REUTERS: Gulf Islamic banks' extra product costs shrinking, study finds

The extra costs which Islamic banks in the Gulf charge consumers relative to conventional banks appear to be falling, according to a study by credit rating agency Standard & Poor's.

For years, bankers have assumed that Islamic institutions charge higher costs because of several factors, including the relative complexity of sharia-compliant products compared to conventional ones, and the fact that Islamic financial markets tend to be younger, smaller and less liquid.

Other factors that may push up costs are a lack of clear regulation, in an industry where scholars may issue contradictory rulings, and adverse tax treatment, since Islamic deals often involve multiple asset transfers.

Now the cost gap for Gulf banks rated by S&P seems to narrowing, to as little as 30 basis points in the first half of 2013 from a high of 110 bps in 2009.

The study used financial data from 2007 to 2013 to calculate the ratios of interest income to average assets for conventional banks and the equivalent ratios for Islamic institutions, said Paris-based Mohamed Damak, primary credit analyst at S&P.

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