By Arno Maierbrugger/Gulf Times Correspondent Bangkok
A new report on the global development of Islamic finance released on December 7 at the World Islamic Banking Conference 2016 held in Bahrain found that overall performance indicators in the industry declined in 2016 compared to 2015 due to the slump in oil prices that put a break on the performance of Islamic financial institutions, but also owing to self-made problems such as continued lack of regulatory standardisation and subpar corporate governance and corporate social responsibility (CSR) levels, particularly in developing nations.
The report, entitled Islamic Finance Development Report 2016 and jointly released by Thomson Reuters’ Islamic finance research team and the Islamic Corp for the Development of the Private Sector, a unit of Saudi Arabia-based Islamic Development Bank, examined key statistics, industry performers and trends across five indicators that are significant for the development of the $2tn Islamic finance industry across 124 countries. From the specific outcome for each country, the report derived a global development indicator which it says dropped to 8.8 in 2016 from 9.9 in 2015.
One of the main reasons for the slowing development in the Islamic finance industry was the “unprecedented oil price storm,” as Nadim Najjar, managing director for Middle East and North Africa at Thomson Reuters, puts it.
According to him, the sharp drop in oil prices lowered the financial performance of banks in countries that have a larger Islamic finance sector such as the Gulf Cooperation Council nations and Malaysia, whereby the latter also had to deal with the drastic drop of the value of its currency, the ringgit. While the low oil prices did not negatively affect the growth of Islamic finance assets as such, they caused a decline in returns and also resulted in negative equity performances of a variety of listed Islamic financial institutions, and also of Shariah-compliant equities and takaful. Sukuk was the least vulnerable of the asset classes, the report found, but also notes that there were lower issuance volumes in 2015.
Particularly, the reports mention corporate governance, absence of standardisation and corporate social responsibility as problem areas for the development of Islamic finance. In many countries opening up to Islamic finance, namely in Africa, South and Central Asia, there is a lack of a clear and obligatory financial reporting framework for Islamic banks and other financial institutions which results in incomplete or inconclusive financial reporting. Overall performance keeps being weakened by a lack of standardisation of Islamic finance regulations. The report points out that there are just 35 countries with at least one type of Islamic finance regulation in practice. Lacking international standardisation thus often leads to confusion what kind of Islamic finance products or transactions are Shariah-compliant in which jurisdiction and which are not.
With regards to CSR, the report found that there is a significant lack of CSR transparency at certain Islamic financial institutions which is another reason for a slower sector development. Too few Islamic banks are actually disclosing their CSR activities, and the total amount of CSR funds disbursed by these institutions remains low and its utilisation opaque.
However, the report also states that other areas are improving. Some key jurisdiction in Islamic finance, namely Malaysia and Pakistan, worked on fine-tuning their Shariah governance framework during 2015, while Nigeria and Morocco keep seeking to centralise their respective Shariah board regulations. Education in Islamic finance, a key enablers for the sector’s development, has made particularly great strides: The number of Islamic finance education institutions grew further and can meanwhile be found in abundance in Malaysia, Indonesia and Pakistan, whereby in the West, skills training providers and other learning institutions, namely in Luxembourg, Belgium and the UK, realised the potential of Islamic finance education and keep opening more and more training centres and university courses.
For Thomson Reuters’ Najjar, the momentum of the global Islamic finance industry remains strong.
“We maintain a positive outlook for the industry, projecting Islamic finance assets to reach $3.5tn by 2021,“ he says, adding that “Islamic banking remains strong in many countries and its growth is also supported by the continued development and introduction of banking and other Islamic finance sectors in new countries.”
With regards to particular markets, Malaysia, Bahrain and the UAE continue to dominate the Islamic finance development ranking this year, although Malaysia posted a slight decline in its overall performance. Noteworthy emerging countries in Islamic finance that have moved up were South Africa, Morocco, Tanzania, Japan and Russia. High potential is seen by the report in established markets in Southeast Asia, as well as in Africa where Islamic finance has been discovered by a couple of governments as a new way of financing large infrastructure projects and an alternative source for government revenues that were dwindling in the past in the fallout of dropping global commodity prices.
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