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Islamic banks in the Arabian Gulf will see "mid-single-digit growth" this year and next due to government spending on strategic initiatives and healthy oil prices, S&P Global Ratings said.
Islamic banks in the Gulf lost ground in 2018 as compared to growth at conventional banks. However, the rating agency said sharia-compliant lenders have strong fundamentals with a stable market share of around 36 per cent of total bank assets in the GCC. They also enjoy stable profits, providing an average return on assets of 1.6 per cent.
“Overseas expansion is providing higher geographic diversification but it also comes with risks. High capital buffers will provide resilience to banks,” said Mohamed Damak, senior director and global head of Islamic Finance at S&P Global Ratings during a media roundtable in Dubai on Monday.
On the outlook for Islamic finance globally, he said the market would continue to grow slowly due to weaker economic performance in some core countries, including Turkey and Iran.
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The sukuk market expanded strongly in the first eight months of 2019, however, with $113 billion (Dh415bn) issued globally, up 34 per cent on the same period last year, he added. In the UAE, sukuk issuance was Dh5.5bn, slightly higher than the Dh5.4bn issued in the first eight months of last year.
The total volume of sukuk issuance in Islamic countries is expected to be around $140bn to $150bn in 2019, up from $131 billion in 2018, according to the ratings agency. Indonesia and Turkey continued strong levels of issuance in the first eight months of 2019.
“Issuers continue to prefer the conventional route in the Gulf due to the lack of standardisation and the complexity attached to sukuk issuance versus conventional bonds,” Mr Damak said.
“Oil price volatility but a higher number (in oil prices) means lower financing needs and issuance for the GCC,” he added.
Green sukuk issuance is also likely to accelerate as efforts to combat climate change gain traction and countries in the region start renewable projects. Dubai is targeting a renewable mix of 75 per cent by 2050 while Saudi Arabia intends to build a $200bn solar project.
“A lot of these investments could be financed through green sukuk,” said Mr Damak.
Separately on Monday, Dubai Islamic Economy Development Centre (DIEDC) signed an agreement with the Dubai International Financial Centre, Dubai Financial Market and the Climate Bonds Initiative on Monday to collaborate on growing the green sukuk market and stepping up the exchange of knowledge and expertise in the field.
“The agreement aims to promote the issuance of green sukuk in the UAE and across the world, in addition to developing the standards of certification for green sukuk along the lines of the Climate Bonds Standard and Certification Scheme,” DIEDC said in a statement.