The Islamic finance industry will expand this year but lower oil prices and a slower economic growth could force the shariah-compliant financial sector, a key area marked for growth by financial hubs in the Middle East and Asia, to lose momentum, S&P Global Ratings has said.
The industry’s assets reached $2 trillion at the end of 2016, slightly below S&P’s September forecast due to local currency depreciation and tepid economic performance in some of the “core Islamic finance countries”, the rating agency said.
The economies in the wider Middle East and the North Africa (Mena), especially in the Arabian Gulf region, which account for about a third of the world’s proven oil reserves, have slowed down on the back of lower oil prices, as governments that rely heavily on hydrocarbons for revenue, were forced to cut spending. Sovereigns and some of the major corporations and financial institutions, have turned to conventional and Islamic debt markets to address their funding needs.
Issuance of sukuk – bonds that adhere to Islamic principles – remained robust during 2016 and 2017, however that may not be the case next year, the rating agency said.
“We think that 2018 is less certain as we don’t see some of the large issuances of last year repeating next year,” Mohamed Damak, a senior director and global head of Islamic finance at S&P Global Ratings said.
Islamic finance is viewed as a key growth area by financial hubs in the Middle East and Asia. Dubai, the commercial and business hub of the Middle East, is aspiring to become the leader in Islamic economy and Dubai Islamic Economy Development Centre (DIEDC), set up in 2013, announced in May that the emirate is getting closer to its goal.
S&P however said that globally, economic performance of core countries, fragmentation and lack of integration by business line and geography, and an absence of a strong response to the long-standing debate about standardisation are some of the factors that could determine the sector’s pace of growth in the second half of 2017 and 2018.
Despite the prospects of a slower expansion, Mr Damak said Islamic finance has much to offer the world’s economy.
“We see a natural connection between Islamic finance principles, responsible finance, sustainable development goals, and impact investing,” he said. “All aim to create a more equitable financial system that has a positive tangible impact on the economy and population.”
The contribution of Islamic finance at global state has so far been limited by the industry’s relatively small size and structure, added Mr Damak.
Copyright reserved 2017 – The National