Islamic Finance

Interview: Redha Al Ansari, Head of Islamic Finance Research, Refinitiv

BY

16 Nov 2020

Insight

Salaam Gateway

This interview is produced and sponsored by Refinitiv. It was first published in the State of the Global Islamic Economy 2019/20 report produced by DinarStandard and supported by the Dubai Islamic Economy Development Centre. The report can be downloaded from here.

Serving more than 40,000 institutions in approximately 190 countries, Refinitiv provides information, insights, and technology that drive innovation and performance in global financial markets. Refinitiv’s heritage of integrity enables its customers to make critical decisions with confidence while their best-in-class data and cutting-edge technologies enable greater opportunity. Refinitiv allows the financial community to trade smarter and faster, overcome regulatory challenges, and scale intelligently.

Islamic finance has returned to double-digit growth in 2019. What are the factors behind such growth? And what will drive further growth in the future?

Islamic finance’s growth and development were quite impressive in 2019, registering a double-digit growth of 14%, taking the industry’s total global assets to $2.88 trillion. This is compared to just a 3% growth in 2018. It was a solid year all-round, backed by market activities in many parts of the world, including new market entrances, mergers and acquisitions, governments passing new Islamic finance regulations, and increased sukuk activities.

So far, in 2020, the situation has changed somewhat with the spread of COVID-19. The lockdown has clearly impacted many economies worldwide, and the Islamic finance sector has not been immune to these economic downturns. However, challenging times such as these are when opportunities arise. Historically, we have seen many governments taking initiatives to move towards Islamic finance in difficult times. This year, we have seen many African countries, such as Algeria, introducing Islamic financial products to divert much-needed liquidity from its parallel or informal financial sector, valued between $30 billion and $35 billion, into the formal banking system. Tanzania, Tunisia, and Kazakhstan are other countries that are continuously developing their regulations to accelerate the growth of their Islamic finance sectors.

Other notable developments in terms of Islamic finance regulations have been witnessed in the UAE. Despite the long history of Islamic finance in the country, in 2019, the UAE introduced new regulations related to banking, takaful, and sukuk in order to improve its existing regulatory framework, which had not previously covered all areas of the industry. Uzbekistan is another country expected to make a significant entry into the world of Islamic finance after announcing a collaboration with IDB and UNDP to support the introduction of Islamic finance products and services.

By the end of 2019, there were 14 countries with central Shariah boards, and this number is likely to grow with the planned additions of boards in Kuwait, Qatar, and the Philippines. Central Shariah boards allow the principles and structures of Islamic finance to be harmonized at a national level and thereby promote its acceptance and growth. In fact, Islamic banking in Kuwait grew more strongly in 2019 than conventional banks did, and the introduction of a central Shariah board will further support the industry. The Philippines is an interesting case; although the Islamic finance sector is still in its infancy there, the government is taking the right steps to ensure the sector takes off on a strong note.

Sukuk have been growing at an extraordinary pace in the past few years. Can the industry maintain its growth trajectory in the face of the pandemic?

Sukuk performance in the past decade has been remarkable as it continues to evolve and expand into new territories and sectors. In 2020, over $1.35 trillion worth of sukuk have been issued since the first sukuk in 1990 in Malaysia, and over 15,000 sukuk have been issued by a variety of corporate, sovereign, and quasi-sovereign bodies across 31 countries. Interestingly, we can see around 90% of this sukuk were issued in the past 10 years, and 55% in the past five. This clearly shows the important role sukuk have been playing in funding governments and corporations over the past few years.

This market’s actual expansion and growth began in 2014 when several non-Muslim-majority countries issued their debut sukuk, including Hong Kong, Luxembourg, South Africa, Senegal, and the United Kingdom. There are also compelling trends in traditional markets. Saudi Arabia, for instance, has become the first country to have more sukuk issuances than bonds. Between 2017 and Q3 2020, Saudi Arabia issued $113.9 billion worth of sukuk, compared with $64.2 billion in bonds. And in 2020, Saudi Arabia tapped the sukuk market with $1.3 billion in green sukuk.

Looking more closely at sukuk issuances in the first three quarters of 2020, we see that the total issuance of $130.5 billion exceeds the $127.3 issued in the same period the previous year, despite the slow start at the beginning of the year. One of the reasons for the increase in sukuk issuance in 2020 is the increased funding requirements on the back of COVID-19 as governments take initiatives to revive economies.

Green sukuk have also gained momentum in the past few years. As of Q3 2020, a total of $7.6 billion worth of green sukuk has been issued since the first green sukuk in 2017. The COVID-19 pandemic is, to an extent, encouraging issuers to tap into green sukuk as governments and corporations continue efforts to help individuals and affected sectors with aid and subsidies. A number of countries are planning to issue green sukuk in the near future, including Uzbekistan and Kazakhstan, as well as some of the principal Islamic finance markets.

Islamic banking and takaful are transforming through mergers and acquisitions. How is this going to impact the industry going forward?

The consolidation wave that has swept the GCC banking sector in 2019 continued to pick up the pace during 2020. This trend is now showing signs of extending to the insurance and takaful sectors after the Saudi Arabian Monetary Authority (SAMA) announced plans to increase minimum capital requirements for insurance providers to SAR 500 million, which is five times the current requirement.

Consolidation is the way forward for the Islamic banking sector in an increasingly competitive environment. Islamic banks have long struggled to increase market share and compete with conventional banks, including in the central Islamic finance markets. The Islamic banking market share in most countries lags at under 30%, and very few have reached 40% or more. To address this issue, central banks are encouraging banks and takaful operators to consolidate.

The growth of consolidation is also partly due to overbanking in some jurisdictions. In the GCC, for instance, where some countries have over 40 banks catering to the needs of about 3 million adults, such countries can be considered over-banked. Comparing the banking structure in some of the GCC countries with advanced economies such as the United States or Canada, we see somewhat different structures. In advanced economies, a few large banks dominate the market, and a series of smaller banks struggling to compete for share. Islamic banks are required to enter the big leagues and compete for higher market share, and that is through consolidation.

tags:

SGIE 2020/21