Global economic rebound to drive recovery of Islamic finance sector

A growing Muslim population, more sukuk issuances and ethical consumerism are set to boost demand for Sharia-compliant products, report says

The Kingdom Tower stands illuminated at night on King Fahad Road in Riyadh, Saudi Arabia, on Monday, April 9, 2012. Saudi Arabia's gross domestic product expanded 6.64 percent in the fourth quarter from a year ago, the kingdom's statistics agency said. Photographer: Waseem Obaidi/Bloomberg *** Local Caption ***  1016260.jpg

A global economic recovery, fiscal and monetary easing, as well as liquidity made available by major governments and central banks are expected to drive the post-pandemic growth and demand for Islamic finance assets, according to Alpen Capital and Alpen Asset Advisers.

Other factors leading to higher appeal for Islamic products include a growing Muslim population seeking Sharia-compliant financial instruments, increasing sukuk issuances and the global trend of ethical consumerism, according to a report by the company.

“The Islamic finance and wealth management industry faced the dual shocks of adjusting to the pandemic and historically low oil prices in 2020,” Sameena Ahmad, managing director of Alpen Capital, said during an online seminar on Tuesday.

Quote
An optimistic outlook by the International Monetary Fund on global economic recovery is expected to spur a recovery within the sector
Sameena Ahmad, managing director of Alpen Capital

“While the industry slowed down during the year after experiencing record growth in 2019, it showed resilience and total Islamic finance assets in 2020 are estimated to match the previous year’s figures.”

However, in a separate report issued earlier this month, S&P Global Ratings said the global Islamic finance industry will grow at a slower pace as the volume of sukuk, also known as Islamic bonds, shrinks and core markets grapple with economic slowdowns caused by the Covid-19 pandemic.

The $2.4 trillion (Dh8.81tn) Sharia-compliant finance industry is expected to register “low to mid-single-digit growth” this year and in 2021, according to the credit rating agency. The industry grew by 11.4 per cent last year on the back of sukuk issuance that was higher than expected, according to S&P Global.

“An optimistic outlook by the International Monetary Fund on global economic recovery is expected to spur a recovery within the sector,” said Ms Ahmad.

The IMF said the global economy will rebound and expand by 6 per cent in 2021, after contracting by 3.3 per cent last year.

“Sukuk is expected to maintain its position as a major growth driver for the Islamic finance industry,” said Hameed Mohamed, executive director of Alpen Capital.

In 2019, sukuk issues by governments and companies, accounted for 19 per cent of the global Islamic finance industry. Despite initial concerns about the effects of the Covid-19 pandemic on Islamic capital markets, sukuk issuances in 2020 matched levels recorded in 2019, according to the Alpen Capital.

Quote
Sukuk is expected to maintain its position as a major growth driver for the Islamic finance industry
Hameed Mohamed, executive director of Alpen Capital

“The emergence of new avenues such as green sukuk and socially responsible investing are likely to boost growth. Going forward, core markets across the Middle East and North Africa and South-East Asia regions as well as non-core markets such as Kazakhstan and Uzbekistan could see higher issuances,” said Ms Ahmad.

Covid-19 has also led to calls for standardisation in the Islamic finance industry, experts said during the panel discussion.

The pandemic allowed the Islamic finance industry to look inward and standardise, said Mr Mohamed. Governments have begun to talk to each other to develop a uniform standard to position the industry for growth in the future, he said.

More consolidation is expected in the Islamic finance industry after the pandemic.

“More than 500 Islamic banks operate globally. Many Islamic institutions are concentrated in Malaysia and the GCC,” said Amin Fateh, general manager of Minhaj Advisory.

Several new asset classes have opened up within Islamic investment, such as charitable trusts, private equity, exchange-traded sukuk funds, Sharia-compliant mortgage investment funds and halal mutual funds.

Such offerings are expected to appeal to a broader consumer base, thus improving demand prospects for Islamic instruments, according to Alpen Capital.

Updated: June 30th 2021, 8:55 AM
EDITOR'S PICKS
NEWSLETTERS