The global Islamic finance industry is expected to show low-to-mid-single-digit growth in 2020-2021 after 11.4% in 2019 following strong sukuk market performance, said S&P Global Ratings in a new report.
This is due to the significant slowdown in core Islamic finance economies in 2020, amid measures implemented by various governments to contain the COVID-19 pandemic, and the expected mild recovery in2021.
Despite the challenging environment, S&P has highlighted opportunities to accelerate and unlock the long term potential of the industry. In particular:
1. Islamic finance social instruments can help core countries, banks, companies and individuals economically affected by the pandemic navigate current conditions, with market participants eyeing Qard Hassan, Zakat, Waqf, and Social Sukuk.
The Islamic Development Bank (IsDB) was a first mover with its $1.5 billion sustainability sukuk, which will reportedly be used to help member countries cope with the effects of the pandemic, particularly in the health care and small and midsize enterprises segments.
Similar issuances are expected in core Islamic finance countries and they could help put the Islamic finance industry back on environmental, social, and governance (ESG) investors’ radar, the report said.
2. Streamlining sukuk issuance will restore its attractiveness to issuers. Issuing sukuk remains more complex and time consuming than conventional bonds. As with previous crises, the pandemic has shown that when Islamic finance issuers need swift access to capital markets, they typically use conventional instruments.
However, there are some exceptions including issuers with already-established programs or that can tap a recent issuance; issuers that are under stress and need to access all available funding sources; or issuers that are domiciled in jurisdictions where the sukuk process is streamlined. Because of the pandemic, stakeholders are realizing the importance of inclusive standardization.
3. Lockdown measures, implemented by various countries around the world, have also shown the importance of leveraging technology and creating a nimbler Islamic finance industry. Higher digitalization and fintech collaboration could help strengthen the resilience of the industry in a more volatile environment and open new avenues for growth. However, recent months have demonstrated that there is still room for improvement, particularly for sukuk issuance, compliance with regulations, and ease and speed of execution.
With the right coordination between different Islamic finance stakeholders, the industry can create new sustainable growth opportunities that serve its markets. Moreover, thanks to its key principles, Islamic finance can help mitigate the effects of the pandemic on core countries and contribute to shared prosperity.
However, the industry is more than ever in need of strong and decisive reforms to enhance this contribution. Almost 50 years ago, the promoters of Islamic finance succeeded in unearthing a new industry and it is now the responsibility of all stakeholders to ensure that it can reach its full potential. – TradeArabia News Service
Islamic finance industry likely to slow in 2020-21: S&P
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