S&P: Global Islamic finance to continue expansion in 2022-2023

Standard and Poor’s (S&P) Global Ratings believes the global Islamic finance industry will see double-digit expansion again in 2022-2023 after a 10.2 percent growth in total assets in 2021 (excluding Iran).

Growth last year was supported by Islamic banking assets in some Gulf Cooperation Council (GCC) countries and Malaysia, Sukuk issuances exceeding maturities, and the solid performance of the Islamic fund’s industry, according to a new S&P report titled ‘Islamic Finance 2022-2023: Same Constraints, New Opportunities’.

Thanks to higher commodity prices and the relative resilience of many core Islamic finance countries to the Russia-Ukraine conflict, Standard expects the Islamic finance industry will continue to expand about 10 percent annually, supported by:

• Economic acceleration:   It expects economic growth to accelerate in most core markets, particularly the GCC and Malaysia, thanks to higher oil prices. Indonesia is also expected to see stronger economic growth. Meanwhile, S&P forecasts a significant slowdown in Turkey following double-digit expansion in 2021. 

• On the other hand, S&P points out global headwinds that are clouding its outlook including the Russia-Ukraine conflict and continued stubbornly high inflation, fueled by food and commodity prices, as well as the Chinese authorities’ lockdowns in major cities and regions to stem Covid-19 and the US Federal Reserve and other major central banks ramping up their fight to rein in inflation.

• Faster bank asset growth:   With the more supportive economic outlook for many Islamic finance countries, bank financing growth is expected to accelerate. In Saudi, continued mortgage demand and the implementation of Vision 2030 projects will create opportunities for industry expansion. In other GCC countries, more positive economic sentiment, government spending, and investments will help accelerate growth. In Southeast Asia, S&P expects the $290 billion Islamic banking market to expand at a compound annual growth rate of about 8 percent over the next three years.

• Declining Sukuk volume but increasing stock:  S&P Global Ratings forecasts total Sukuk issuance will decline in 2022. This compares with stabilization at $147.4 billion in 2021, versus $148.4 billion in 2020, and the 105 percent increase in foreign-currency-denominated issuance over the same period. Several factors are at play. Shrinking global liquidity and increasing complexity related to regulatory standards are likely to hold back Sukuk issuance in 2022, assuming any adverse Covid-19-related disruption in core Islamic finance countries remains in check. S&P also expects lower financing needs for some core Islamic finance countries and some corporates to remain prudent with their growth capital expenditure after slowly recovering from the pandemic. At the same time, a more supportive economic environment and government spending are likely to create opportunities in commodity-exporting countries.

• The report also notes the total volume of issuance was down 23.2 percent and foreign currency-denominated issuance increased 12.3 percent in Q1 2022 after some issuers frontloaded their plans to benefit from market conditions prior to interest rate rises. Despite the decline in volumes, S&P expects Sukuk issuance to still exceed Sukuk maturing in 2022, which we estimate at about $96 billion.