The global Islamic finance industry will show low-to-mid single-digit growth in 2020-2021 after 11.4% in 2019, says S&P Global Ratings in its 2021 outlook released on September 22.
“The significant slowdown of core Islamic finance economies in 2020, because of measures implemented by various governments to contain the COVID-19 pandemic, and the expected mild recovery in 2021, explain our expectations,” said the credit rating agency.
It estimates global Islamic finance assets, covering banking, sukuk, takaful, and funds, were $2.4 trillion in 2019.
S&P expects Islamic banking, which is the biggest component of the global industry, to show “at best stable total assets or low-single-digit growth” after 6.6% increase in 2019.
“The COVID-19 pandemic will halt growth at GCC Islamic and conventional banks in 2020 as they focus on preserving asset quality rather than business expansion,” said S&P’s report.
Shariah-compliant banks are likely to see a greater effect on asset quality indicators since they typically have a higher proportion of exposure to real estate and cannot charge late payment fees, it added.
The agency also expects lending growth to significantly slow.
Explaining its outlook on sukuk, which is the second largest component of global Shariah-compliant financial assets, the agency said it does not see core Islamic finance countries using the instrument as a primary source of funding despite their higher financing needs amid the economic downturn caused by the pandemic.
“We project the volume of issuance will reach $100 billion in 2020 compared with $162 billion in 2019--when Turkey, returning GCC issuers, Malaysia, and Indonesia supported the market,” said S&P.
Corporates will also not support a rise in sukuk this year as they hold on to cash, cut capital expenditure and turn to bank financing.
The rating agency said the industry might see much higher default rates among sukuk issuers, especially those with low credit quality or business plans that depend on supporting economies and market conditions.
S&P sees the takaful sector expanding at mid-single-to-high-digit rates, and the funds industry might see some negative effects from market volatility.
However, it’s not all doom and gloom and S&P does see the pandemic as an opportunity “for more integrated and multifaceted growth with higher standardisation, stronger focus on the industry’s social role, and greater use of fintech”.
Islamic social finance instruments qard hassan, social sukuk, waqf, and zakat can help core Islamic countries, banks, and corporations navigate the current challenges, said S&P.
“These instruments, together with green sukuk--which are taking a back seat this year--and the additional layer of governance Islamic banks and instruments are subject to could help put the industry more prominently on ESG investors’ radar,” said the rating agency.
S&P picked out several key issues that it says show there’s “still room for improvement” in fintech.
“For example, because of the lack of financial inclusion and dedicated digital solutions, workers’ remittances were delayed in some countries as exchange and money transfer outlets were closed.
“Sukuk structuring and issuance were also delayed because of a lack of fintech, despite the creation of a new platform where the issuance process is reportedly fairly streamlined,” said the company, referring to Wethaq that was launched last year in the UAE and that received a fintech experimental permit in June this year from Saudi authorities.
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