Islamic finance industry set for continued growth in 2022 despite challenges

Islamic banks' assets globally will continue to outperform their conventional peers this year, Moody's says

The central business district in Jakarta. Indonesia is among core Islamic finance markets in the world set to continue growing in 2022. Bloomberg
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The Islamic finance sector is set to continue growing in 2022 as the accelerating economic recovery, particularly in the GCC region, brightens the outlook for credit growth despite challenges from a rise in interest rates and decline in sukuk issuance amid higher oil prices, Moody's Investors Service said.

Islamic banks' asset growth globally will also continue to outperform their conventional peers this year, the ratings agency said in a report on Tuesday. Strong fundamentals are also expected to drive expansion of assets under management for the Islamic funds industry.

However, sukuk issuance, which reduced in 2021, is expected to decline further in 2022.

"The economic recovery in key Islamic finance markets will boost credit growth and demand for Shariah-compliant products and we expect Islamic banks' asset growth to continue to outperform their conventional peers," said Ashraf Madani, a vice president at Moody's.

"At the same time we expect higher oil prices will lead to lower sukuk issuance in 2022."

Sukuk issuance dropped in 2021 after five consecutive years of growth. It declined 12 per cent to $181 billion amid lower sovereign funding needs as higher oil prices boosted revenue, particularly in the GCC states. The majority of issuances last year — nearly $128bn — had long-term maturities of more than one year, according to the report.

Moody’s expects issuances to fall to the $160bn-$170bn range in 2022 as “higher oil prices and the economic recovery help the region generate fiscal surpluses and thus lower the need to resort to the market”.

Expected interest rate hikes globally could also deter some issuers from tapping the market in 2022.

“However, higher issuance by financial institutions to support asset growth, government refinancing needs and new issuers joining the market could partially offset the negative trend from higher oil prices and interest rates,” Moody’s said.

The global economy bounced back strongly from the pandemic-driven slowdown last year despite the emergence of new Covid-19 variants and the growth momentum has continued in 2022. Oil prices that surged 67 per cent in 2021 on the back of robust demand for crude, have risen sharply this year as Russia’s military offensive in Ukraine intensifies. Prices have rallied about 30 per cent since the start of the year.

Sovereigns in the region that generate a major chunk of revenue from the sale of hydrocarbons and borrowed heavily in 2020, have considerably lower financing needs this year.

“We expect gross long-term global sovereign sukuk issuance to decrease to $73bn in 2022 and $75bn in 2023, from $86bn in 2021,” Moody’s said.

In 2022, Moody’s estimates $16bn worth of sukuk issuance from the GCC, $21bn from Malaysia, $21bn from Indonesia, around $10bn from other sovereigns and almost $5bn from multilateral development banks.

“We estimate that the aggregate fiscal deficit of major sukuk-issuing sovereigns (Saudi Arabia, Malaysia, Indonesia and Turkey) will decline to $92bn in 2022 from $118bn in 2021 and $194bn in 2020,” Moody’s said.

It projects the aggregate fiscal positions of GCC sovereigns, excluding Kuwait, to improve to a surplus of $50bn this year, up from a surplus of $13bn in 2021 and a deficit of $112bn in 2020, which offsets a “large increase in scheduled sukuk repayments”.

“These projections are based on the 2022 average oil price assumption of $75 per barrel,” the ratings agency said.

The Islamic finance industry has been on a growth path in recent years. Despite the pandemic, Islamic financing expanded at an average compound rate of 10.5 per cent in 2020 and 2021, while conventional loan growth expanded at 3.4 per cent during the same period.

“In Muslim majority countries, Islamic banks manage to attract populations that otherwise, for ethical and religious reasons, would remain outside the banking system, meaning that they have a higher reservoir of growth compared to conventional banks,” Moody’s said.

The market share of Islamic financing assets in core Islamic markets, including the GCC and South-East Asia, increased to 34.6 per cent of total financial assets, including conventional bank loans, in September 2021, from 33 per cent in December 2020 and 31.3 per cent in December 2019, Moody’s said.

Updated: May 30, 2023, 7:22 AM