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Islamic finance to grow as main markets recovers


Muhammad Arif : Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan

The ratings agency forecast global issuance of Islamic bonds, or sukuk, to reach $140-155 billion this year, up from roughly $140 billion in 2020. —

Global Islamic assets expanded by 10.6 per cent last year against growth of 17.3 per cent in 2019 as the pandemic disrupted the rising trend due to slowdown in global economy

The global Islamic finance industry is expected to grow 10-12 per cent during the 2021-22 due to increased sukuk issuance and a modest economic recovery in the main Islamic finance markets, says a latest report.

S&P Global Ratings said the $2.2 trillion industry continued to grow at a slower pace last year despite the Covid-19 pandemic. Global Islamic assets expanded by 10.6 per cent last year against growth of 17.3 per cent in 2019 as the pandemic disrupted the rising trend due to slowdown in global economy.

“Islamic finance grew rapidly in 2020, albeit at a slower pace than in 2019, despite the double shock from the pandemic and the drop in the oil price,” said Mohamed Damak, head of Islamic Finance at S&P Global Ratings.

Islamic finance, which bans interest payments and pure monetary speculation, has been on the rise for many years across markets in Africa, the Middle East and Southeast Asia, but it remains a fragmented industry with uneven implementation of its rules.

“Although we expect a modest recovery for most core Islamic finance countries in 2021-22, we think that the sector will expand against the backdrop of continued standardization and integration,” Damak said.

Saudi, Qatar support-The industry is expected to receive some support in the coming two years in Saudi Arabia, where mortgages and corporate lending are expected to rise as the country pushes ahead with plans to diversify the economy. Investments in Qatar for the 2022 soccer World Cup and the Expo event in Dubai later this year are also expected to support growth.

“Over the next 12 months, we could see progress on a unified global legal and regulatory framework for Islamic finance that the Dubai Islamic Economy Development Center and its partners are developing. Depending on the outcome and its adoption, we believe that such a framework could help resolve the lack of standardization and harmonization that the Islamic finance industry has faced for decades,” Damal said.

Sukuk issuance up-The ratings agency forecast global issuance of Islamic bonds, or sukuk, to reach $140-155 billion this year, up from roughly $140 billion in 2020, thanks to abundant liquidity and sustained financing needs among corporates and governments.

S&P also highlighted that the full impact of the coronavirus crisis has yet to materialize and more requests for sukuk restructurings and maturity extensions, as well as higher default rates, are expected this year.

“We see pressure on real estate developers, given the drop in real estate prices in the GCC (Gulf Cooperation Council) and building risks in the commercial real estate sector. Similarly, companies related to aviation, tourism, travel, and hospitality — sectors that have been severely hit by Covid-19 — will take several quarters to recover to prepandemic levels,” S&P said.

“We have excluded Iran from our statistics this year owing to the extreme volatility of the country’s currency in the parallel market (as disclosed by the Central Bank of Iran), which makes comparison with last year’s numbers or any forecasts less meaningful,” the rating agency said.

Islamic banking and financing in Pakistan will get a further shot in the arm as the International Monetary Fund (IMF) advises the central bank “to ensure a level playing field “to Islamic banking versus the already strong conventional banking”.

The Washington-based fund’s report, unveiled this week, did its high level professional assessment and review of the introduction and spread of Islamic banking and finance (IBI). It covers a number of countries including its functioning in Pakistan.

The key point and the theme of the report has asked State Bank of Pakistan (SBP), the central bank, to ensure all the way that Islamic banking gets a level-playing field. This underscore the fact that while Islamic banking is still in infancy, the conventional banking in Pakistan is big in terms of business volumes, well-entrenched in government and private sectors and is highly influential.

“The government of Pakistan is advised to ensure a level playing field to Islamic banks in order to maintain Pakistan’s fast pace growth, a country with 96 per cent of Muslim population,” it said.

Asked to comment on the report, which gives this additional task in the future, but highly appreciates the steps already taken for the growth of IBIs, a spokesman of the SBP said: “Along-sides the efforts already made by us, you will see SBP unfolding a number of steps of a far- reaching nature for the expansion of Islamic banks and financial systems. Our new steps will help introduce the banks a number of new Islamic products which will ensure the growth of the system on a still higher and fast track.

“In this growth tasks, we at the SBP and the Islamic banks, are highly encouraged by the response and commitment of the customers, the international lenders like the IMF, World Bank, Asian Development Bank, and Jeddah-based Islamic Bank,” he said.

One of the key reasons for this projected expansion is the SBP’s ongoing “Financial Inclusion Plan,” which targets to attract a growing number of customers to the banking fold on a mass scale. The plan is being funded by the Word Bank. It can enlarge the banking businesses and their profits manifold as millions new customers may let the banks handle their financial affairs.

The SBP, the World Bank and the IMF all agree that the visible trend among new account openers in Pakistan is a high degree of preference for Islamic banking. This is true as various surveys of the unbanked people show that they prefer Islamic banking, as they think that the interest-based conventional banking does not meet their needs, as portrayed by the Islamic tenets on business and finance.

The IMF is of the view that although “IBI in Pakistan is now at its evolutionary stage but it has already expanded at a compound annual growth rate of nearly 50 per cent between 2002 and 2005 and reached a market share of 11.44 per cent by end-2015. The SBP eyes 15 per cent of banking assets for Islamic banking by the end of the next year.”

The IMF also had a deep look at the Financial Inclusion Plan of Pakistan, database Findex and said: “Only 13 per cent adult population – more than half of the country’s population – has a bank account. Around 96 per cent of the country’s population is Muslim, indicating the latent appetite for Islamic financial products.”

IMF noted: “The regulatory support has been propelling the growth of Pakistan’s IB sector. The large Muslim population and low market penetration also suggest that there’re substantial upside potential for its further growth.” It said that full-fledged IBs – four domestic IBs and two subsidiaries of foreign-owned banks – are subject to the same prudential requirements as conventional banks, including the minimum capital requirement (MCR) regime, the minimum capital adequacy ratio, large exposure, loan classification, provisioning and the related party lending.

The IMF analysis said six full-fledged IBs had CAR of 14 per cent by end-2015 “significantly above the prescribed minimum of 10 per cent, but below the conventional banks. The non-performing financial ratio of 2 per cent is significantly below the average for conventional banks of 12 per cent. The IBs are also not profitable and liquid but the profit margins and liquidity levels are, however, lower than their conventional counterparts.”

The customer deposits fund close to 85.3 per cent of the banking industry’s assets. Since the funding is mostly in local currency, the exchange risk is low. There is a dearth of funding options like Sukuk, thereby potentially creating maturity mismatches with financing structure.”

As the IBI grows in all its products, segments and business sectors, the UAE-banks are doing extremely good business – more on the Islamic side and quite well on the conventional side.

This is applauded by leadership of the Islamic world, particularly from the UAE. Sheikh Nahyan bin Mabarak Al Nahyan, UAE’s Minister of Culture and Knowledge Development, said: “I am confident that the banking sector of Pakistan will continue to show resilience whilst positively contributing towards Pakistan’s economy.”

Sheikh Nahyan, who is also the chairman of the Board of Bank Alfalah Limited, made these remarks while naming Numan Ansari, former CEO of Faysal Bank, as the new president and CEO of Bank Alfalah.

He said: “We hope that Mr Ansari will meet the bank’s strategic objectives and build the franchise further. We wish him success in his new role.”


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