04-Sep-2016
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
2016.
"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.
