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The Middle East Islamic banking sector is forecast to grow at an annual rate of 5 per cent for the next two years, a drop from historic highs of 15 per cent, reflecting tougher economic conditions, according to the governor of the Central Bank of Bahrain (CBB).
"As a result of the slowdown in economic activity, and overall environment, Islamic finance in previous years took off very quickly and penetrated new markets," Rasheed Al Maraj told The National on the sidelines of a conference in Bahrain .
“Now, it is reaching a stage of maturity where you don’t expect the same kind of big growth rates possible before. Nevertheless, the growth rate we are forecasting, which is around 5 percent, is above that of the conventional banking industry.”
Total Islamic finance assets are projected to reach US$3.8 trillion by 2022 after growing by 7 per cent to $2.2tn in 2016, according to a report published on Tuesday by Thomson Reuters and the Islamic Corporation for the Development of the Private Sector (ICD).
Performance of all Islamic finance sectors is improving as oil prices pick up, while governments are enhancing regulations to strengthen the industry, the report said.
Bahrain is positioning itself as the Islamic banking capital of the Middle East, and is seeking continued steady growth in the coming years with the help of new regulations and 'fintech' .
Mr Al Maraj told the conference a total of $22 billion worth of Islamic bonds, or sukuk, have been issued to date in 2017 – a record for Islamic banking – and this is set to continue in 2018 as geographic demand widens. In particular, there has been a "surge" in demand from the US.
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“Almost $40bn of sukuks are to mature in 2018, around a quarter of which will mature in the first quarter of next year,” Mr Al Maraj said.
“The other interesting feature to emerge in this region has been pricing for sukuks, which has been tighter than bonds. This underscores pockets of liquidity in the region among Islamic investors against a dearth of quality assets.”
Moody's Investors Service, the ratings agency, is forecasting the global sukuk market would grow by 12 per cent to $95bn this year, aided by higher demand from Islamic retail banks and a sharp gain in issuance from GCC sovereigns.
Mr Al Maraj would not be drawn on whether the central bank would make issuances in 2018 after selling $850 million sukuk in September.
“Bahrain has always worked hard to participate with the industry in introducing a new product, so we are continuously on the lookout for any kind of new product, especially ones that will benefit Islamic banks,” he said.
“We are in continuous talks on R&D and whatever we think is appropriate at the right time, and if the product has been researched from all angles, we may [issue something new].”
Meanwhile, the central bank is preparing to introduce ‘FAS 30’ regulations – the Islamic equivalent of IFSR 9 to govern corporate governance and sharia external auditing – by early next year, Mr Al Maraj said.
Bahrain, though, is “pacing itself” when it comes to drawing up further new regulations for Islamic banking. “We think we have issued enough regulation in the past and need the industry to digest.”
With regards to the conventional banking sector, he forecast a "positive direction" for the industry next year. "Judging by the recent results, the banks have done well in the first half of 2017. The sector is well capitalised, the liquidity is quite good, and we see no adverse impacts on quality of assets," he said.