Dubai: Global Islamic finance industry is expected to face serious growth challenges the next few years as it faces headwinds including negative impact of much lower oil prices in its core markets and the prevailing low interest rates in most major developed countries, according to Standard & Poor’s.
“In our view, after 20 years of solid growth, the industry has achieved a critical mass that enables it to face increasing headwinds. Still, the reality of declining oil revenues could start to take a toll on governments’ budgets and economic growth in core markets for Islamic finance. Our 2015 conference will discuss the perspectives on recent market development and regulatory frameworks,” said Stuart Anderson, Managing Director & Regional Head, Middle East, S&P.
Global sukuk issuance volumes have dropped by about 40 per cent since the beginning of 2015. As of September 30, 2015 issuance totalled $48.8 billion (Dh179 billion) compared to $82.7 billion in the same period in 2014.
Analysts expect further decline in 2016, but sees some of the decline to be counterbalanced by the opening up of Iran and more issuance from non-core markets such Europe, Russia, CIS countries and Africa.
“A significant fall in sukuk issuance this year is attributed to the Central Bank of Malaysia’s decision to switch out of sukuk to other liquidity management instruments for Malaysian Islamic banks. We expect a further slowdown of sukuk issuance in core markets when oil price starts to impact government spending and economic growth,” said Mohammad Damak, Global Head of Islamic Finance for Standard & Poor’s.
In addition to lower oil prices and its impact on government spending, the potential Fed interest rate hike followed by a liquidity squeeze in the banking system could result in lower issuance by central banks.
New players
Offsetting some of these negatives are factors such as advancements in standardisation for Islamic finance products that could attract new players, improvement in legal environment so that all players are clear on what to expect, regular issuance of a series of local sukuk (liquidity management instruments).
Additionally, infrastructure spending could continue in some of the core markets despite the fall in oil prices. These spending could be financed through sukuk.
“Economic conditions in core sukuk markets remain somewhat supportive. A lot of new infrastructure issuers are looking for issuance in 2015-16,” said Karim Nassif, Associate Director of Infrastructure Finance at S&P.
“Additionally, the yield gap is narrowing between conventional issues and sukuk, which should be an incentive for corporate issuers to look at sukuk option,” said Damak.
