By Arno Maierbrugger/Gulf Times Correspondent/Bangkok
The global Islamic finance industry will continue to grow at a comparably slow rate of around 5% in 2019 and 2020 in terms of assets, according to the newly issued “Islamic Finance Outlook 2020” by US-based business intelligence firm S&P Global Ratings. This follows a 10% growth rate in 2017 but only 2%-3% growth in 2018, which was mainly owing to flat sukuk issuances and generally weaker economic conditions in the industry’s core markets, with the notable exceptions of Malaysia, Indonesia and Turkey, as well as Qatar where a number of issuers have returned to the capital markets as of late.
The report says it does not expect a quick rebound in the market, but acknowledges that the sukuk sector has improved from a total issuance volume of close to $130bn in 2018 – which was only slightly more than around $125bn in 2017 – to $162bn in 2019, according to Mohamed Damak, global head of Islamic finance at S&P Global Ratings. For 2020, he expects an issuance volume of up to $170bn, with accelerators being environmental, social and governance (ESG) sukuk, including green sukuk, and more medium-sized companies and financial institutions issuing Islamic bonds due to better standardisation in legal documentation and Shariah interpretation, which makes it cheaper and less complex to issue sukuk.
More commitments to environmental standards and the green economy in general in Islamic jurisdictions are also driving ESG investments, which – in turn – will attract a new type of investors to Islamic bonds, particularly in segments where ESG-related concerns and Shariah-compliant financing overlap, Damak said.
Apart from regulatory improvements, legal standardisation and ESG investments, the report sees another main opportunity to unlock further potential of Islamic finance, which is – unsurprisingly – Islamic fintech, although the S&P analysts are reluctant to predict a quick adaption of technological innovations in the Islamic finance industry since banks will first have to deal with the disrupting effects of fintech. As an example, the report notes that new digital financial services can equally be a potential threat to some business lines such as money transfer, especially in the Gulf Co-operation Council (GCC) region where expatriates send more than $100bn back home every year.
However, over time, fintech is expected to spur growth of Islamic finance by enhancing the speed and ease of transactions, particularly through blockchain technology, which also helps increase transaction security and improves the traceability of transactions. It will also allow for a range of new digital banking solutions and will simplify and streamline regulatory and legal processes.
“We believe fintech will have only a marginal influence on our Islamic bank and sukuk ratings over the next two years,” the report says.
“[But] we consider that Islamic banks will be able to adapt to their changing operating environment through a combination of collaboration with fintech companies and cost-reduction measures. We also believe that regulators across the wider Islamic finance landscape will continue to protect the financial stability of their banking systems. Furthermore, we think that blockchain could help the operational management of sukuk, but will not induce any changes in the legal substance of the transactions.”
In money terms, the S&P forecast would translate into growth to $2.63tn in Islamic finance assets in 2019 and to $2.76tn in 2020. While the report is not providing a forecast beyond 2020, another study does: The “Islamic Finance Development Report 2019” compiled by Thomson Reuters and the Islamic Corp for the Development of the Private Sector forecasts that the Islamic finance industry will reach total assets of $3.47tn by 2024, based on a compound annual growth rate of 5.5% calculated from $2.52tn in assets in 2018.
Rating agency Moody’s in an earlier report also predicted stable growth in Islamic banking in most core Islamic markets, with an additional factor being mergers between Islamic and conventional banks in the GCC, where Islamic banks are the remaining entities, which could also drive one-off increases in Islamic banking assets in the years to come.
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