A flourishing industry
Islamic finance is gaining popularity across the globe and Islamic banking assets are expected to reach $1.4 trillion this year, according to a report.
The share of Islamic assets in core Muslim majority markets is steadily rising with Saudi Arabia’s reaching 49 per cent and various other markets expanding with double-digit growth, according to the report released by Thomson Reuters ahead of the Global Islamic Economy Summit, starting today in Dubai.
The existing Islamic finance market stands at an estimated $1.35 trillion in assets based on disclosed assets by all Islamic finance institutions — full Shariah-compliant as well as those with shariah windows — covering commercial banking, funds, sukuks, takaful and other segments.
The breakdown by category includes $985 billion for commercial banking, $251 billion for sukuks, $44 billion for Islamic funds and $26 billion for takaful, or insurance.
“This represents a very small proportion of the global financial assets, it is a fast growing segment rising at 15 per cent to 20 per cent a year in many of its core markets,” the report says.
In addition, an estimated $628 million of Islamic microfinance assets is also a growing segment although only representing about 0.8 per cent of the estimated total global microfinance market of $78 billion in 2011.
Globally, banking assets, excluding funds, insurance and other distinct segments, accounted for $123.7 trillion in assets in 2012. Current Islamic banking assets amount to $985 billion, comprising less than one per cent of global assets.
The gap between the potential and existing Islamic finance market remains large. Assuming an optimal scenario in core Islamic finance markets of countries of the Organisation of Islamic Cooperation, or OIC, the 2012 potential of the Islamic banking universe could reach $4,095 billion in assets within the OIC. The optimal scenario assumes full regulatory support for Islamic finance in OIC markets and a 100 per cent Islamic banking penetration with the proportionate Muslim demographic of OIC countries.
With a large segment of the global low-income population concentrated in Muslim majority countries, it is also estimated that 72 per cent of people living in Muslim-majority countries do not use formal financial services. This makes Islamic microfi-nance an important market given Islamic finance law sensitivities among all segments of the Muslim popula-tion.
The Islamic microfinance market is also a growing segment but with a huge gap relative to its potential. According to the study released by the Consultative Group to Assist the Poor, or CGAP, the estimated size of Islamic microfinance today is $628 million in managed assets, which is 0.8 per cent of the estimated total global microfinance market of $78 billion. Between 2006 and 2011, Islamic microfinance market has quadrupled, according to the CGAP study.
Attracting global banks
Islamic finance has attracted the attention of global finance while becoming a major economic driver for the economies of Muslim-majority countries.
Global banks such as Deutsche Bank, HSBC, Standard Chartered and Citi have their investment banks serving as lead arrangers on sukuk issuances around the world.
“Many global banks have an Islamic window or separate Islamic banking subsidiaries, while the United Kingdom’s government has become the first non-Islamic country to announce a major sukuk issuance,” the Thomson Reuters study says.
UK Prime Minister David Cameron recently announced a £200 million sukuk to be issued in 2014. This issuance hopes to make England at par with other global leaders within the Islamic finance industry. It is also expected to strongly strengthen the domestic Islamic finance industry. The current legislation within the UK supports sukuk’s unique infrastructure and has resulted in over $34 billion in sukuk listings. In parallel, the London Stock Exchange will create an index to give a more accurate rating to sukuks.
Demand for sukuk
The demand for sukuk, or Islamic bonds, is expected to almost double in value over the next four years, driven by strong economic growth in the Middle East and Asia and their spread to new markets, according to a report by Thomson Reuters.
Global demand for sukuk is expected to reach $421 billion by 2016 from $240 billion in 2012, according to a Thomson Reuters survey of 169 investors and sukuk arrangers, mainly from the Gulf region and Asia, conducted in August and September.
According to Thomson Reuters, sukuk issuance in all currencies fell by more than a quarter to $79 billion during the first nine months of 2013 compared to $109 billion in a similar period a year ago. It attributed the decline to a rise in global credit spreads since May due to the prospect of US monetary tightening. However, the same report forecasts that sukuk issuance would resume rising rapidly next year, hitting $130 billion in 2014.
Dubai, which is facing stiff competition from London and Kuala Lumpur in attracting Islamic finance, has made a significant progress in sukuk listings this year and lifts the emirate’s leadership vision to become an international hub of Islamic economy. The emirate’s capital markets are expected to cross $16 billion sukuk listings by year-end. So far, nine sukuks worth approximately $13 billion are listed on Dubai’s exchanges this year, the third largest in the world, underlining the growing success of the “Dubai, the Capital of the Islamic Economy” initiative.
Referring to some potential upcoming sukuks, Thomson Reuters report said Tunisia has aimed to issue one billion dinars ($634 million) worth of Islamic bonds, the first time the country had used the developing sector to fund public borrowing.
“One billion dinars are to be available from the Islamic bonds by 2013 budget for the first time,” Finance Minister Slim Besbes told state radio. The issuance is now expected in February or March of 2014.
While the fall of the Muslim Brotherhood means less political support for Islamic finance development in Egypt, both economic pressure and strong consumer demand means the industry should continue to grow, albeit slowly. A planned major sovereign sukuk programme seems shelved for now but there is no official “no” either.
Pakistan’s Meezan Bank is planning to issue a $68.5 million sukuk for a telecommunications operator in the country. The Islamic bond will have a five- to 10-year maturity period.
France’s second-largest bank will also become the second bank in Europe to issue a sukuk and the first bank within the region to issue one in Asia. Societe Generale first sought the expertise of Hong Leong Islamic Bank before planning to issue the $300 million sukuk. The approval has been granted by the central bank and the funds are expected to be re-invested in the purchase of assets in Dubai, which also serves as the Socite Generale’s headquarters.
FWU AG Group, a Munich-based financial services company, recently issued a $55,000,000 sukuk — the first-ever sukuk issuance by a German corporate and the largest ever sukuk from a European corporate. This is also the first sukuk to utilise a computer software programme and intellectual property rights under an Ijara structure.
Moreover, Abu Dhabi Islamic Bank, or ADIB, attracted a spec-tacular order book of over $15 billion for the $1 billion perpetual sukuk, which has no maturity date. The bank can choose to repay the bond on certain dates from 2018 if it wishes. The hybrid sukuk was the first to be publicly issued by a bank to meet the Tier 1 capital requirement in Basel III global banking standards that will be phased in around the world over the next several years — although ADIB privately placed a $2 billion Tier 1 note in 2009.
Almarai became the first corporation in the Gulf to issue a hybrid sukuk worth $435 million. It enables Saudi food producer to diversify its funding sources to pursue its expansion strategy in a cost-effective way.
(Khaleej Times / 25 Nov 2013)---
Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com