By Sherilyn Goh
Islamic finance will likely see its growth slacken to single digits in 2016 from between 10% and 15% over the past decade, in the face of the fall in oil price, rapid regulatory changes, and lack of integration in the industry, according to Standard & Poor’s (S&P) Ratings Services.
“We anticipate single-digit growth in Islamic finance in 2016, after a decade of 10% to 15% growth on average. The decline in oil prices and its implications for core market economies, the rapid changes in the global regulatory framework for banks and insurance companies, and the industry’s fragmented nature are the main contributors to the expected slowdown,” it said.
According to the ratings agency, the global commodities super-cycle that started in 2005 is coming to an end, which in turn weigh on economic growth in some core markets and consequently reduce opportunity for Islamic finance.
“S&P Ratings Services now assumes that oil prices will average US$63 per barrel between 2016 and 2018. The decline in oil prices is taking a toll on oil exporting countries governments’ public finances, and most of these countries are core markets for Islamic finance.
While optimistic that countries in the Gulf Cooperation Council (GCC) will keep up with their investment spending to support growth, S&P Ratings Services cautioned that a cutback is still possible should oil prices continue to fall below expectation and further weaken government balances.
Benefits for growth despite tough landscape
Nevertheless, the ratings agency is of the view that the industry will have the impetus to progress and maintain growth, as governments in core markets see Islamic finance as a tool to maintain their investment spending and counter negative impacts of the oil price decline on their respective budgets.
Despite being plagued with the decline in oil prices, S&P Ratings Services opined that there are still rooms for growth, citing Iran – which has been under sanctions for more than 35 years – as one of the potential growth drivers for the industry.
“If and when sanctions are lifted, we think that a significant amount of investment projects will naturally find its way to the Islamic finance industry, seeking financing. The Iranian banking sector alone cannot cope with these projects because it has its own challenges,” wrote S&P Ratings Services.
Apart from Iran, governments in the GCC countries will likely try to maintain their capital spending while looking for alternative funding sources such as Islamic finance, according to the ratings agency.
The list of newcomers to Islamic finance is also reported to be lengthening.
“We have recently seen a string of successful sukuk issues by issuers domiciled in non-core markets. The average participation of Middle Eastern and Asian investors in the sukuk arena reached 65% in 2014, with European and US-based investors representing the remainder.
The Islamic sukuk investor base is estimated at over US$500 billion (RM2.1 trillion), excluding sovereign wealth funds, official investors, and other conventional investors
Keeping up with global regulatory changes
An industry expected to be worth some US$3 trillion by the next decade, Islamic finance is also affected by rapid changes in the global regulatory environment for banks and insurance companies.
Citing examples such as the Basel III for banks and Solvency II – or risk-based capital requirements for insurance companies and the implementation of bank resolution regimes in major countries, S&P Ratings Services said the bar for Islamic financial institutions to keep pace with developments in conventional finance is raised.
The ratings agency added that the Islamic finance industry remains fragmented, despite a non-negligible size with total assets estimated at more than US$2 trillion.
“We see the need for further strengthening of integration in Islamic finance,” it noted, adding that the regulatory changes could help the industry in resolving issues related to the lack of liquidity management instruments and applying more stringently its principle of profit and loss sharing.
Calling Islamic finance a collection of small industries in specific geographies instead of a truly global industry, S&P views the standardisation of documents and Syariah ruling as potentially able to enhance industry integration and free stakeholders’ capacity to focus on innovation.
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