost
Regulatory reporting
Compliance risk management
Sharia rulings
Sukuk as growth and capital instrument
31
The risk agenda has been elevated significantly as regulators require banks to implement comprehensive reforms. Islamic banks require more attention Areas of greatest progress* 83%
Increased board oversight of risk
Boards playing a more
Areas requiring more progress* 78%

Compensation schemes
active role in setting organizational risk policies and parameters and spending more time on risk Risk Officers has been elevated, and CROs are now actively participating in strategy planning and product development
89%
65% 92% 93%
Strengthen CRO mandate
The influence of the Chief
92%
Attention on risk culture
Capital reallocation
Liquidity risk management
96%
Clearly defining organizational
Clearly defined risk appetite
Enhanced stress testing
risk appetite and risk strategy for the businesses to follow throughout the organization
Embedding the risk culture
59%
Enhanced risk transparency
* Source: Selected responses from Ernst & Youngs survey on risk management practices
32
Risk transformation balancing models and judgment
Risk governance
Strengthening risk governance to integrate risk appetite, stress testing, strategic planning, capital and liquidity management
Data & IT infrastructure
Fund transfer pricing
Longer term strategy to eliminate redundancies across data initiatives, and development of a single data management framework to meet business, Sharia and regulatory demands
Using granular data and enhanced funds transfer pricing to segment and price products effectively
Integrated data and reporting
Building capacity for granular risk, finance and treasury data analysis to improve development and pricing of products
33
Retail developing a whole-customer view of requirements and profitability will be an essential capability for Islamic banks to improve performance
Banking activities customers most want their bank to improve*
Branch proximity
22% 22%
1 2 3
31% 36%
Customer centric operating model Customer acquisition model (integrated onboarding strategy & process definition) Product portfolio management (up sell and cross sell at customer level) Sales force effectiveness Integrated channel strategy (channel proposition, segment alignment, migration) Customer data design and advanced pricing management
Trust
Specific service offering
22%
Product offering
4 5
41%
Price
Service Quality
* Source: Selected responses from Ernst & Youngs global consumer banking survey
34
Retail technology will emerge as both an enabler and a differentiator despite all forms of capital expenditure being under heavy scrutiny
Technology to comply
As new regulatory requirements take effect, Islamic banks will need to become more data intensive. The quality and extent of data expected, the
connectivity between functions, the level of risk assessment and the speed of delivery will prompt organization-wide change programs
Technology to understand
Islamic banks need to implement new systems for effective collection, management and mining of customer data
Technology to deliver
Although some security concerns remain, technology will play an increasing role in the interaction between bank and customer via multiple channels. Increasing importance of smartphones in Islamic banking markets can no longer be ignored
35
Retail the digital channel must now be at the heart of an integrated multichannel offering to improve accessibility, cross sales and servicing
Optimizing the value of digital channels
Key Segments
Mass market HNW SME
Develop joint sales & marketing strategy optimizing sales capture Reassure customers with robust but simple security measures Develop integrated channel development plan with cost benefit by channel Instigate fast track approval & change processes to exploit online channel flexibility
Marketing
Sales & Distribution Management
Branches Internet
Retail Marketing
Contact centers
Direct sales force
RMs ATM / self
Intermediarie s Joint ventures
Understand the real needs of your target customers and keep the online offering & experience as simple as possible
Customer & Product Management Divisional Supports
Customer product design & propositions

Consumer products and propositions HNW Products & Propositions SME Products & Propositions Sharia support
Strategy & Planning
Change
Operational Efficiency
Credit Policy & Risk
Partner with innovative companies to fuel creative channel design Use champion challenger testing to improve channel performance
Group Manufacturing
Prod Service Fulfillment
Customer Servicing
Technology
Credit operations
Payments
Group Supports
HR
Legal
Risk & Compliance
Credit
Finance & Tax
Design end to end experience and operating model for online services, to understand full costs and operating implications
Build online capabilities once, for use by all products and brands
36
A well executed transformation program would take 2-3 years to be implemented and embedded, and could improve Islamic banks profitability by approximately 25%
Global Islamic banking estimated combined profit pool, 2015 (US$ b)
Current performance (2011) Growth momentum (2012 2015)
17 - 18
15 - 17
3 Rs driven improvements
Regulatory transformation
~9
Risk transformation Retail transformation
Potential combined Islamic banking profit pool (2015)
41 - 44
37
Report structure
Opening
Country spotlight
38
Banking sector overview Bahrain
Banking sector 2011

Total domestic assets (US$b) Total loans (US$b) Total deposits (US$b) Total equity (US$b) Assets CAGR (2007-2011) Loans CAGR (2007-2011) Deposits CAGR (2007-2011) Total Islamic assets (US$b) Islamic asset market share Islamic assets CAGR (2007-2011) Total number of commercial banks Total number of Islamic retail banks 47 17 32 27 6.0% 11.4% 12.8% 13 26.9% 7.4% 23 6
Macroeconomic 2011
Real GDP growth
Nominal GDP (US$b) Nominal GDP per capita (US$) Total population (m) Total Muslim population (m) Population (0-14) Population (15-64) Population (65 & over) Population growth Inflation Unemployment rate Policy interest rate
1.9%
29 24,939 1.2 1.1 20.2% 77.2% 2.6% -1.9% -0.4% 3.7% 1.0%
Source: Central Bank Report, Industry Sources, Ernst & Young Analysis
Limitation: Impact of consolidation, off-shore business and window operation
39
Banking sector snapshot Bahrain
Total domestic banking assets (US$b)

60 50 40 38 49 42 46 47 30 25 20 15 10 5 2007 2008 2009 2010 2011 2007 21
Total equity (US$b)

23 25 27 27
30
20 10 -
2008
2009
2010
2011
Total advances (US$b)

18 16 14 12 10 8 6 4 2 2007 2008 2009 2010 2011 11 16 16 17
Total banking deposits (US$b)

35 30 25 20 15 10 5 2007 2008 2009 2010 2011 20 29 25 25 32
15
40
Top five banks Bahrain
Total assets (US$b)

30 25 20 15 10 5 0 Bank A Bank B Bank C Bank D Bank E 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Bank A
Total equity (US$b)
Bank B
Bank C
Bank D
Bank E
Market share (Assets)

16% 14% 12% 10% 8% 6% 4% 2% 0% Bank A Bank B Bank C Bank D Bank E 4% 3% 3% 9% 14% 20% 15% 10% 5% 0% -5% -10% -15% Bank A 11.5%
Return on equity
16.8% 11.8% 13.4%
Bank B
Bank C
Bank D
Bank E
-10.7%
2011 Figures
41
Islamic banking sector snapshot Bahrain
Total assets of top 3 Islamic banks (US$b)

21 18 15 12 9 6 3 0 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0
Total equity of top 3 Islamic banks (US$b)
Bank A
Bank B
Bank C
Bank A
Bank B
Bank C
10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
Market share of top 3 Islamic banks

8.7% 15%
ROE of top 3 Islamic banks

12%
10%
5% 3.5% 2.1% 0% -5% -10% Bank A Bank B Bank C -11% Bank A Bank B Bank C 3%
-15%
2011 Figures
42
Islamic banks in Bahrain need to take a fresh look at their business model
20% Bank D
Islamic Conventional
Bank E
15%
Bank A
Growth in assets CAGR 2008 - 2011
Undifferentiated business models will need to be reconfigured to be specialized (retail, SME) and diversified (regional, trade finance, wealth management, etc.)
10% Bank B Bank C 5%
Bank B Bank A
Bank C
0%
0%
2% Bank F Bank G
4%
6%
8%
10%
12%
14%
16%
18%
20%
-5%
-10%
Low market share
High market share
Market share 2011

Source: Central Bank Report, Industry Sources, Ernst & Young Analysis Banks are ranked based on asset size 2011
43
Report structure
Opening
Country spotlight
44
Banking sector overview Egypt
Banking sector 2011

Total assets (US$b) Total loans (US$b) Total deposits (US$b) Total equity (US$b) Assets CAGR (2007-2011) Loans CAGR (2007-2011) Deposits CAGR (2007-2011) Total Islamic assets (US$b) Islamic asset market share Islamic assets CAGR (2007-2011) Total number of banks Total number of Islamic retail banks 215 80 162 14 8.7% 8.5% 10.7% 8 3.8% 9.5% 39 4
Macroeconomic 2011
Real GDP growth
1.8%
229 2,783 82 78 32.5% 62.8% 4.7% 1.7% 10.1% 12.0% 9.5%
Note: Only commercial banks
45
Banking sector snapshot Egypt

250 200 150 100 50 154 172 189 211 215 16 14 12 10 8 6 4 2 2007 2008 2009 2010 2011
Total equity (US$b)

14 10 11 14
12
2007
2008
2009
2010
2011

100
80 60 40 20 58 70 71 75 80 180 150 120 90 60 30 2007 2008 2009 2010 2011 -

124 135 148 162
108
2007
2008
2009
2010
2011
46
Top five banks Egypt
Total assets (US$b)

30 25 20 15 10 5 0 Bank A Bank B Bank C Bank D Bank E 1.5 1.2 0.9
Total equity (US$b)
0.6
0.3 0.0
Bank A
Bank B
Bank C
Bank D
Bank E
15% 12% 9% 6% 3% 0%

12.7%
25% 20%
Return on equity
22.7%
20.2% 15.7%
15%
6.1% 4.8% 3.5% 2.9% 10% 5% 0% 7.2% 9.0%
Bank A
Bank B
Bank C
Bank D
Bank E
Bank A
Bank B
Bank C
Bank D
Bank E
2011 Figures
47
Post Arab spring, Egypt is expected to be a key market for Islamic banking although pace may be slow initially
15% Islamic Conventional
Bank B
13%
Great potential for Islamic banking but key challenges related to fiscal stability remain
11%
Regulatory clarity will be key to development of Islamic banking in Egypt

Bank B Bank A
9%
7%
5%
Bank A
3%
0%
2%
4%
6%
8%
10%
12%
14%
Low market share
High market share
Market share 2011

48
Report structure
Opening
Country spotlight
49
Banking sector overview Indonesia
Banking sector 2011

Macroeconomic 2011
Real GDP growth
6.5%
847 3,495 242 213 27% 66.6% 6.4% 1% 5.4% 6.6% 6.0%
50
Banking sector snapshot Indonesia

450 400 350 300 250 200 150 100 50 2007 2008 2009 2010 2011
Total equity (US$b)

80 70 60 50 40 30 20 10 2007 2008 2009 2010 2011
408
336 222
258 283
68 54 32 35
43

450

381
400 350 300 250 200 150
400
350 300 250 200 150 100 50 -
345 286 221 222 243
309 225 225 255
100
50 -
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011
51
Top five banks Indonesia
Total assets (US$b)

70 60 50 40 30 20 10 0 Bank A Bank B Bank C Bank D Bank E 0 Bank A 6 4 2 8
Total equity (US$b)
Bank B
Bank C
Bank D
Bank E

18% 16% 14% 12% 10% 8% 6%
40%
Return on equity
30.3% 25.8%
16% 13% 11% 9% 6%

10% 20%
30% 19.5%
15.4%
13.3%
4%
2% 0% Bank A Bank B Bank C Bank D Bank E
0%
Bank A
Bank B
Bank C
Bank D
Bank E
2011 Figures
52
Islamic banking sector snapshot Indonesia

6 0.4 0.3 0.2 2 0.1 0.0
Bank A
Bank B
Bank C
Bank A
Bank B
Bank C
1.5%

1.3%
20% 15%

17.9%
1.0%
0.9% 10%
13.2%
0.5%
0.3%
5%
1.7% 0%
0.0%
Bank A
Bank B
Bank C
Bank A
Bank B
Bank C
2011 Figures
53
With population approaching 250 million, and a positive stable economic outlook, Indonesia is likely to be the next major growth market for Islamic banking
80% 70%
Bank D
While political and economic risks remain, Indonesias nascent Islamic banking industry is forecast to grow five folds to $83 billion by 2015 With local banks focused on retail customers, foreign institutions are developing significant presence in wholesale and corporate banking
Bank A
60%
50% 40% 30% Bank C 20% 10% 0% Bank D Bank C
Bank B
A regulatory proposal seeks to limit foreign ownership to less than 50%

Bank B
Bank A
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Low market share
High market share
Market share 2011

54
Report structure
Opening
Country spotlight
55
Banking sector overview Kuwait
Banking sector 2011

Total assets (US$b) Total loans (US$b) Total deposits (US$b) Total equity (US$ b) Assets CAGR (2007-2011) Loans CAGR (2007-2011) Deposits CAGR (2007-2011) Total Islamic assets (US$b) Islamic asset market share Islamic assets CAGR (2007-2011) Total number of banks Total number of Islamic retail banks 159 108 116 22 5.5% 6.1% 8.7% 52 33% 6.5% 22 5
Macroeconomic 2011
Real GDP growth
5.7%
161 57,102 2.8 2.6 25.7% 72.3% 2.1% 2.6% 4.7% 2.1% 2.5%
56
Banking sector snapshot Kuwait

180 160 140 120 100 80 60 40 20 2007 2008 2009 2010 2011 128 141 145 149 159 25 20 15 10 5 17
Total equity (US$b)

21 17 18 22
2007
2008
2009
2010
2011
120 100 80 60 40 20 2007 85

99 104 106 108 140 120 100 80 60 40 20 2008 2009 2010 2011 -

104 109 116
99 83
2007
2008
2009
2010
2011
57
Top five banks Kuwait
Total assets (US$b)

50 40 30 20 10 10 8 6 4 2 0
Total equity (US$b)
Bank A
Bank B
Bank C
Bank D
Bank E
Bank A
Bank B
Bank C
Bank D
Bank E
35%

31% 31%
14%
Return on equity
13.0% 10.2%
30%
25% 20% 15% 10% 5% 0% Bank A
12%
10% 8% 10% 6% 8% 6% 4% 2% 2.4%
9.1%
Bank B
Bank C
Bank D
Bank E
0%
0.2% Bank A Bank B Bank C Bank D Bank E
2011 Figures
58
Islamic banking sector snapshot Kuwait

60 50 40 30 20 10 0 Bank A Bank B Bank C 6.0 5.0 4.0 3.0
2.0
1.0 0.0
Bank A
Bank B
Bank C

35% 30% 25% 20% 15% 10% 5% 0% Bank A Bank B
10% 8% 6%

9%
30.9%
4%
6.0%
2%
3%
3.6%
Bank C
2% 0%
Bank A
Bank B
Bank C
2011 Figures
59
Search for a differentiated business model to reignite growth

27% Bank C
Islamic
Conventional
22%
Retail banking transformation, wealth management solutions and regional expansion will drive the next phase of growth for Islamic banks in Kuwait
17%
12% Bank A 7% Bank B Bank B Bank A
2%
0% -3%
Bank D 5% 10% Bank C 15% 20% 25% 30% 35%
-8% Low market share High market share
Market share 2011

60
Report structure
Opening
Country spotlight
61
Banking sector overview Malaysia
Banking sector 2011

Macroeconomic 2011
Real GDP growth
5.1%
288 9,977 28.9 17.3 29.4% 65.5% 5.1% 1.6% 3.2% 3.1% 3%
62
Banking sector snapshot Malaysia

700 600 579 435 464 504 60 50 40 30 20 10 2007 2008 2009 2010 2011 28
Total equity (US$b)

48
500
400 300 200 100
40 34
44
397
2007
2008
2009
2010
2011

350 300 250 200 150 100 50 2007 2008 2009 2010 2011 100 208 235 286 254 400 300 200 325 500

411 304 334 359
267
2007
2008
2009
2010
2011
63
Top five banks Malaysia
Total assets (US$b)

150 120 90 60 30 0 12 10 8 6 4 2 Bank A Bank B Bank C Bank D Bank E 0 Bank A
Total equity (US$b)
Bank B
Bank C
Bank D
Bank E

30% 25% 20% 15% 10% 5% 0% Bank A Bank B Bank C Bank D
Return on equity
25% 20%
25%
22.4% 14.8% 15.8%
14%
13% 8% 4%
Bank E
15%
14.1%
14.2%
10%
5% 0%
Bank A
Bank B
Bank C
Bank D
Bank E
2011 Figures
64
Islamic banking sector snapshot Malaysia

25 20

1.4 1.2 1.0 0.8 0.6 0.4 0.2
15
10 5 0
Bank A
Bank B
Bank C
0.0
Bank A
Bank B
Bank C

4.0% 3.0% 2.0% 1.0% 0.0%

25% 20%
3.7%
2.3% 1.8%
16%
15% 10% 5% 0%
18% 13%
Bank A
Bank B
Bank C
Bank A
Bank B
Bank C
2011 Figures
65
Malaysia is seeking to double the share of Islamic banking assets by 2020. The game changer would be conversion of conventional banks
40%

Bank B
Islamic
Conventional
35%
Bank A
Bank D
Growth in Assets CAGR 2008 - 2011
Consolidation will help create larger Islamic banks with capacity to grow regionally Operational transformation of Islamic banks and windows is a pre requisite for meaningful growth
30%
25%
20%
Bank E Bank D Bank C Bank A
15%
Bank G Bank D
10%
Bank C
Bank B
Bank F
5%
0%
0%
5%
10%
15%
20%
25%
30%
Low market share
High market share
Market share 2011

66
Report structure
Opening
Country spotlight
67
Banking sector overview Pakistan
Banking sector 2011

Macroeconomic 2011
Real GDP growth
2.4%
209 1,184 177 170 34.7% 61% 4.2% 1.8% 12% 6.2% 12%
68
Banking sector snapshot Pakistan

140 120 112 92 93 99 124
Total equity (US$b)

8 6
4 2 0 4 4 6 7 7
100
80 60 40 20 0
2007
2008
2009
2010
2011
2007
2008
2009
2010
2011

40 30 20 10 0 2007 2008 2009 2010 2011 30 26 33 34 35 70 60 50

58 41 44 50
40
30 20 10 0
36
2007
2008
2009
2010
2011
69
Top five banks Pakistan
Total assets (US$b)

14 12 10 8 6 4 2 0 Bank A Bank B Bank C Bank D Bank E
Total equity (US$b)

1.6 1.4 1.2
1.0
0.8 0.6 0.4 0.2 0.0
Bank A Bank B Bank C Bank D Bank E

12% 10% 8% 6% 4%
Return on equity
25% 20%
10%
10% 7% 6% 4%
22.2% 17.3% 13.1%
21.0%
23.3%
15% 10% 5% 0%
2%
0%
Bank A
Bank B
Bank C
Bank D
Bank E
Bank A
Bank B
Bank C
Bank D
Bank E
2011 Figures
70
Islamic banking sector snapshot Pakistan

2.5
2.0 1.5 1.0 0.5 0.0 Bank A Bank B Bank C

0.18
0.12
0.06
0.00 Bank A Bank B Bank C

2.0% 1.5% 1.0% 1.8%
25% 20% 15% 10%

20.4%
0.6%
0.5% 0.0% Bank A Bank B
0.5%
6.3%
-1.2% Bank A Bank B Bank C
5%
0%
Bank C
-5%
2011 Figures
71
Islamic banks will continue to experience high growth as they build their distribution capacity
Bank B
60%
Industry leader Islamic bank has thrived on differentiating itself from conventional peers Strong potential for organic growth but Islamic banks need to build distribution capacity and scale
50%
40%
Bank C
30%
Bank A
20%
10%
Bank B Bank C
Bank A
0%
0%
2%
4%
6%
8%
10%
12%
Low market share
High market share
Market share 2011

72
Report structure
Opening
Country spotlight
73
Banking sector overview Qatar
Banking sector 2011

Total assets (US$b) Total loans (US$b) Total deposits (US$b) Total equity (US$b) Assets CAGR (2007-2011) Loans CAGR (2007-2011) Deposits CAGR (2007-2011) Total Islamic assets (US$b) Islamic asset market share Islamic assets CAGR (2007-2011) Total number of banks Total number of Islamic retail banks 187 109 98 26 23.9% 25.9% 21.4% 44 23% 30% 18 4
Macroeconomic 2011
Real GDP growth
14.8%
174 101,340 1.7 1.3 12.5% 86.7% 0.8% 5.8% 1.9% 0.6% 4.5%
74
Banking sector snapshot Qatar

200 153 150 109 100 50 2007 2008 2009 2010 2011 79 126 187
Total equity (US$b)

30
25 20 15 10 5 2007 2008 2009 2010 2011 9 17 26
13
15

120 100 80 60 40 20 2007 2008 2009 2010 2011 43 66 73 109 120

100
80 60 40 20 2007 2008 2009 2010 2011 57 45 67 98 83
85
75
Top five banks Qatar
Total assets (US$b)

90 14 12 60 10 8
Total equity (US$b)
30
6 4 2
0 Bank A Bank B Bank C Bank D Bank E
Bank A
Bank B
Bank C
Bank D
Bank E

50% 43.5%
20% 16% 12%
Return on equity
17.7% 13.2% 16.5% 12.2% 17.5%
40%
30% 20% 10% 0% 10.3% 8.4% 8.0% 7.5%
8%
4% 0%
Bank A
Bank B
Bank C
Bank D
Bank E
Bank A
Bank B
Bank C
Bank D
Bank E
2011 Figures
76
Islamic banking sector snapshot Qatar

18
15 12 9 6 3 0 Bank A Bank B Bank C

3.5
3.0 2.5 2.0 1.5 1.0 0.5 0.0 Bank A Bank B Bank C
9%

8.4% 8.0%
18% 15%

16.5% 12.2% 13.3%
6% 3.4% 3%
12% 9% 6% 3%
0% Bank A Bank B Bank C
0% Bank A Bank B Bank C
2011 Figures
77
Regulatory clarity has helped Islamic banks in Qatar to achieve scale in the high growth market. There is also potential for a strong Islamic capital market play in future
50% 45% Islamic Conventional
Bank B
Growth in Assets CAGR 2008 - 2011
40% 35% 30%
Barring the conventional industry leader, Islamic banks are comparable in size to conventional peers Large infrastructure spend will fuel continued profitable growth for the banking industry
Bank A
25%
Bank C
20%
Bank A
15%
10% 5% 0%
Bank C Bank B
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Low Market Share
High Market Share
Market Share 2011

78
Report structure
Opening
Country spotlight
79
Banking sector overview Saudi Arabia
Banking sector 2011

Total assets (US$b) Total loans (US$b) Total deposits (US$b) Total equity (US$b) Assets CAGR (2007-2011) Loans CAGR (2007-2011) Deposits CAGR (2007-2011) Total Islamic assets (US$b) Islamic asset market share Islamic assets CAGR (2007-2011) Total number of banks Total number of Islamic retail banks 417 232 298 51 9.5% 9.5% 11.4% 207 49% 12.5% 12 4
Macroeconomic 2011
Real GDP growth
7.1%
597 21,262 28 27 29% 68% 3% 2.2 % 5.0% 5.8% 2%
80
Banking sector snapshot Saudi Arabia

450
400 350 300 250 200 150 100 50 2007 2008 2009 2010 2011 352 370 383 417 60 50 40 30 20 10 2007 29
Total equity (US$b)

48 51
291
44 36
2008
2009
2010
2011

250 200 201 161 199 210 232 300

250
200 150 100 50 194 229 254 266 298
150
100 50 2007 2008 2009 2010 2011
2007
2008
2009
2010
2011
81
Top five banks Saudi Arabia
Total assets (US$b)

90 12 9 6 30 3 0 Bank A Bank B Bank C Bank D Bank E Bank A
Total equity (US$b)
60
Bank B
Bank C
Bank D
Bank E
25% 20% 15% 10% 5% 0% Bank A 19.5%

25% 20% 14.3% 12.5% 15% 9.0% 17.2%
Return on equity
22.5%
15.2% 10.4%
14.8%
11.7%
10%
5% 0%
Bank B
Bank C
Bank D
Bank E
Bank A
Bank B
Bank C
Bank D
Bank E
2011 Figures
82
Islamic banking sector snapshot Saudi Arabia

60
50 40 30 20 10 0 Bank A Bank B Bank C 4 2 0 10 8 6
Bank A
Bank B
Bank C
15% 12% 9% 6% 3% 0%

14.3% 25% 20% 15% 10% 2.5% 2.4% 5% 0% Bank A Bank B Bank C

22.5%
6.4% 2.7%
Bank A
Bank B
Bank C
2011 Figures
83
With more than 50% share of the banking system assets in 2012, Islamic banking is in fact mainstream banking in Saudi Arabia
Bank C
30%
Conventional banks have large Islamic banking book which is more than just a window operation Housing finance will be reconfigured based on new mortgage law and (draft) regulations and offers significant growth opportunity
25%
20%
Bank D
A key systemic challenge is to safeguard and strengthen Sharia governance framework

Bank A
15%
Bank B
10%
Bank A
Bank C
5%
Bank D
Bank B
10% 15% 20%
0%
0%
5%
Bank E
-5%
Low market share
High market share
Market share 2011

84
Report structure
Opening
Country spotlight
85
Banking sector overview Turkey
Banking sector 2011

Total assets (US$b) Total loans (US$b) Total deposits (US$b) Total equity (US$b) Assets CAGR (2007-2011) Loans CAGR (2007-2011) Deposits CAGR (2007-2011) Total Islamic assets (US$b) Islamic asset market share Islamic assets CAGR (2007-2011) Total number of banks Total number of Islamic retail banks 631 354 378 88 20% 27.2% 18.9% 31 4.9% 30% 62 4
Macroeconomic 2011
Real GDP growth
8.5%
775 10,524 74 72 26.2% 67.4% 6.4% 1.2% 6.5% 8.8% 5.8%
86
Banking sector snapshot Turkey

700 600 500 400 300 200 100 2007 2008 2009 2010 2011 374 299 427 520 631 100 90 80 70 60 50 40 30 20 10 -
Total equity (US$b)

86 71 50 54 88
2007
2008
2009
2010
2011

400 350 300 250 200 150 100 50 2007 2008 2009 2010 2011 136 168 189 354 400 350 300 250 200 150 100 50 -

378 325 239 189 270
268
2007
2008
2009
2010
2011
87
Top five banks Turkey
Total assets (US$b)

120 100 80 60 14 12 10 8 6 4
Total equity (US$b)
40
20 0 Bank A Bank B Bank C Bank D Bank E
2
0 Bank A Bank B Bank C Bank D Bank E

20% 15% 10% 5% 0% 17% 15% 15% 30% 25%
Return on equity
24.8% 18.3% 13.9%
13%
11%
20%
15% 10% 5% 11.8%
16.5%
Bank A
Bank B
Bank C
Bank D
Bank E
0%
Bank A
Bank B
Bank C
Bank D
Bank E
2011 Figures
88
Islamic banking sector snapshot Turkey

10
8 6 4 2 0 Bank A Bank B Bank C

1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Bank A Bank B Bank C

1.6% 1.2% 0.8% 0.4% 0.0% Bank A Bank B Bank C

16% 13.6% 9.9% 14.6% 12% 8% 4% 0% Bank A Bank B Bank C
2011 Figures
1.5%
1.3% 1.2%
89
Turkeys 2023 financial services vision could see Islamic banking industry tripling in size to more than $100 billion (approximately where Malaysia is today)
40% Bank B
35%
Bank D 30% Bank A Bank C
Bank E
Islamic banks will continue to post strong growth helped by regulatory clarity and new liquidity management solutions Possible entry of more foreign Islamic banks through acquisition & conversion
25%
20% Bank D 15%
Bank C
Bank A Bank B
10%
5%
0%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Low market share
High market share
Market share 2011

90
Report structure
Opening
Country spotlight
91
Banking sector overview UAE
Banking sector 2011

Macroeconomic 2011
Real GDP growth
4.2%
339 42,921 7.9 6 20.5% 78.5% 0.9% 5.0% 0.9% 4.6% 1.0%
92
Banking sector snapshot UAE

500 400 300 40 200 100 2007 2008 2009 2010 2011 20 2007 35 391 325 411 434 450 80
Total equity (US$b)

74 66 60 45 76
2008
2009
2010
2011
300

250 259 262 268 350 300 250 200 150 100 50

246 193 265 283 289
200
169
100
2007
2008
2009
2010
2011
2007 2008 2009 2010 2011
93
Top five banks UAE
Total assets (US$b)

80 60 40 4 20 0 Bank A Bank B Bank C Bank D Bank E 2 0 Bank A
Total equity (US$b)

10
8 6
Bank B
Bank C
Bank D
Bank E

18% 16% 14% 17.1% 15.4% 11.0% 9.5% 8% 5.4% 4% 0% Bank A Bank B Bank C Bank D Bank E Bank A 16% 12%
Return on equity
14.0% 13.8% 13.9% 10.4%
12%
10% 8% 6% 4% 2% 0%
7.1%
Bank B
Bank C
Bank D
Bank E
2011 Figures
94
Islamic banking sector snapshot UAE

30
25 20 15 10 5 0 Bank A Bank B Bank C 3.0 2.5 2.0 1.5 1.0 0.5 0.0
Bank A
Bank B
Bank C

6% 5% 4% 3% 2% 1% 0% Bank A Bank B Bank C 0% 1.7% 4% 8% 5.4% 4.5% 16%

13.5% 10.4% 6.7%
12%
Bank A
Bank B
Bank C
2011 Figures
95
Regaining momentum through retail banking transformation is essential for Islamic banks in UAE
Strategic Growth Matrix
15%
Bank B Bank B Bank D
10%
Bank C
5%
Bank D Bank A Bank A

8% 10% 12% 14% 16% 18% 20%
0%
0%
2%
4%
6%
-5%
Bank C
-10%
Undifferentiated business models will need to be reconfigured to be specialized (retail & SME) and diversified (regional, infrastructure, wealth management, etc.)
High market share
Low market share
Market share 2011

96
Report structure
Opening
Country spotlight
97
Ernst & Young Leadership Islamic Banking Center of Excellence (and what they have to say)
Game changer for us would be bold, fresh thinking that drives responsible innovation Real progress will only come from greater integration with the real economy
Ashar Nazim ashar.nazim@bh.ey.com

Successful strategy execution is dependant on a bank's operating model being realigned to deliver on the new strategy
Shoaib Qureshi shoaib.qureshi@sa.ey.com

If the change does not happen at the right time, there will be nothing left to change
Abid Shakeel abid.shakeel@bh.ey.com

Islamic banking is no rocket science but structuring real Islamic products requires sophisticated thinking
Shahid Mughal shahid.mughal@om.ey.com

Market leadership will belong to those who can meet both commercial and Shari'a needs of their customers
Nida Raza nida.raza@bh.ey.com

Industry may potentially face an existential threat if it cannot manage its most important risk, i.e. Shari'a noncompliance
Mustafa Adil mustafa.adil@bh.ey.com

I wish my Islamic bank could deliver the same service levels that my previous conventional bank had to offer!
Sohaib Umar sohaib.umar@bh.ey.com
Noman Mubashir noman.mubashir@bh.ey.com
98
Report methodology and tools
Global Islamic banking assets are estimated based on publicly available data from 22 Islamic banking markets The research and insights are primarily based on EY Islamic Banking Universe (EY Universe), which is proprietary, based on sample, and is not meant to be fully exhaustive The EY Universe analysis covers 62 Islamic banks and 42 conventional banks across 12 Islamic banking markets, with a total asset base of $2.6 trillion (2011) For the purpose of this report, the analysis excludes Iran market due to its unique characteristics (except when reporting estimated global industry assets) EY Universe covers approximately 80% of the estimated global Islamic banking assets (excluding Iran market) Insights are also based on industry survey, including interviews with executives and industry observers, to identify key trends, risks and priorities Limited disclosures on Islamic windows, subsidiary operation and offshore businesses was a limiting factor The EY Universe is categorized as follows: GCC Bahrain, Kuwait, Qatar, Saudi Arabia, UAE South East Asia Indonesia, Malaysia Rest of the World Bangladesh, Egypt, Jordan, Pakistan, Turkey
The break down of banks selected country wise in the EY Universe is:

Bahrain 7 Islamic and 4 conventional banks Saudi Arabia 4 Islamic and 5 conventional banks Kuwait 4 Islamic and 3 conventional banks Qatar 3 Islamic and 3 conventional banks UAE 8 Islamic and 4 conventional banks Indonesia 5 Islamic and 4 conventional banks Malaysia 13 Islamic and 4 conventional banks Pakistan 5 Islamic and 3 conventional banks Bangladesh 5 Islamic and 2 conventional banks Jordan 2 Islamic and 1 conventional banks Egypt 2 Islamic and 4 conventional banks Turkey 4 Islamic and 5 conventional banks
Anonymity and Quotes
All interviewees were assured of anonymity and minutes documented during our discussions Quotations have been used to support arguments made in the report.
99
Ernst & Young universe of Islamic and conventional banks
Islamic banks that contributed data to Universe: Bahrain

Conventional banks that contributed data to our Universe : Bahrain

Al Baraka Banking Group (ex subsidiaries) Al Baraka Bank Bahrain Ithmaar Bank Al Salam Bank Bahrain Islamic Bank Khaleeji Commercial Bank Kuwait Finance House Bahrain
Arab Banking Corporation Ahli United Bank Bank of Bahrain and Kuwait National Bank of Bahrain
Saudi Arabia

Saudi Arabia

Al Rajhi Bank Bank Al Jazira Alinma Bank Bank AlBilad
National Commercial Bank Samba Financial Group Riyad Bank The Saudi British Bank Arab National Bank
Kuwait

Kuwait

Kuwait Finance House Ahli United Bank Boubyan Bank Kuwait International Bank
National Bank of Kuwait Burgan Bank Commercial Bank Kuwait
Qatar

Qatar

Qatar Islamic Bank Masraf Al Rayan Qatar International Islamic Bank
Doha Bank Qatar National Bank Commercial Bank of Qatar
100
UAE

UAE

Abu Dhabi Islamic Bank Ajman Islamic Bank Al Hilal Bank Dubai Islamic Bank Emirates Islamic Bank Noor Islamic Bank Sharjah Islamic Bank
Abu Dhabi Commercial Bank Emirates NBD First Gulf Bank Mashreq Bank National Bank of Abu Dhabi
Indonesia

Indonesia

Bank Bri Syariah Bank Muamalat Bank Syariah Mandiri Bank Syariah Mega Bank Syariah Bukopin
Bank Central Asia Bank Mandiri Bank Negara Indonesia Bank Rakyat Indonesia
Malaysia

Malaysia

Affin Bank Al Rajhi Bank Alliance Bank Asian Finance Bank Islam Bank Muamalat CIMB Islamic Bank Hong Leong Islamic Bank Kuwait Finance House Malaysia Maybank Islamic Bank Public Islamic bank RHB Islamic Bank
CIMB Bank Maybank Bank RHB Bank Public Bank
101
Pakistan

Pakistan

Al Baraka Pakistan Bank Islami Burj Bank Dubai Islamic Bank Pakistan Meezan Bank
MCB Bank National Bank United Bank
Bangladesh

Bangladesh

Al Arafah Bank First Security Bank ICB Islamic Bank Islami Bank Bangladesh Shahjalal Islamic Bank
Agrani bank Rupali Bank
Jordan

Jordan
Jordan Dubai Bank Jordan Islamic Bank
Arab Bank
Egypt

Al Baraka Egypt Faisal Islamic Bank of Egypt
Egypt

Arab Cairo Bank Banque Misr Commercial International Bank Union National Bank Egypt
Turkey

Al Baraka Turk Bank Asya Kuveyt Turk Turkiye Finanse
Turkey

Turkiye Vakiflar Bankasi Yapi ve Kredi Bankasi Turk Economi Bankasi Turkiye Garanti Bankasi AK Bank
102
References and acknowledgments
Sources Making the right moves Global banking outlook 2012-13 Financial regulatory reform What it means for bank business models Rapid Growth Markets (RGMs) forecast DNA of the CIO Trading places - the emergence of new patterns of international trade Central bank reports Global Insight - comparative world overview tables Zawya Economist intelligence unit The Banker Islamic Finance News Bloomberg Bank annual reports Ernst & Youngs Project Team Shoaib Qureshi Noman Mubashir Saad Qureshi Zahid Awan Ali Al Musawi
Our industry awards
18TH Annual World Islamic Conference 2011, Bahrain
3rd International Takaful Summit, London
CPI Financial Islamic Finance Awards, Dubai
Thought Leadership Award, 2011
Best Takaful Advisory Firm, 2011/2009
Best Islamic Research, 2011
CPI Financial Islamic Finance Awards
World Islamic Banking Awards, Bahrain
Nader Rahimi Ashar Nazim Abid Shakeel Nida Raza Sohaib Umar Mohd Husin Murat Hatipola
Best Islamic Advisory Firm, 2011/2010/2009
Best Islamic Finance Advisory Firm, 2009/2008/2007
Best Islamic Finance Advisory Firm, 2009/2008/2007/2006
Kuala Lumpur Islamic Finance Forum, Malaysia
Sheikh Mohammed Bin Rashid Al Maktoum Award
For questions or comments, please contact : Shoaib Qureshi: shoaib.qureshi@bh.ey.com
WIBC Leading Islamic Financial Services Provider, 2008
Most Outstanding Business Advisory & consulting Firm, 2007/2006
Best Islamic Consulting Firm, 2006
Consistently ranked the best Islamic Advisory firm with awards every year since 2006
103
Ernst & Young Assurance Tax Transactions Advisory

About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. The Middle East practice of Ernst & Young has been operating in the region since 1923. For over 85 years, we have evolved to meet the legal and commercial developments of the region. Across the Middle East, we have over 4,200 people united across 20 offices and 15 Arab countries, sharing the same values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. 2012 EYGM Limited. All Rights Reserved. EYG no. AU1369 This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.
104
Celebrating 20 Years of Leadership and Innovation in the Islamic Finance World

MEGA: Shaping the Future of the Global Islamic Finance Industry Since 1993 2 Decades of Supporting the Market Leaders MEGA is the leading international information firm focused on achieving business results for the Islamic banking & finance industry since 1993. Our exclusive focus on Islamic finance has enabled us to create significant value for the leading players in the Islamic banking, finance and investment markets. The portfolio of MEGA brands represents the landmark industry conferences and our clients are the leading players in the international financial markets. Partnering with Governments and the Industry Thought Leaders Our Strategic Partners are world leaders in their respective fields and include key government finance and regulatory agencies such as the Central Bank of Bahrain, Dubai International Financial Centre, UK Trade & Investment, the Monetary Authority of Singapore, the Economic Development Board of Bahrain, the Qatar Financial Centre Authority, Luxembourg for Finance, Business Bermuda, the U.S. Chamber of Commerce and Invest in Mauritius. These and our other strategic alliances with international thought leaders including Ernst & Young further strengthen MEGAs brand leadership position by providing original new research insights on the Islamic finance industry worldwide. Investing in Our Brands: Number 1 in Each of Our Markets MEGA continues to grow its portfolio of Islamic finance brands to further extend our leadership position across the Banking, Takaful, Funds, Capital Markets, and Project Finance segments. Each brand is successfully developed over many years in order to further cement its number 1 position in its respective market. In 1994 we founded the World Islamic Banking Conference (WIBC), which at the time was one of the first conferences in the world to focus on this nascent industry. That first year we had 120 pioneering delegates and one sponsor. Today, fast approaching 2 decades later and with more than 1,200 delegates from over 50 countries attending the conference each year, WIBC is an iconic brand internationally recognised as the worlds largest gathering of Islamic finance leaders. A World Stage: Genuinely Global Dialogues MEGA brands have a genuinely global reach across the Islamic finance industry. An initiative to further broaden this international representation The World Comes to WIBC was launched at WIBC 2007 and has grown to now feature a British Pavilion led by UKTI and comprising leading British-based banks. Over the years, the World Comes to Initiative has expanded and now features a series of Country Pavilions, Country Interfaces and Country Focus Roundtable Debates showcasing exciting new high-growth markets for Islamic finance. A number of leading international Islamic banking groups also now convene their annual board meetings along the sidelines of WIBC. Understanding Client Needs & Delivering Long-Term Value MEGAs leadership position has come as a result of our relentless focus on the constantly changing needs of our clients as the Islamic finance industry has grown and matured. Whether it be the challenges of launching a new bank, a new investment fund, an innovative new retail financial product or raising corporate profile in a key target market, we ensure that our offerings are closely aligned to the immediate business priorities of our clients. Then we make sure that we deliver on our promises and that is why the market leaders come back and work with us year after year. Our genuine value creation is highlighted by our long-term relationship with Ernst & Young who have worked with us continuously since the inception of the World Islamic Banking Conference 19 years ago - and who are also now our partners across the portfolio of MEGA brands.
A MEGA Brand: Shaping the Future of the Global Islamic Finance Industry Since 1993 P.O. Box 72045, Dubai, UAE | t. +9714 343 1200 | f+971 4 343 6003 MEGA Brands. MEGA Clients. Market Leaders. www.megaevents.net
20th Annual
Supported by
8, 9 & 10 December 2013, The Gulf Hotel, Kingdom of Bahrain
WIBC: Celebrating 2 Decades of Supporting Growth, Excellence & Innovation in the Global Islamic Finance Industry
20 Years of shaping the future of the global Islamic finance industry 20 Years of gathering industry thought leaders in dynamic debate 20 Years of bringing together more than 1,200 international industry leaders 20 Years of successfully working with the market leaders 20 Years of delivering a one-of-a-kind spectacle to the Islamic finance industry
In collaboration with
WIBC is a MEGA Brand
1,200 Industry leaders. 50+ Countries. 1 Gathering: WIBC 2013
The Worlds Largest Annual Gathering of International Islamic Finance Leaders

To be a part of the 2 decades of WIBC celebrations please contact: sophie@megaevents.net | t:+971 4 343 1200 | f:+971 4 343 6003 | P.O. Box 72045, Dubai | www.megaevents.net/Islamic_banking

World Islamic Banking Competitiveness Report 2012-13

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World Islamic Banking Competitiveness Report 2012-13

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19th Annual

World Islamic Banking Competitiveness Report 2012-2013

Executive brief Competitive positioning

Global industry insights

Indonesia Kuwait Malaysia

COMPETITIVENESS REPORT 2012-2013

Executive brief Competitive positioning

Global industry insights

Indonesia Kuwait Malaysia

COMPETITIVENESS REPORT 2012-2013

Executive brief Competitive positioning

Global industry insights

Indonesia Kuwait Malaysia

COMPETITIVENESS REPORT 2012-2013

Global Islamic Banking Assets 2011

South East Asia

Rest of the World

Global Islamic Banking Assets 2013e

Source: IMF, The Banker, Central Bank Reports, EY Universe

COMPETITIVENESS REPORT 2012-2013

Banking asset penetration (% of Nominal GDP, 2011)

COMPETITIVENESS REPORT 2012-2013

Banks Home Market

Average ROE (2008 2011)

COMPETITIVENESS REPORT 2012-2013

Saudi Arabia Kuwait Saudi Arabia

COMPETITIVENESS REPORT 2012-2013

20.0% Average ROE (2008 2011)

Egypt Turkey Indonesia Bangladesh

Egypt Jordan Jordan UAE Bahrain

20,000 Equity US$ m (2011)

Source: Company Reports, Ernst & Young Analysis, EY Universe

COMPETITIVENESS REPORT 2012-2013

Average ROA (2008 2011)

200,000 Assets US$ m (2011)

Source: Company Reports, Ernst & Young Analysis, EY Universe

COMPETITIVENESS REPORT 2012-2013

Financing growth (CAGR, 2008 - 2011)

23.5% 12.9% 10.0% 8.3% 4.2% 12.8% 12.8%

COMPETITIVENESS REPORT 2012-2013

Price to earnings (November 22, 2012)

Price to book (November 22, 2012)

COMPETITIVENESS REPORT 2012-2013

40% Growth in Islamic assets CAGR 2008 - 2011 35%

Higher growth markets with potential for large retail play

30% 25% 20%

10% Low market share

30% Market share 2011

40% High market share

Source: Company Reports, Ernst & Young Analysis, EY Universe

Market Share = Islamic Assets / Total Banking Assets

COMPETITIVENESS REPORT 2012-2013

Relatively developed infrastructure

COMPETITIVENESS REPORT 2012-2013

0.8 0.7 0.6 0.5 0.4

Code of Conduct reviewed by IB Committee Chairman

IIBR is moved from Bid to Ask contributor field 41030 41000

0.3 0.2 0.1

COMPETITIVENESS REPORT 2012-2013

GDP CAGR 2000-2010

Leading Islamic finance centers

COMPETITIVENESS REPORT 2012-2013

Regulatory framework for Islamic

Sovereign sukuk planned Launch of Sharia compliant products