ISLAMIC FINANCE
A transformative opportunity Standardized supervision of Islamic finance is expected to lead to greater market confidence and restoration of its attractiveness to issuers
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he Islamic finance sector continues to demonstrate modest growth globally however at a slower rate compared to 2019/20 because of the economic fallout due to the outbreak of the COVID19 pandemic and low oil prices owing to plunging demand amid measures to contain the virus in core Islamic economies. In 2021, narrowing fiscal deficits across the GCC region will likely drive a plunge in new Sukuk issuance. But despite the decline, Islamic bond issuance is expected to remain above the prepandemic annual averages mainly due to governments financing requirements due to the prolonged pandemic. Moody’s estimated that the gross longterm global sovereign Sukuk issuance will hit the $96 billion mark this year compared to $109 billion issued in 2020. However, the current economic challenges have created opportunities to accelerate and unlock the long-term potential of the Islamic finance sector, S&P Global said in its report, Islamic Finance Outlook 2021 Edition. These pandemicinduced challenges are expected to put the Islamic finance industry back on environmental, social and governance (ESG) investors’ radar, streamline Sukuk issuance to encourage the industry’s
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attractiveness and leverage technology to create a nimbler finance industry.
Sustainable finance The twin shocks of COVID-19 and plunging oil prices are expected to enhance the appetite for sustainable instruments as governments and corporates in the Gulf region seek to revive their economies amid diversification from hydrocarbonbased economies and transition to sustainable financing. “Islamic finance social instruments can help core countries, banks, companies and individuals economically affected by the pandemic navigate current conditions, with market participants eyeing Qard Hassan, Zakat, Waqf, and Social Sukuk,” said S&P Global. As GCC countries are tapping debt markets – taking advantage of low borrowing costs and investor demand for higher returns – to finance projects and plug their budget deficits, analysts expect Islamic finance social instruments to widen the appeal of Islamic bonds beyond traditional markets in the Middle East and South Asia to include ethical investors in Western countries. “The Sukuk instrument overall remains attractive to issuers because it provides investor diversification and access to the
Banking and Finance news in the MEA market
Islamic pool of liquidity, which is growing in line with the market share of Islamic finance in the core Islamic countries,” said Ahsan Ali, Managing Director, Global Head of Islamic Origination, Standard Chartered Bank. Gulf region Islamic lenders are seeing a growing frenzy for green bonds although the appetite is still in its infancy as more investors are committing to responsible investment. Last year, the overall green bond market was worth over $230 billion, and it reached $2 billion in the Middle East region with the potential to grow further. “Whilst not mutually exclusive, Shari’ah finance offers a framework that embodies the social and ethical values of ESG investing, providing Middle East investors with an attractive opportunity to adopt more sustainable, responsible investment strategies – and, ultimately, the ability to tap into the significant value potential from ESG and the global shift towards sustainability,” said Soumaya Hissoussi, Senior Vice President, Lombard Odier Abu Dhabi Branch. The Gulf region’s first $587 million green bond was issued by First Abu Dhabi Bank (FAB) in March 2017. The Abu Dhabibased lender also issued a five-year Hong Kong dollar-denominated green bond
