21/06/2017 01:53 AST
Islamic finance industry will continue to expand this year, but lose some momentum in 2018, S&P Global Ratings forecast.
The industry’s assets reached $2 trillion at year-end 2016, slightly below our September forecast. Even though sukuk issuance accelerated in the first half of this year and will likely stay strong in the second half, “we don’t believe this growth rate is sustainable. We think stronger growth is possible if, together, supervisory bodies and market participants achieve greater standardization, resulting in a truly global industry,” S&P Global Ratings said.
It noted that the current economic situation in core Islamic finance markets and depreciation of local currencies have weighed on the industry’s performance in 2016 and 2017.
Further, it said “the lack of product and market integration constrains growth, in our view, as does the absence of standardized Shariah interpretation and legal documentation,” noting that “integration, standardization, and higher interest in responsible finance could be a game changer, but only in the medium term.”
The report said Islamic finance remains concentrated primarily in oil-exporting countries, with the Gulf Cooperation Council (GCC), Malaysia, and Iran accounting for more than 80% of the industry’s assets. The drop in oil prices and governments’ cuts to investment and current spending have reduced the industry’s growth prospects, S&P added.
While Malaysia’s economy continued to perform adequately, thanks to its diversification, the average growth rate in the GCC dropped significantly between 2012 and 2017. Iran, on the other hand, experienced a growth spurt in 2016 after certain sanctions were lifted and the oil sector picked up, but this growth is expected to moderate over the next three years.
Meanwhile, Iran’s economy will continue to suffer from the scarcity of financing options and the remaining sanctions.
Another factor explaining the muted industry growth is depreciation/devaluation of currencies in some countries. In particular, S&P observed a marked impact of this on Islamic finance activity in Iran, Malaysia,
Turkey, and Egypt, where exchange rates have deteriorated (see chart 2). As the US dollar continues to strengthen in 2017 and 2018, more of this effect might be expected. In this context, the Islamic finance industry was protected by the peg between the dollar and various GCC currencies.
“Overall, we think the industry’s growth rate will stabilize at about 5% in 2017 and 2018, which is lower than the average over the past decade. More recent industry entrants, such as Morocco and Oman, will likely show stronger growth, but their contribution to the overall Islamic finance industry will likely remain small.”
Islamic banks In the GCC face a tough year, the report stressed. “We expect the slowdown at Islamic banks in the GCC will persist in 2017 after asset growth declined to 5.3% in 2016 from 10.7% in 2014. In our base-case scenario, we assume that asset growth will stabilize at about 5% as governments’ spending cuts and revenue-boosting initiatives, such as new taxes, reduce Islamic banks’ growth opportunities in the corporate and retail sectors. We see banks becoming more cautious and selective in their lending activities, triggering stiffer competition. Yet we don’t expect this will happen uniformly in all GCC countries. Although the economic slowdown will likely remain pronounced in Saudi Arabia, Islamic banks’ growth accelerated there in 2016, thanks to their strategy of increasing business among corporates and small and midsize enterprises (SMEs).”
By contrast, the decline in economic activity was steeper in Qatar, where a mix of lower liquidity and government spending cuts prompted banks to curtail their expansion plans. Qatar’s placement under sanction by some Arab countries could also further weaken prospects for its Islamic finance industry in
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