The liquidity coverage ratios (LCRs) of Islamic banks in key Asian countries including Pakistan and GCC countries highlight sound liquidity profiles and broad compliance with Basel-III regulatory requirements. However, banks with a greater proportion of retail deposits that are considered more ‘sticky’, typically display stronger LCRs,” said Simon Chen, a Moody’s Vice President and Senior Analyst.
In Asia, the retail funding of Islamic banks is constrained by their small branch networks, which results in weaker LCRs when compared to their conventional peers and GCC counterparts. In GCC countries, retail customers tend to be more Shariah aware, resulting in a large base of low-cost retail savings deposits at Islamic banks and hence a lower reliance on short-term wholesale funding.
For 2015, retail deposits comprised around 67 percent of Islamic banks’ customer deposits for the three GCC countries, compared to 40 for conventional banks, according to Moody’s data. In Saudi Arabia, the largest Islamic banking system by assets in the GCC region, the retail deposits at Islamic banks represent more than 80 percent of their deposit bases. The retail focus of Islamic banks in GCC countries provides greater stability for their funding profiles and hence typically offers a significant advantage over their conventional peers in terms of LCRs.
A long history, coupled with a higher preference for Shariah-compliant products among their majority Muslim populations and the Islamic banks’ extensive distribution networks, are key reasons behind the success of the retail businesses of these banks across the region.
Islamic banks in GCC countries have become systemically important and continue to increase their market penetration, outpacing conventional banks. In Saudi Arabia, where even conventional banks offer Islamic products, Islamic finance assets represent more than 50 percent of system financing. In Kuwait and Qatar, such assets account for around 40 percent and 29 percent of the system, respectively; higher than 23 percent in Malaysia and just over 5 percent in Indonesia.
In Qatar, the segregation of Islamic and conventional banking operations since 2011 has helped Islamic banks to build solid franchises with loyal retail customer bases. However, the Islamic banks are not yet large enough to establish a retail base comparable to those of Saudi Arabia and Kuwait. In contrast, banks in GCC countries which are more reliant on corporate deposits and institutional funding display lower LCRs because of the higher outflow rates that their funding bases attract.
Sustained lower oil prices continue to reduce the flow of deposits from the government and government-related entities in the region, creating funding and liquidity pressures for these banks, pushing up market funding levels. In addition, a tougher economic environment has also resulted in an overall slowdown in corporate deposits inflows in most GCC countries.
Lower oil prices have also reduced overall domestic liquidity in GCC countries, pushing up banks’ reliance on wholesale funding. This development could lead to a gradual weakening of the LCR metrics for both Islamic and conventional banks.
“The granularity and relative stability of retail deposits continue to provide support to Islamic banks’ deposit bases. As deposit growth slows, we expect banks to increase market funding in order to bridge the funding gap and support credit growth, which will in turn pressure their LCRs,” said Khalid Howladar, Moody’s Global Head of Islamic Finance.