ISLAMIC FINANCE
The Broadening Appeal of Islamic Finance The standardisation and integration of the Islamic finance sector, which includes aspects of Shariah interpretation and legal documentation, is expected to lead to greater market confidence and broaden its appeal to global investors
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he Islamic banking and finance sector continues to demonstrate considerable growth globally, driven by continued standardisation and integration of the industry, the robust global appetite for Shariah-compliant products and funding diversification goals. S&P Global projected that the global Islamic finance industry will grow by 10% to 12% in 2021/22 after slowing to 10.6% in 2020. The economic recovery in the Middle East, Africa and South Asia (MEASA) region on the back of higher oil prices and strong response to COVID-19 will boost credit growth and demand for Shariahcompliant products. The improving operating environment and high funding needs will also enhance the growth of Islamic banks’ asset and liquidity position in core Islamic finance markets as
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the lenders are expected to continue outperforming their conventional peers. On the sustainability front, the prolonged health crisis has thrust the Islamic finance industry back on environmental, social and governance (ESG) investors’ radar while encouraging the streamlining of the sector to boost its attractiveness. Digitalisation in the Islamic finance sector is also creating a nimbler finance industry. Moody’s said that the issuance of green Sukuk will accelerate in the coming years, particularly in Southeast Asia and the Gulf region, as regional governments seek to attract private capital to low-carbon and climate-resilient infrastructure projects. Though analysts projected that issuance would decline further this year following several years of high growth, improving market conditions will remain
Banking and Finance news in the MEA market
supportive for Islamic bond issuance. Sukuk issuance edged down by 12% in 2021 to $181 billion due to lower sovereign funding needs in the GCC and Indonesia thanks to the rally in oil prices and a rebound in the economy. “We expect issuance activity to further decline in 2022, to between $160 billion and $170 billion, as high oil prices continue to support GCC countries’ fiscal positions,” said Moody’s. Meanwhile, the standardisation of the global Islamic finance legal and regulatory framework represents a huge opportunity for the industry to streamline as well as strengthen processes and practices to broaden the appeal of Shariah-compliant financial products.
Standardising Islamic finance Islamic finance, which bans interest p a y m e n t s a n d p u re m o n e t a r y speculation, has been on the rise for many years across key Islamic markets in the MEASA region but the industry has remained largely fragmented with the uneven implementation of its rules. The overall volume of Sukuk issuance in 2020 plunged to $139.8 billion from $167.3 billion in 2019 despite the plunge in the oil price and the significant increase in financing needs in core Islamic finance markets. This was because more issuers
