Islamic finance industry to see double-digit growth in 2022-2023

Stronger economic growth in major Islamic finance countries is expected to boost industry assets by around 10% between 2022 and 2023.

The global Islamic finance sector continued to expand in 2021, with assets up 10.2%, compared to 11.4% in 2020 (excluding Iran), supported by growth in banking assets. Last year’s increase was supported by Islamic banking assets in some GCC countries and Malaysia, sukuk issuances exceeding maturities and the strong performance of the Islamic fund industry.

This year, rising commodity prices should support a stronger recovery in many core Islamic financial markets.

Moreover, most of these countries are relatively resilient to macroeconomic shocks resulting from the Russian-Ukrainian conflict. This will support the industry outlook for 2022-2023. However, global headwinds could be a game changer due to persistent and stubbornly high inflation, Covid-19 related lockdowns and the US Federal Reserve and other major central banks stepping up their fight to contain inflation.

The faster growth of banks should also contribute to the expansion of the sector. With a more favorable economic outlook for many Islamic finance countries, growth in bank funding is expected to accelerate.

In Saudi Arabia, the continued demand for mortgages and the implementation of Vision 2030 projects will create opportunities for expansion of the sector. In other GCC countries, more positive economic sentiment, government spending and investment will help accelerate growth.

In Southeast Asia, we expect the $290 billion Islamic banking market to grow at a compound annual growth rate of around 8% over the next three years.

In 2022, we expect total sukuk issuance to decline from a stabilization at $147.4 billion in 2021 from $148.4 billion in 2020, and a 105% increase in foreign currency denominated issuance on the same period.

There are several factors at play. Dwindling global liquidity and increasing complexity related to regulatory standards are likely to dampen sukuk issuance in 2022, assuming any adverse Covid-19 related disruptions in major Islamic finance remains under control.

We also expect funding needs from some leading Islamic finance countries to decline and some companies to remain cautious in their growth capex spending after slowly recovering from the pandemic.

At the same time, a more favorable economic environment and public spending are likely to create opportunities in commodity-exporting countries. In addition, local currency issuance by some governments is expected to continue as they seek to develop local capital markets and provide alternative financing avenues for their economies.

We note that total issuance volume fell 23.2% and foreign currency-denominated issuance increased 12.3% in the first quarter of 2022, after some issuers frontloaded their plans to take advantage of market conditions. before the rise in interest rates.

Many of these issues came either from low-rated counterparties or in the form of capital-enhancing instruments. Despite the decline in volumes, we expect sukuk issuance to still exceed sukuk maturing in 2022, which we estimate at around $96 billion.

Although their contribution to the industry remains small, we also expect the takaful and fund sectors to grow this year. We continue to see the takaful industry grow at an annual rate of 5-10%. Fund growth is less certain due to market turmoil since the start of 2022, with a quarter of sector equity funds and 60% of money market or sukuk funds likely to suffer from rising interest rates. global interests.

We also see opportunities in the alignment of certain Islamic financial products and environmental, social and governance (ESG) factors. We expect to see a higher volume of green and sustainable sukuk (from a low base) as issuers seek to broaden the investor base and include funds aligned with sustainability themes.

Many Islamic finance countries are exposed to climate transition risk, and several are developing or implementing transition strategies, including significant investments in clean energy. These present real opportunities for sustainable sukuk in major Islamic finance countries.

However, the energy transition should take time to materialize in the GCC and Malaysia, and therefore a sporadic recourse to green sukuk.

The social angle of Islamic finance presents another opportunity for sustainable sukuk. As the economic effects of the pandemic continue to show up in the form of higher unemployment rates, especially in countries with budget constraints, social sukuks can help cushion the blow. These and other Islamic financial instruments could have an even greater effect if properly exploited.

Mohamed Damak is Senior Director and Global Head of Islamic Finance at S&P

Updated: July 12, 2022, 4:30 a.m.

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