Islamic Banking & Finance Page 10th April 2020

Growth of Islamic Banking and Finance under Corona Virus epidemic in 2020

Like other multinationals, Islamic Development Bank (IsDB Group) is also setting up a special $730 million fund to mitigate the negative health and socioeconomic impact of the COVID-19 pandemic.
However apart from this initiative, Islamic finance is set to keep expanding in 2020 year in spite of the corona virus pandemic outbreak and beyond as the GCC countries and Malaysia would drive help drive growth in Shariah-compliant financial products.
Sukuk issuance is set to remain stable at around $180 billion but a prolonged market disruption could dissuade issuers from coming to market, Moody’s Investors Service has said. Further takaful insurance market will see steady growth as insurance premiums pick up in newly penetrated markets,” said VP-Senior Credit Officer at Moody’s. “However, downside risks are rising because of the corona virus outbreak, as prolonged market disruption could dissuade issuers from coming to market.”
The ratings agency said Saudi Arabia would remain the world’s largest Islamic banking market, while the sector will continue to expand rapidly in Malaysia. Moody’s expects mergers between Islamic and conventional banks in the GCC region will drive one-off increases in assets, as they did in 2019. There will be continued focus on the Sukuk industry and increased issuance by the governments of the core Islamic finance markets. The deficit financing needs of some GCC sovereigns, amid weaker oil prices and higher Sukuk refinancing, will also provide support.
Islamic banking penetration in the core Islamic financial markets of the GCC, Malaysia, Indonesia and Turkey, increased to 31.2 per cent in September 2019, from 25.5 per cent in 2013, while annual global Sukuk issuance increased to $179 billion from $131 billion.
According to Fitch Ratings, Sukuk issuance with a maturity of more than 18 months from the GCC region, Malaysia, Indonesia, Turkey and Pakistan totaled $42.2 billion in 2019, up from $39.8 billion in 2018. The 2019 figure was nearly 40 percent higher than 10 years earlier, although below the record high reached in 2017, Fitch said.
In 2018, Islamic finance assets grow three per cent in to $ 2.5 trillion while the Sukuk asset class continues strong growth, rising 10 per cent in 2018 to $ 470 billion. Islamic FinTech also gained pace with the issuance of block chain-based micro-Sukuk and a spate of developments in the UK and the US markets.
According to Islamic Finance Development Report 2019, growth in the industry’s biggest sector, Islamic banking, slowed to two per cent in 2018, largely in line with slowing growth for the global economy. Islamic banking assets totaled $ 1.76 trillion. Many Islamic banks or windows are also undergoing transformations through either reorganization or consolidation.
“Despite the slower growth, new banks and markets continue to enter the market, as seen in Ethiopia, Algeria and Afghanistan. Also, new liquidity tools are being developed to help grow existing Islamic banking markets, as seen in Oman, the UK and Pakistan Mergers between Islamic and conventional banks in the GCC will drive one-off increases in assets, as they did in 2019, it added.
In Kuwait, the merger between Kuwait Finance House and Bahrain-based Ahli United Bank once completed, is likely to create the world’s largest Islamic bank, surpassing Saudi Arabia-based Al Rajhi Bank.
Saudi Arabia will remain the world’s largest Islamic banking market, Islamic Financing assets in the kingdom rose to $309bn as of September 2019 from $296bn in December 2018, according to the report. “We expect Islamic finance penetration in Saudi Arabia to increase to 80 per cent of system-wide loans (including both conventional and Islamic financing assets) over the next 12-18 months, from 77 per cent in 2018, driven by increased demand from both corporate and retail clients.”
In the GCC, Oman remains the fastest-growing Islamic banking market at a rate of 10 per cent in the first nine months of 2019. Oman has two standalone Islamic banks and six Islamic windows at conventional banks offering Islamic services and the sector’s market share has risen from zero to around 15 per cent of banking system financing assets as of September 2019, with potential for further growth, it said.
In Turkey and Indonesia, the penetration of Islamic banking remains relatively low at 5 per cent and 10 per cent, respectively.
The report also said demand for Islamic asset management is rising due to large Muslim populations, supportive legislation and growing investor demand for Shariah-compliant products.
We expect Islamic assets to grow by a moderate 3 per cent to 4 per cent per annum in the short to medium term, constrained by weak economic growth prospects and geopolitical tensions in the Middle East, the largest Islamic region in the world. In 2018, Islamic assets under management (AUM) stood at $67.4bn.