Fitch Ratings expects sound profitability and solid liquidity to continue for Islamic banks in Europe, Middle East and Africa (EMEA), while capital buffers should remain adequate for the risks.

"Financing growth is expected to be reasonable, and higher than conventional banks. Asset quality should remain stable, despite higher profit rates,” Fitch said.

Predicting more consolidation in the Islamic banking sector in EMEA, Fitch said in the GCC and Jordan, Islamic banks’ market share of sector assets ranged from 85% down to 16%, with growth likely to outpace conventional banks in 2024.

M&A to create new regional leaders

Smaller Islamic banks with weaker franchises and pricing power, higher funding costs and thinner capital buffers are most pressured. M&A can create new regional leaders, as with the recent Kuwait Finance House acquisition of Ahli United Bank. Islamic banks also remain focused on expansion through digital and fintech initiatives.

Operating conditions for EMEA Islamic banks are benefitting from high oil prices and profit rates, particularly in the main GCC markets, driving Fitch Ratings’ neutral 2024 sector outlook.

Two-thirds of the Issuer Default Ratings (IDRs) assigned to EMEA Islamic banks are investment-grade. These are mainly driven by potential sovereign support (59%); ratings are therefore highly sensitive to sovereign rating pressures. The large distribution of IDRs from ‘A+’ to ‘CCC+’ (the latter mainly in Iraq) mostly reflects that of sovereign ratings.

Most rating Outlooks are Stable

The Positive Outlooks relate to Qatari Islamic banks, reflecting that on the sovereign, which is driven by improvements in its external balance sheet and better debt/GDP forecasts. The Negative Outlooks relate to three Turkish Islamic banks, reflecting the still-high vulnerability of their financial profiles to operating environment risks. The one Rating Watch Negative is an idiosyncratic case in Iraq.

Sharia-sensitivity, awareness and confidence are higher in these markets, with the presence of enabling regulations and the segment being long-established.--TradeArabia News Service

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