Monday, 5 September 2016

The Slowdown In Islamic Finance Is Likely To Continue In 2017, Says Report


DUBAI (S&P Global Ratings) Sept. 5, 2016--S&P Global Ratings believes that the 
drop in Islamic finance growth is likely to continue in 2017. Nevertheless, we 
estimate the industry's total assets will reach $2.1 trillion at year-end 
"We think two factors will act as a brake in 2017," said S&P Global Ratings' 
Mohamed Damak, Global Head of Islamic Finance, "the impact of policy responses 
to the decline of oil prices in core markets and the lack of standardization 
in the industry."
Still, Islamic finance will have the impetus to continue progressing and 
maintain growth of around 5% in 2017, in our view. We expect the industry will 
be worth $3 trillion sometime in the next decade. 
For our full report, see "Islamic Finance In 2017: Modest Growth Amid 
Oil-Price Woes," published today.
In our opinion, modest growth will derive from subdued economic growth of 
Islamic finance's core markets in the Gulf Cooperation Council (GCC) 
countries, partly compensated by continuous demand from an expanding customer 
base. A broader consensus around the need to standardize legal structures and 
Sharia interpretation could help the industry to progress, as could the 
industry's potential contribution to the United Nation's sustainable 
development financing goals. 
While we have seen a policy response to the new normal of oil prices 
materializing in some GCC countries, including the United Arab Emirates and 
Saudi Arabia, in the form of spending cuts, lifting of subsidies, and 
privatization of government assets, we think the oil price environment will 
weigh negatively on economic growth in the GCC for the next two years. 
"The consequence for Islamic banks will be a slowdown in growth, deterioration 
of asset quality, and reduction of profitability," said Mr. Damak. 
Malaysia, which also is a strong contributor to the Islamic finance sector, 
appears as an outlier in economic terms, since we expect its GDP growth to 
stabilize at around 4.7% on average for 2017-2018. Iran is also a potential 
outlier: The market is looking at this country as a potential new contributor 
to a renewed era of growth of the Islamic finance industry. 
The volume of sukuk issuance in the first half of 2016 was not that 
encouraging. The market is slowly accepting the evidence that the process of 
issuing sukuk can be painful and it has become more reticent in issuing such 
instruments. However, stakeholders, including some multilateral lending 
institutions (MLIs), are becoming more serious about standardization of 
structures and Sharia interpretation. MLIs are aiming to show the market how 
to achieve standardization through the implementation of standard structures, 
documentation, or steps that issuers should go through to make sukuk issuance 
easier and more efficient. For example, the Islamic Development Bank Group is 
working on a solution that could simplify the sukuk issuance process and 
respond to the lack or fragmentation of sovereign assets. 
We see this as an important opportunity for the development of the market and 
to put the industry back on a strong growth path.