Business

Islamic finance industry hampered by global economic conditions

Islamic finance industry hampered by global economic conditions

August 15, 2017 | 08:27 PM
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Global economic volatilities, consistently low oil prices and reduced demand for credit are among the factors that currently weigh on the Islamic financial service industry, the recently released IFSB Industry Stability 2017 Report by Kuala Lumpur-based Islamic Financial Services Board (IFSB) suggests.The study says that 2016 marked another year of slower growth amid adverse macro-economic conditions in some core markets for Islamic finance, including adjustments in the value of global Islamic banking assets in US dollar terms on the back of exchange rate depreciations in countries such as Malaysia, Turkey and Indonesia, as well as the persistent lack of global standardisation of the industry, and lower liquidity and profitability compared to the conventional banking sector.According to the IFSB, the global size of the Islamic financial service industry has not changed much over the last year, with total Islamic finance assets just slightly increasing to $1.89tn from $1.88tn, whereby the volume of sukuk outstanding and takaful contributions grew marginally to $318.5bn and $25bn, but assets of Islamic funds decreased to $56bn as a result of an economic backdrop that reduced demand for investment facilities particularly in Gulf Cooperation Council (GCC) markets. Another factor that affected asset growth was the currency depreciation in Iran, the world’s largest Islamic finance jurisdiction in terms of assets.While the largest Islamic financial service industry sector, Islamic banking, was somewhat stagnant as a whole in terms of asset growth, some dynamic could be seen in a re-composition of global assets, the IFSB report says. While assets of Iran dropped significantly in US dollar terms, this was compensated by banking asset growth in the GCC and Asia despite the latter’s currency depreciations. The share in total Islamic financial assets of Middle East and North Africa, including Iran, but excluding GCC, decreased to 30%, but the GCC’s share increased to 42%, while Asia remained at 22%.With regards to sukuk, the volume of annual sukuk issuances reached $75bn in 2016, bringing the total volume of outstanding sukuk close to $320bn, with 79% of the issuances originating from sovereign issuers and multilateral organisations, and only 21% being corporate issuances. Malaysia, Indonesia, the UAE, Saudi Arabia and Turkey were the five largest issuers of sukuk last year.Overall, the IFSB says that owing to subdued global economic growth conditions and unexpected developments on the world political stage, another year of slowdown in the global Islamic financial service industry should be factored in after a period of double-digit growth until 2015. Since, Islamic finance assets have failed to register a notable expansion over 2016 and in the course of 2017.However, there are some positive developments in terms of a market re-mix between conventional and Islamic banking in certain countries. Islamic banking market share has increased in 18 countries while remaining constant in eight others, including Iran and Sudan, which both have a fully Shariah-compliant banking industry which translates in a market share of 100%. Furthermore, Islamic banking is now labelled to be of “domestic systemic importance” in 12 countries, the IFSB report notes, while only five jurisdictions experienced marginal declines. In turn, four newly added jurisdictions in ISFB’s Islamic banking market-share tracker are Afghanistan with a Shariah-compliant banking market share of 5.9%, the Maldives with 4.3%, Iraq with 1.5% and Kazakhstan with 0.1%.In a similar assessment, London-based market analysis firm BMI Research comes to the conclusion that growth will continue to be slow in key Islamic banking markets over the coming years, although BMI expects that large sovereign sukuk issuances will drive the sector to some extent, as well as future expansion into untapped markets that would offer some opportunities, particularly because a number of countries are now adopting new regulations and frameworks supporting the development of Islamic finance innovation. This includes a focus on Islamic financial engineering and financial technology to create incentives for Shariah-compliant venture capital and create new products such as online crowdfunding platforms, crypto-currency based transactions, online takaful services or robo advisory as a response to new market realities in Islamic finance. Those services should be seen as a response to changing client demographics and preferences for modern and digitised distribution methods, including through mobile devices, as well as younger clients’ preference for low-cost, passive investment strategies, the analysts say, adding that a failure to adapt to these structural dynamics would put the Islamic finance industry at a substantial competitive disadvantage.
August 15, 2017 | 08:27 PM