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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S&P: Islamic finance could make inroads into North Africa

Large current account deficits and declining conventional financing sources have prompted governments from Arab spring countries to look at opportunities offered by Islamic finance, reports CPI Financial.

"Shari’ah-compliant banking previously presented an attractiveness that was at best exotic for regulators and banks active in these markets. Now, the perception is changing and public awareness is increasing," said Standard & Poor's credit analyst Mohamed Damak.

“We have observed this development in the North African countries where we rate banks--Egypt, Tunisia, and Morocco. These sovereigns have recently taken steps to implement policies to support the development of Islamic finance: Tunisia plans to issue Sukuk to attract new class of investors; Egypt implemented new regulatory frameworks for Sukuk issuance; and Morocco is laying the legal foundation for Islamic banks.

“Nevertheless, we believe that Islamic finance in this region has yet to demonstrate its economic added value beyond enabling products abiding with Islamic law. Such added value could materialize through creating access to a new class of investors or by offering Shari’ah-compliant products at costs comparable with their conventional counterparts. The stiff price competition in some of the North African markets indicates that customers in these regions are relatively more sensitive to the costs associated with banking products.”

"Islamic finance in North Africa remains underdeveloped but regulatory changes are laying the groundwork for its growth," said Mr. Damak. "However, we believe that success will depend on their ability to offer products at a cost competitive with conventional banking activities."

“We also believe that Islamic finance can be a good fit for infrastructure and project finance, as banks lack long-term funding capability required by these projects. Several projects in renewable energy, transport infrastructure, and communication are ongoing or expected to be launched in the future in North African countries. Using Sukuk to finance some of these projects could help diversify investor bases and tap additional pools of resources.”