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Islamic finance to grow 10%, but struggles in new markets

Reuters/Jumana El Heloueh
Islamic banking asset growth will propel the expansion of the Islamic finance industry, says S&P Global Ratings
  • Industry’s assets totalled $2.5trn in 2021, 66% of which in GCC
  • 2022 sukuk issuance is $112bn compared with $130bn last year 
  • Islamic insurance (takaful) sector will grow 5-10% in 2022

The global Islamic finance industry will expand by 10 percent in 2022 and 2023 thanks to strong economic growth in core markets, high commodity prices and relatively little impact from the Russia-Ukraine war.

However, data from S&P Global Ratings forecasts shows that the sector has struggled to make inroads in non-traditional markets outside the Gulf.

Excluding Iran, the industry’s assets totalled $2.5 trillion as of 2021, of which 66 percent were in the GCC, 14 percent in Malaysia, and 3 percent in each of Turkey, Egypt, Indonesia and Bangladesh. Around 80 percent of all Islamic finance industry assets are in oil exporting countries.

“The outlook is positive for the (Islamic finance) industry overall, but not for all asset classes,” Mohamed Damak, S&P Global Ratings senior director and global head of Islamic finance, told a webinar this week. His company’s forecasts are based on average oil prices of around $100 for the rest of 2022 and $85 in 2023. 

“That will help the economies of most Islamic finance core countries. These countries have not been severely impacted by the Russia-Ukraine conflict.”

Islamic banking asset growth will propel the expansion of the Islamic finance industry, the agency believes. 

“This would be driven by the government’s vision and strategy to diversify their economies like in Saudi Arabia, for example,” said Damak. “For others, it’ll be driven by consumption and working capital financing, like in Qatar.”

S&P Global Ratings had forecast 2022 sukuk issuance would be around $145 billion to $150 billion, which would be similar to 2021’s total of $147.4 billion and $148.4 billion in 2020. 

Yet, in the first nine months of 2022, sukuk issuance was $112 billion. That compares with nearly $130 billion for the same period last year.

“Now here we are in October and the picture is far worse than what we expected,” said Sapna Jagtiani, director for corporate ratings at S&P Global Ratings. “We’ve had a really challenging interest rate environment.”

Around $96 billion of sukuk will mature in 2022 and Damak believed this would have a net positive contribution on the wider Islamic finance industry.

The Islamic insurance (takaful) sector will grow around 5-10 percent in 2022, S&P estimates.

“But the (Islamic) fund industry will be affected by extreme volatility in financial and capital markets,” said Damak, noting about 25 percent of Islamic funds are equity funds and around 60 percent are money market and sukuk funds. 

Malaysian Islamic banks have around a 38 percent market share of the country’s domestic banking industry, S&P estimates, forecasting this could increase to 45 percent by 2026.

Similarly, Indonesia’s sharia-compliant banks could expand their share of local banking assets by three percentage points to 10 percent over the same period, S&P believes. 

The ratings agency highlights how little the geographical spread of Islamic finance assets has altered over the past decade.

This reflects what Damak describes as a major risk to the sector, namely a perception that it does not add economic value to the wider financial industry. 

“In countries where Islamic finance tried to make inroads, the demand did not follow because sometimes the products were more expensive than the conventional products, like what we’ve seen in the UK and North Africa,” said Damak.

“And other times, the structuring of the transaction was much more complicated than (for) conventional products – like what we’ve seen with sukuk in Africa, which were at a certain point in time sold as the panacea for the deficit of infrastructure financing on the continent.

“We’ve seen only a handful of sukuk (in Africa), and issuers made it to the finish line because of the help they got from the likes of the ICD (Islamic Corporation for the Development of the Private Sector) and other multilaterals.”

Digitalisation could ease some of these challenges and help make Islamic financial products more cost competitive versus their conventional alternatives. 

“Islamic finance can be plugged anywhere as long as it shows an economic added value beyond the fact of being compliant with sharia,” he added. 

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