Islamic Finance 2021-2022: Toward Sustainable Growth

Turkey will continue to grow in the participation finance sector and will be driven primarily by public sector participation banks

ANALYSIS 16.07.2021, 17:10
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Islamic Finance 2021-2022: Toward Sustainable Growth

According to the report released by Global Ratings of Standard & Poors (S&P), the global Islamic finance sector is believed to have a 10 to 12 percent growth rate in 2021-2022. Despite the shock caused by the pandemic and the drop in oil prices, there was rapid growth in Islamic finance in 2020.

Although a modest recovery for most core Islamic finance countries in 2021-2022 is expected, there is the possibility that the sector will expand on the basis of continued standardization and integration. Over the next 12 months, there is the possibility of progress on a unified global legal and regulatory framework for Islamic finance that the Dubai Islamic Economy Development Center (DIEDC) and its partners are developing. Such a framework could help resolve the lack of standardization and harmonization that the Islamic finance industry has faced for decades. In addition, with the sector’s increasing compliance with environmental, social and administrative (ESG) values, private Islamic social finance instruments and green sukuk are used more frequently. This would help tackle the aftermath of the pandemic and support the agenda for core countries’ energy transition. However, such processes may remain slow given the additional complexity of these instruments and the core Islamic finance countries’ slow implementation of policies to manage the energy transition.

The Growth is Supported

The Islamic finance industry continued to grow in 2020, although more slowly than in 2019. The industry’s assets expanded by 10.6% in 2020 versus 17.3% in 2019, when higher-than-expected Sukuk supported growth.

Turkey will Continue to Grow

Economic recovery in Islamic finance countries is expected, although some countries’ GDP growth will be lower than observed historically. Growth is predicted due to the United Arab Emirates (UAE), where Dubai Expo is most likely to help boost economic activity. Turkey will continue to grow in the participation finance sector and will be driven primarily by public sector participation banks.

COVID-19 Pandemic and Negative Risks

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up, and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal social and economic activity levels, looks to be achievable by most developed economies by the end of the third quarter.

A Decline in Sukuk Issuance

In 2020, unlike what some market participants expected, the overall volume of Sukuk issuance dropped to $139.8 billion from $167.3 billion in 2019. That led to a sharp drop in the oil price and the significant increase in financing needs of core Islamic finance countries. These issuers have instead tapped the conventional markets, where it is easier and quicker to get the funds. Some corporates will also suffer from the current economic environment. However, this risk has not yet fully materialized on banks’ balance sheets because of the regulatory forbearance and liquidity support measures implemented in many countries. The extension of these measures in most countries has further delayed the materialization of credit risk.

Fintech Will Enhance The Industry's Resilience

COVID-19 has demonstrated how the capacity of a company or a bank to shift its business online is critical for its continuity. For Islamic banks and sukuk, higher digitalization and fintech collaboration could help strengthen their resilience in more volatile environments and open new avenues for growth. The industry is partially there, and digitalization is now taking a prominent place among decision-makers’ priorities. Getting banking services digitally, issuing sukuk on a digital platform using blockchain technology, and enhancing cybersecurity will be the three main factors that would help the industry’s resilience.

A prerequisite for fintech’s ability to enrich the Islamic finance industry is providing adequate physical infrastructure and implementing the necessary supervision and regulatory framework. That is why several regulators and authorities in the GCC and elsewhere have launched incubators or specific regulatory sandboxes where fintech companies can test innovations.

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