Islamic Finance Industry Likely To Grow by Around 10 Percent: Report

The global Islamic finance industry is expected to continue its growth trajectory, with around 10 percent growth across the industry in 2023-2024, excluding Iran, according to S&P Global Ratings.

The industry expanded by a similar number in 2022, largely due to the Gulf Cooperation Council (GCC) countries, notably Saudi Arabia and Kuwait. This growth is expected to continue in 2023 despite the overall slowing of issuance volumes. The sukuk market, however, is expected to provide a positive contribution to industry growth in 2023 as new issuance is expected to exceed maturing sukuk.

The Islamic funds and takaful sectors are also expected to continue expanding, even though structural weaknesses are still present, curbing the industry’s broader geographical and market appeal. S&P believes that progress toward greater standardization and digitalization could enhance the industry’s structural growth potential, creating new opportunities for the industry. The industry’s increasing focus on sustainability-related themes is also expected to create new opportunities.

Islamic banking assets grew by 92 percent in the GCC countries, mainly Saudi Arabia and Kuwait, fuelling the 2022 performance. Kuwait Finance House’s (KFH) acquisition of Ahli United Bank (AUB) was the primary factor behind Kuwait’s growth. KFH is expected to convert its conventional activities to Sharia compliance in line with its acquisition plans. Saudi Arabia’s banking system is expected to continue underpinning a large portion of the expanding Islamic finance industry.

In Southeast Asia, the Islamic banking industry is expected to grow at around 8 percent over the next couple of years despite an economic slowdown in the major markets of Malaysia and Indonesia. Low penetration and robust demand for Islamic products and services support this trend. In both markets, Islamic banking is expected to continue gaining market share as growth outpaces conventional banking. However, in Turkey, the depreciation of the lira has been a constraint, and pressure on the Egyptian pound is unhelpful for the industry.

Sukuk issuance volumes are expected to fall in 2023, albeit at a slower pace than in 2022. Lower and more expensive global liquidity, greater complexity related to structuring sukuk, and reduced financing needs for issuers are expected to deter the market. However, corporates are expected to contribute to issuance volumes, particularly in countries where governments have announced transformation plans. For example, in Saudi Arabia, the banking system will be limited in its capacity to finance multiple projects related to Vision 2030 implementation. Issuers with high financing needs, such as those in Egypt and Turkey, are also likely to tap the sukuk market as part of their strategy to mobilize all available resources.

Over the past 12 months, there has been a significant decline in foreign currency-denominated sukuk issuance, mainly due to lower and more expensive global liquidity. The market also suffered from uncertainty around regulation and standardization. Challenges related to the adoption of AAOIFI Standard 59 in the United Arab Emirates resulted in a significant decline in foreign currency-denominated sukuk. Introducing mechanisms for the revaluation of underlying assets could be one of the next obstacles that the market may face.

S&P Global Ratings expects sustainability-linked sukuk to continue increasing in the next 12-24 months, albeit from a low base. S&P will continue to monitor any future developments related to regulation and standardization and how they may affect future issuance volumes. If sukuk became an equity-like instrument, investor and issuer appetite, as well as pricing mechanisms, would likely change significantly.

Overall, the Islamic finance industry is expected to continue expanding in 2023, supported by strong growth in the GCC countries and robust demand for Islamic products and services in Southeast Asia. However, structural weaknesses and challenges related to regulation and standardization could hamper the industry’s broader geographical and market.Islamic banking assets grew by 92 percent in the GCC countries, fuelling the 2022 performance