The global $2 trillion (Dh7.35 trillion) Islamic finance industry will continue to expand this year, but lose some momentum in 2018. In the GCC, however, the slowdown at Islamic banks will persist in 2017 after asset growth declined to 5.3 per cent in 2016 from 10.7 per cent in 2014, analysts said.
Industry experts think Islamic finance sector growth rate will stabilise at about five per cent in 2017 and 2018, which is lower than the average over the past decade. The Islamic finance industry’s assets reached $2 trillion at year-end 2016, although slightly below S&P’ Global Ratings’ 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 standardisation, resulting in a truly global industry,” said S&P primary credit analyst Mohamed Damak. 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, Damak explained.
“The lack of product and market integration constrains growth, in our view, as does the absence of standardised Shariah interpretation and legal documentation. Integration, standardisation, and higher interest in responsible finance could be a game-changer, but only in the medium term.” Islamic finance remains concentrated primarily in oil-exporting countries, with the GCC, Malaysia, and Iran accounting for more than 80 per cent of the industry’s assets.
Analysts believe that the drop in oil prices and governments’ cuts to investment and current spending have reduced the industry’s growth prospects. 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, we’ve observed a marked impact of this on Islamic finance activity in Iran, Malaysia, Turkey, and Egypt, where exchange rates have deteriorated,” said Damak. “As the US dollar continues to strengthen in 2017 and 2018, we might see more of this effect. In this context, the Islamic finance industry was protected by the peg between the dollar and various GCC currencies.” 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, he said.