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Islamic finance set to grow 10% in 2023

DP World is using renewable energy generated by the Dubai Electricity and Water Authority Wam
DP World is using renewable energy generated by the Dubai Electricity and Water Authority
  • Rise despite Gulf slowdown
  • Sukuk market stays positive
  • Digitalisation could be ‘game changer’

The Islamic finance industry is set to grow by 10 percent this year, driven by Saudi Arabia and Kuwait, according to a new report by ratings agency S&P Global.

This is despite a slowdown in growth in the Gulf region caused by Opec+ oil production cuts.  

“We generally expect sukuk issuance volume to diminish in 2023. [But] we still believe that new issuances will exceed maturing sukuk, resulting in another positive contribution to the industry’s growth in 2023,” the report issued on October 10 said. 

The value of the global industry topped the $3 trillion mark in 2022, covering Islamic bonds (sukuk), insurance, banking assets and funds. 

Sukuk are sharia-compliant bonds developed as an alternative to conventional bonds, which are not considered permissible by many Muslims as they pay interest and may finance businesses involved in activities not allowed under Islamic law.

The World Bank last week forecast that the Saudi economy will contract by 0.9 percent this year. With a budget deficit of 2 percent of GDP due to oil price cuts the government has extended to the end of the year to drive up oil prices during a time of slowing demand. 

The report identified green or sustainability-linked sukuk issuances as a growth area for Islamic finance. The industry has grown from less than $500 million in 2017 to nearly $10 billion in 2022. This year’s Cop28 climate summit in Dubai could give it a further push. 

“We expect to see much more activity in this space as issuers attract global investors’ attention and regulators start offering incentives,” the report said. It noted that the UAE regulator has exempted companies listing green sukuk in 2023 from paying registration fees. 

Industry experts at an Islamic finance forum in Dubai, held by S&P, said sukuk investors had so far shown little interest in environmental questions. 

Untapped market

Mohamed Damak, S&P’s senior director and global head of Islamic finance, told a forum for the industry in Dubai this week that increased digitalisation could be a game changer for the sector. 

“The process would go from a cumbersome one of three months to put a sukuk together for an issuer to this three months becoming three weeks. Then we’d really change the face of the industry,” Damak said. “It would attract a lot of interest from issuers who are sitting on the sidelines today.” 

Among those on the sidelines, Asian investors are a major untapped market for the sector, said Abdul Kadir Hussain, managing director of Dubai-based Arqaam Capital. 

“Asian liquidity has not been unlocked for sukuk issuances,” he said, referring to Indonesia and Malaysia, where Islamic investment is still in its infancy compared to the Gulf region. 

Nadia Zubairi, head of debt capital markets at Bank ABC in Bahrain, said sukuks were still seen globally as an emerging market product but had global potential. 

In March the bank managed a $600 million 5-year sukuk by Air Lease Corporation (ALC) that was the first sukuk issuance by a corporate from North America.