After many years of rapid growth, Islamic finance is slowing down in tandem with the price of oil as demand from the Arabian Gulf wanes, according to a report by S&P Global Ratings.
As a result, growth in Sharia- compliant assets around the world is likely to remain unchanged next year at 5 per cent, the rating agency said.
The drop in demand for Islamic finance is especially noticeable in the issuance of sukuk, or Islamic bonds, said Mohamed Damak, the global head of Islamic finance at S&P in Dubai.
“We now expect the low oil price to persist and believe that oil prices will increase only moderately for at least the next two years, averaging US$45 per barrel next year and $50 in 2018,” Mr Damak said.
“Given the dependence of core Islamic finance markets on oil, we now expect the economic growth in some of these markets to remain muted.”
Mr Damak said that the lack of standardisation in the Islamic finance industry and the time it takes to arrange Sharia-compliant debt are also weighing on its growth, putting off potential customers who want greater transparency and quicker arrangement times.
The lack of cash in the banking system in the region as deposits dry up is also affecting the growth of sukuk as much as it is conventional bonds.
The issuance of global sukuk is likely to reach $50 billion to $55bn this year compared to $62bn last year, Mr Damak said. So far, about $39.4bn worth of sukuk has been sold this year.
The slowdown comes at a time when Arabian Gulf nations are looking for ways to finance budgetary shortfalls.
This year Abu Dhabi issued $5bn in conventional bonds, while Qatar sold $9bn. Meanwhile, Kuwait and Saudi Arabia may sell sukuk this year to finance their fiscal deficits, according to a report in July from the ratings agency Fitch.
mkassem@thenational.ae
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