According to S&P report, islamic finance faces challenges from the decline in oil prices, changes in the global regulatory and its own fragmented nature. The industry could be worth $3 trillion sometime in the next decade
Islamic finance will grow again in 2016, but at a more subdued pace. According to a report of Standard & Poor's Ratings Services, the islamic finance growth will drop to single digits in 2016 from between 10% and 15% over the past decade.
The industry has achieved critical mass: Islamic finance assets worldwide exceed $2 trillion by S&P estimate. But, S&P now thinks the industry faces three main challenges. “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”, said Standard & Poor's Global Head of Islamic Finance Mohamed Damak, in the the study “Islamic finance to still grow in 2016 but with a sag”.
In any case, islamic finance will have the impetus to continue progressing and maintain some growth. In fact, S&P expects the industry will be worth $3 trillion sometime in the next decade.
Governments in core markets see in Islamic finance a tool to maintain their investment spending, somewhat countering the negative impact of oil prices on their budgets. Standard & Poor's now assumes that oil prices will average $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. “Positively, we expect governments in Gulf Cooperation Council (GCC; Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates) countries will protect their investment spending to support growth”, said the study.
Then, 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.
And also, standardization of documents and Sharia ruling could enhance industry integration and free stakeholders' capacity to focus on innovation.
A $2 trillion industry still concentrated in the GCC, Iran e Malaysia. In particular, Iran's banking sector currently represents about 40% of Islamic finance industry assets are concentrated in Iran.
About Malaysia, Bank Negara Malaysia (BNM) tried to offer solutions for liquidity management for Islamic financial institutions a few years ago and subsequently became the largest issuer of sukuk globally. However, in the beginning of 2015, BNM withdrew from the sukuk market because its issuance didn't satisfy the ultimate goal. Instead, it sukuk instruments became very successful and attracted a broad array of investors.
The list of newcomers to Islamic finance keeps on 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 U.S.-based investors representing the remainder. “These investors are primarily interested in the slightly higher yields offered by some sukuk, versus similar conventional financial instruments”, continued S&P, who estimate the Islamic sukuk investor base at just over $500 billion, excluding sovereign wealth funds, official investors (central banks and multilateral), and other conventional investors.
S&P sees the need for further strengthening of integration in Islamic finance. Despite its non-negligible size, the industry remains fragmented. It's more a collection of small industries in specific geographies than a truly global industry.
“Islamic finance stakeholders' efforts and the industry's contribution to development of the real economy will likely fuel growth”, concluded Damak. This development is capturing the interest of major financial institutions, such as the International Monetary Fund and the World Bank, and some advanced countries.