Uncertainty takes its toll on global Islamic finance growth in 2016

Future prospects of capital market, banking and takaful to be driven by higher awareness, government support and larger infrastructure financing needs, analysts say

Increasing demand for Shariah-compliant services and products from a more aware Muslim population supported Islamic banking growth in 2016 but total value of sukuk remained mostly flat as Malaysia reduced short-term borrowings and the GCC states opted to tap liquidity from conventional sources. Growth in takaful also slowed as the market matures.

Overall, however, the Islamic financial landscape is expanding, growing from just over $2 trillion at the end of 2015--a significant milestone--to a forecasted $2.2 trillion for the full year 2016, according to the ICD–Thomson Reuters Islamic Finance Development Report (IFDR) 2016. The sector is expected to grow to $3.54 trillion by 2021, helped by Iran’s fully Shariah-compliant financial market valued at $434 billion entering the global economy after sanctions against the country were lifted in January 2016.

SUKUK

Malaysia’s decision in 2015 to stop issuing short-term sukuk continued to reverberate in 2016, leaving the value of all sukuk outstanding subdued. The overall global political and macroeconomic environment also continued to have a softening effect on sukuk, of which only $39.82 billion was issued up to the third quarter of 2016 with Moody’s Investors Service expecting total new issuance in the year to hit $70 billion and S&P predicting up to $55 billion. Market respondents to the Thomson Reuters Sukuk Perceptions & Forecast Study 2017 expect new issuance will be more than $50 billion in 2016 and reach $75 billion in 2017.

The Thomson Reuters sukuk study forecasts full-year 2016 sukuk outstanding to be $327.5 billion compared to $309.8 billion in 2015. This is expected to reach $343.3 billion in 2017 and $420.9 billion in 2021. 

“The macroeconomic and political situation, particularly in the Middle East and North Africa, presents concerns as oil prices remain low and conflicts continue. We have some political instability and some currency problems, especially in the North African countries and Yemen,” Abdelilah Belatik, Secretary General of Bahrain-based General Council for Islamic Banks and Financial Institutions (CIBAFI), told Salaam Gateway on the sidelines of the 8th Annual World Islamic Retail Banking Conference (WIRBC) in Dubai in November.

“This will become more clarified in 2017,” added Belatik.

SUKUK STOPS FOR A BREATH BEFORE EXPANSION

Although the value of new sukuk issuances dropped by 18 percent year-on-year in the first nine months of 2016 to $39.8 billion, new issuers like Ivory Coast and Togo have emerged. By comparison, the value of new issuances fell 51 percent in the same period of 2015 compared to the previous year, the sukuk study shows. Malaysia remains the biggest domestic sukuk market with $23.14 billion in new issuances, followed by the UAE with $3.95 billion and Saudi Arabia with $3.2 billion.

GCC countries preferred to tap conventional liquidity from international investors in 2016, as quantitative easing drove yields to zero or even negative rates in some markets. “These factors underpin our expectation of flat new sukuk issuance volumes for 2016 at around $70 billion,” said Nitish Bhojnagarwala, Associate Vice President at Moody’s.

“Nevertheless, the longer-term outlook remains promising as we expect rising sukuk issuance into 2017 from sovereigns, banks and corporates in the GCC, as regional financing needs continue to increase amid lower oil prices,” he told Salaam Gateway.

Malaysia’s decision to earmark as Shariah-compliant around $25 billion of its Employee Provident Fund (EPF) is expected to create a substantive new pool of Islamic liquidity. “At around 15 percent of the $170 billion total, this will help drive the demand side of the sukuk equation to the point where pricing may be consistently more favourable for international issuances of such instruments,” Bhojnagarwala said.

The consistent expansion in the GCC’s infrastructure-building drive is also likely to have a positive impact on Islamic financing, as the need to raise funds increases. “The deficit financing needs of the GCC members and their drive to promote Islamic finance means that we expect the GCC to take an increasing regional share of overall issuances into 2017,” said Bhojnagarwala.

Indonesia, the largest Muslim country by population, said it would increase public sukuk issuance over 10 years until half its outstanding government debt was Shariah-compliant, compared to 14 percent today. “Such definitive support for Islamic capital markets is unprecedented from a sovereign. Although a latecomer in promoting the sector, Indonesia is clearly seeking to make up for lost time where it can directly impact issuance,” added Bhojnagarwala.  

ISLAMIC BANKING GROWTH STILL OUTPACING THE REST

Growth in Islamic banking globally was the stand-out performer in Islamic finance, with asset value forecasted to grow 14.2 percent for the full year 2016 to $1.657 trillion, compared to a 6.4 percent growth in 2015, according to the IFDR. Moody’s data show that the sector continued to outpace growth in the conventional banking segment.

“Despite slowing, growth in the Islamic banking sector continues to broadly outpace that of conventional banks in most systems where Islamic banks have been established. This is driven by strong retail demand and proactive government legislation,” Bhojnagarwala said.

“However, the broader slowdown in growth reflects more challenging economic conditions across a number of core Islamic markets, particularly in the GCC countries due to lower oil prices,” he added.

In spite of the clearly ebullient growth numbers for Islamic banking, optimism among participants is muted.

“From the banking perspective, I would not say that 2016 was a tough year, but it was not better than 2015; and 2017 will be more challenging,” Hisham Hammoud, Executive Vice President and Chief Business Officer of UAE-based Shariah-compliant Ajman Bank, told Salaam Gateway. Demand for banking products and services was muted in 2016, he said, “as customers continue to wait and watch” how the economic and political situations develop.

The results of a CIBAFI survey reveal that the optimism level of the global Islamic banking industry was lower in 2016 compared to the previous year in all geographical regions except North Africa.

The top concern of Islamic bankers in 2016 was the macroeconomic environment, followed by service quality, business growth and expansion, and shareholder value and expectation. This is a change from the 2015 survey, which listed macroeconomics as the sixth most pressing concern.

The demand side of the equation poses one of the largest concerns for GCC-based Islamic banks accustomed to high customer uptake in the past. “I think the challenge will be about the customer’s financing needs. Are they willing to invest in 2017? For example, is buying a house still a priority, or has that changed? That is what worries us. How do we go back to stable, wealthy clients?” said Hammoud.

Moody’s sees potential for growth in Islamic banking coming from countries such as Oman, Turkey and Indonesia, where the penetration of Shariah-compliant banking assets remains relatively low between 5 and 10 percent while demand is growing and government initiatives support growth. According to Moody's data, Oman’s Islamic banking sector saw a compounded annual growth rate (CAGR) of more than 30 percent between 2013, when Islamic banking was introduced in the country, and 2016. Turkey’s Islamic banking CAGR between 2010 and 2016 has been about 28 percent, and Indonesia’s 27 percent.  

TAKAFUL STUTTERS BUT CONTINUES TO GROW

Growth in the takaful sector for full year 2016 is forecasted to slow to 5.3 percent to reach $40 billion compared to an 11.8 percent surge in 2015, according to the IFDR. The report cites oil price volatility in the GCC and increasing competition from conventional insurance operators as some of the main reasons for the lacklustre performance, but expects the sector to continue growing to $42 billion in 2017 and $54 billion in 2021.

Takaful’s growth is led by countries in the GCC and Southeast Asia and the increase in Muslim populations in these regions, who are educated and have an increasing awareness of takaful’s alignment with Shariah. Saudi Arabia remains the biggest takaful market, as its insurance market is fully based on a cooperative insurance model, after the conversion of its insurance sector and the introduction of the law on the ‘Supervision of Cooperative Insurance Companies’ in 2002, according to the IFDR.

The demographic factors coupled with low levels of insurance penetration and low insurance density “mean there is significant headroom in the market for Shariah-compliant insurance and that double-digit growth in takaful premiums globally will likely continue,” said Moody’s Bhojnagarwala.

Some of the challenges for the sector remain the non-standard nature of the regulatory and Shariah frameworks. “The inability to achieve compliance and consistency … coupled with a lack of consumer awareness has fragmented the market. The lack of viable Shariah- and regulatory-compliant investment opportunities for takaful companies, and competition from both within the sector and from the larger conventional insurers, are other factors that prevent takaful operators from achieving economies of scale,” added Bhojnagarwala.

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