Assets held by Shariah-compliant financial institutions worldwide will expand to approximately $3trillion from the current $2trillion in the next few years, despite moderate growth and stronger headwinds Islamic finance industry faces in 2016.
Standard & Poor's Ratings Services said 2016 would be a crossroads for Islamic finance with headwinds, including the possible negative impact of much lower oil prices and the prevailing low interest rates in most major developed countries, slowing the industry growth.
"Offsetting these negatives are factors such as advancements in standardisation for Islamic finance products that could attract new players, the potential lessons for the industry from bank resolution regimes in conventional finance, and the benefits from implementation of Solvency II for many insurance companies in 2016," S&P analysts said on Sunday ahead a conference it is hosting in Dubai to discuss "Prospects for Islamic finance."
The Islamic finance industry's current and expected trends, and the increasing role of regulation and the way it shapes and supports market development will be a particular focus of the 4th Annual Islamic Finance Conference opening today, it said.
"In our view, after 20 years of solid growth, the industry has achieved a critical mass that enables it to face increasing headwinds. Still, the reality of declining oil revenues could start to take a toll on governments' budgets and economic growth in core markets for Islamic finance. Our 2015 conference will discuss the perspectives on recent market development and regulatory frameworks," said Stuart Anderson, Managing Director & Regional head, Middle East, Standard & Poor's.
Anderson pointed out that the industry's move toward product standardisation has accelerated over the past couple of years, with increasingly similar products and sukuk structures being used across different countries.
Higher standardisation could help in attracting new players, while leaving space for innovation. The moves in conventional finance toward the implementation of bank resolution regimes and the bail-in of certain categories of liabilities could spill over into Islamic banking. For example, Islamic banks have so far not strictly applied profit and loss sharing, which is embedded in the principles of Islamic finance, he said.
"We think that, with the rollout of bank resolution regimes in conventional finance, applying this principle more strictly in Islamic finance could be smoother," said Anderson. Global sukuk issuance volumes have dropped by about 40 per cent since the beginning of 2015. "The fall stems mainly from the Central Bank of Malaysia's decision to switch out of sukuk to other liquidity management instruments for Malaysian Islamic banks. In other countries, however, Islamic finance has continued to attract significant interest, and its ethical nature is seducing some clients beyond its natural reach", said Mohamed Damak, global head of Islamic Finance for S&P.
S&P analysts felt that the advance of Islamic finance into non-Muslim countries has stalled over the past year, mainly due to regulatory hurdles and the generally low interest rate environment that makes other funding sources more attractive.
"We anticipate that assets held by Islamic financial institutions worldwide - currently totalling about $2 trillion by our estimates - will expand to approximately $3.0 trillion in the next few years. We expect the pace of Islamic finance growth will moderate in 2016, compared with advances over the past couple of years, chiefly because of the now less supportive economic environment in the industry's two major growth engines, Malaysia and the GCC."
In the UAE, Shariah-compliant assets have crossed the $100 billion milestone for the first time. Islamic banking penetration in the UAE currently stands at 21.4 per cent and represents a 14.6 per cent share of the global market. The industry in the UAE is growing at more than twice the rate of conventional banking, according to EY's report based on a study. The Islamic banking sector in the Emirates is on track to achieve $263 billion of Shariah-compliant assets by 2019.
The projected size of the Islamic banking sector in the UAE is expected to account for almost 15 per cent of the world's six core Islamic markets estimated to hit $1.8 trillion by 2019. Global Islamic banking assets witnessed a compound annual growth rate of around 17 per cent from 2009 to 2013.