DBS Group Holdings, Singapore’s biggest lender, has announced a progressive winding down of its Islamic banking unit, the Islamic Bank of Asia (IB Asia), established in 2007 as a joint venture between the bank and Gulf-based investors.

A company statement cites the inability of reaching economies of scale as a main factor behind the decision.

“I don’t think it is surprising,” says Khalem Howladar, global head, Islamic finance at Moody’s. “Islamic banks generally use retail banking as a foundation for the overall business. The lack of a large Muslim population base in Singapore constrains the ability of any Islamic bank to grow on both the asset and liability side. Corporates are much less sensitive to shariah compliance even in Muslim countries, so even less business opportunities there. Ultimately, unless you have a sizeable retail population for whom Islamic finance is important (say Malaysia, Indonesia) prospects are limited,” he tells GTR.

DBS will continue to develop and distribute shariah-compliant products such as Islamic bonds or sukuks, within the bank’s main operations. The bank also intends to absorb the majority of IB Asia staff and support them through this transition.