JEDDAH — The drop in Islamic finance growth is likely to continue in 2017, S&P Global Ratings forecast. 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, they are "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, S&P said. “We expect the industry will be worth $3 trillion sometime in the next decade.”
“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 Shariah 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,” S&P said.
"The consequence for Islamic banks will be a slowdown in growth, deterioration of asset quality, and reduction of profitability," said 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, S&P said.
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 Shariah 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. Only a rating committee may determine a rating action and this report does not constitute a rating action,” S&P said. — SG
