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Monday, 13 October 2014

GCC Islamic finance prospects bright

The GCC Islamic finance industry is expected to maintain its rapid growth over the coming years despite mixed results across the sectors in 2014, according to Standard & Poor’s Ratings Services (S&P).

The industry’s expansion is expected to be driven by the GCC’s robust economic prospects, continued infrastructure needs and rising issuance from governments and government-related entities.

S&P managing director and regional head (Middle East) Stuart Anderson (pictured) said, “We remain upbeat on the outlook for the GCC Islamic finance industry, but we have seen mixed fortunes across sectors this year and a broad spectrum of structural issues continuing to pose challenges. Despite growth, the industry remains a demand-driven market, with limited supply. The expansion and enhancement of existing Islamic finance centres in the GCC, and a more transparent regulatory environment are critical to accelerate growth.

“S&P’s 3rd Annual Islamic Finance Conference in Dubai this week will discuss the outlook for the industry with a focus on the role of regulation in facilitating its development.”

Prospects for the sukuk sector will be one of the event’s key themes. The sector has registered healthy volumes in 2014 with $20.3bn worth of issuances in the GCC (as of October 5); 27.3% higher than the same period last year.

The fall in the issuance of corporate and infrastructure sukuk by almost a third compared to the same period in 2013 was more than compensated by higher issuance from governments and financial institutions. S&P believes the sukuk issuance in 2014 is on course for a 5% growth from last year. Refinancing needs from maturing sukuk and the good economic prospects for the GCC underpin our expectations.

Meanwhile, GCC Islamic banks have continued to increase their market share in the region. Although S&P expects the growth of Islamic banks to gradually converge with that of their conventional peers over the next decade, the market share of Islamic banks will continue to rise in the next few years. S&P expects total GCC (Gulf Co-operation Council) banking assets - both conventional and Islamic - to rise to $2tn by end-2015 from $1.7tn in 2013. In contrast to the Islamic banking sector, the takaful sector in the GCC underperformed their conventional peers. Continued resistance to the concept of insurance has left the market dominated by compulsory lines of business and weakened by fierce price competition.

S&P estimates the GCC takaful sector to generate just over 10% of total market premiums. The sector is dominated by medical and motor insurance, while the provision of life savings products, the mainstay of mature markets, is still undeveloped in the region.

Current and expected trends in Islamic finance, especially the increasing role of regulation in shaping market development will be key themes of the conference in Dubai on Tuesday.

The role of regulation in market development will be a major focus of the S&P event. The ratings agency believes that the Islamic Financial Services Board’s (IFSB) revised capital adequacy standard could give the industry an opportunity to resolve some of its long standing structural weaknesses.

(Gulf Times / 12 October 2014)
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