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Growth doubts over Islamic finance despite trillions in assets

Core countries account for the majority of Islamic finance – the GCC accounted for 86 percent of growth in 2023 Alamy via Reuters
Core countries account for the majority of Islamic finance – the GCC accounted for 86 percent of growth in 2023
  • $170bn sukuk expected this year
  • New rules could limit growth
  • GCC remains core market

Islamic finance assets grew to about $3.3 trillion worldwide last year, but credit ratings agency S&P has warned that a planned industry standard could drive down sukuk issuance in 2025 and beyond. 

S&P is predicting high single-digit growth in total assets in 2024-25 after an increase of 8 percent last year. 

The agency expects the release of sukuk – sharia-compliant bonds – to hover between $160 billion and $170 billion this year after a strong start to 2024. 

Issuance was $47 billion in the first quarter of the year, up from $38 billion in the first quarter of 2023. 

The need for financing remains high in the sector’s core markets, particularly given the economic transformation programmes underway in countries such as Saudi Arabia. 

On Monday, giga-project Neom announced a revolving credit facility worth $2.7 billion. It follows a Murabaha structure, a common Islamic financing tool.

S&P expects sukuk to help fill the funding gap in the GCC and other Islamic finance markets. 

But the agency has also cautioned that the draft version of Standard 62 on sukuk – published by the Accounting and Auditing Organisation for Islamic Financial Institutions – will have a “significant effect” on the market if it is adopted in its current form.

The draft standard, which will be discussed in an AAOIFI public hearing on May 2, requires that the ownership and risks related to the underlying assets are transferred to sukuk holders. This could make some forms of sukuk more difficult to structure, according to S&P. 

“The market may not be ready for these material changes,” the agency said. 

According to S&P, Islamic banking assets growth contributed to 56 percent of the industry’s growth in 2023, down from 72 percent in 2022. 

Kuwait Finance House's acquisition of Ahli United Bank in 2022 and the lower growth in Kuwait in 2023 were the main drivers of this drop. 

Overall, financial institutions across the GCC accounted for 86 percent of the asset growth in 2023. Saudi Arabia was the chief contributor, having generated 57 percent. 

“We expect the implementation of Vision 2030 and growth in corporate and mortgage lending to continue supporting the Islamic finance industry over the next 12-24 months,” said Mohamed Damak, S&P primary credit analyst, in the report.

The GCC accounted for 70 percent of global Islamic banking assets and 37 percent of sukuk issuance last year. 

Islamic finance has struggled to attract interest beyond its core markets, which has kept the industry small and sukuk activity sporadic outside those countries. 

“We see the Islamic finance industry as a collection of local industries rather than a truly globalised sector… The industry is yet to resolve challenges related to its competitiveness and appeal beyond sharia compliance,” Damak said.

“From digital sukuk to tokenisation, the opportunities appear significant on paper, but the road to get there is rocky.”

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