Page 71 - KLIFF2022eBook

KLIFF 2022 PROGRAMME BOOK

ISLAMIC FINANCE 2022-2023: SAME

CONSTRAINTS, NEW OPPORTUNITIES

Dr. Mohamad Damak
Global Head of Islamic Finance,
Standard & Poor’s Global Ratings, Dubai UAE

This report does not constitute a rating action.

Key Takeaways

• We expect stronger economic growth in core Islamic finance countries to boost industry assets about 10% over
2022-2023.
• Less competitive Islamic finance products and complexity related to structuring sukuk are still holding back
expansion into new markets.
• Sustainability and digitalization could unlock growth opportunities provided some prerequisites are fulfilled.

S&P Global Ratings believes the global Islamic finance industry will see double-digit expansion again in 2022-2023 after
10.2% growth in total assets in 2021 (excluding Iran). Growth last year was supported by Islamic banking assets in some Gulf
Cooperation Council (GCC) countries and Malaysia, sukuk issuances exceeding maturities, and the solid performance of the
Islamic funds industry.
This year, we think higher commodities prices will underpin a stronger recovery in many core Islamic finance markets. Moreover,
most of these countries are relatively resilient to macroeconomic shocks resulting from the Russia-Ukraine conflict. This will
support the industry’s prospects for 2022-2023 but global headwinds could change the picture. We recently announced
downward revisions to our global macroeconomic base-case forecasts the U.S., China, and the eurozone. We also expect high
commodities prices and a changing global liquidity picture to result in lower sukuk issuance in 2022, after volumes declined
23.2% in the first quarter. Given discrepancies between various sources, we have focused our analysis on international sukuk
issuances, which increased 12.3% in first-quarter 2022 after some riskier issuers tapped the market before the global liquidity
retrenchment.

The Islamic finance industry is still held back by structural weaknesses, namely the complexity inherent to transactions and the
correlation of performance with oil prices given concentration in commodities-exporting countries. The industry’s geographical
distribution has not materially changed over the past decade, suggesting that it may be struggling to attract interest beyond
traditional markets. What’s more, the clear preference of some Sharia scholars for a higher proportion of profit and loss sharing
in sukuk is posing certain legal challenges. In our view, once sukuk become equity-like instruments, investor and issuer appetite
will likely diminish significantly. Therefore, standardizing and satisfying the requirements of all stakeholders is a plausible way for
the industry to maintain its attractiveness.
We also see opportunities in the alignment of certain Islamic financial products and environmental, social, and governance
(ESG) factors. We expect to see a higher volume of green and sustainability sukuk (from a low base) as issuers look to
broaden the investor base and include funds aligned with sustainability themes. Many Islamic banks have also made significant
strides in digitalization, such as those in the GCC or Malaysia, but players in other core Islamic finance countries are yet to
follow. Moreover, digital sukuk could generate significant investor interest in the future once the necessary prerequisites are
implemented.

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