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HSBC pulls back from Islamic banking

HSBC branch in Dubai

Through its HSBC Amanah arm, headquartered in the UAE, HSBC was a pioneer in the industry and it operated the largest Islamic business of any Western bank.

October 18, 2012 4:07 by

Four days after HSBC Holdings said it would shrink its global Islamic banking operations, National Bank of Abu Dhabi revealed very different plans: it aims to triple the contribution of its sharia-compliant operations over the next eight years.

The contrast suggests that rather than being a sign of weakness in the Islamic finance sector, HSBC’s decision reflected its own business priorities – and to the extent that the British bank pulls back from the industry, local banks will gain an opportunity to expand.

HSBC announced early this month that except for wholesale banking operations, it would no longer offer Islamic products in Britain, the United Arab Emirates, Bahrain, Bangladesh, Singapore and Mauritius.

It said it would focus its Islamic finance business on customers in Malaysia and Saudi Arabia, while keeping a limited presence in Indonesia.

Through its HSBC Amanah arm, headquartered in the UAE, HSBC was a pioneer in the industry and it operated the largest Islamic business of any Western bank, so the news sent ripples through the sector.

Some analysts speculated the decision reflected doubts about the long-term profitability of Islamic banking – perhaps dissatisfaction with costs that can be higher than conventional banking in some areas. Frequent asset transfers can attract repeated taxation, while buying the expertise to structure complex sharia-compliant transactions is expensive.

The details of HSBC’s announcement, however, suggest the bank will not come close to pulling out of Islamic finance, and may even continue growing in some parts of the industry. The bank estimated it would keep about 83 percent of its Islamic business revenue after the move.

HSBC also stressed it would keep its wholesale Islamic banking operations, which are believed to be more profitable than retail and include its business of arranging issues in the Gulf’s booming sukuk market, where it is a leader.

“The impact on the competitive landscape and the Islamic banking market as a whole will be minimal, as the closures affect only relatively small Islamic banking markets or countries where HSBC’s retail banking presence is limited,” said Alexander von Pock, principal at consultancy A.T. Kearney.

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