Three accelerators to boost Islamic finance growth: S&P

The three accelerators according to the ratings agency are: Inclusive standardisation, Fintech and ESG opportunities

Image used for illustrative purpose.

Image used for illustrative purpose.

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Three accelerators could return the Islamic Finance industry to the days of double-digit growth according to S&P Global Ratings.

At its annual Islamic Finance media roundtable, S&P said that it expects the industry to continue to grow slowly. However, three accelerators could help the industry get back on track for strong growth, if there is a coordination between the different stakeholders.

The three accelerators according to the ratings agency are: Inclusive standardisation, Fintech and ESG opportunities.

“If you look at the growth rate for 2018, it’s been at around 2 percent and we think that in 2019-2020, a 5 percent growth rate would be an appropriate assumption,” Mohamed Damak, senior director & global head of Islamic Finance, Financial Institutions Ratings at S&P said at the roundtable.

GCC Islamic banks’ total assets will increase by mid-single digits over the next 12-24 months according to S&P. The ratings agency also said that it believes that only a major increase in geopolitical risk or a significant drop in oil prices could weaken the credit profile of GCC Islamic banks.

For the year 2018, Islamic banks in the Gulf region expanded slower than their conventional peers for the first time in five years. However, S&P said that GCC Islamic banks have strong fundamentals in terms of capitalisation, liquidity, asset quality, profitability, total assets and geography.

On the sukuk market, Damak said that after a stagnation in 2018, the sukuk issuance has recovered in 2019.

“[In] 2019 so far we had a very strong performance,” he said. “The total volume of issuance until the end of August is up by 34 percent to $113 billion vs $84 billion for the same period last year.”

“Also the foreign currency issuance is up by 35 percent to around $24 billion vs almost $18 billion in 2018 during the same period,” Damak added.

Indonesia led the good performance, increasing its issuance volume from $8.9 billion in August 2018 to $19.3 billion in August 2019. Turkey also increased its issuance volume significantly from $3.7 billion to $11.4 billion.

Accelerators for faster growth

The first accelerator is the inclusive standardisation, which according to S&P is the standarisation of Sharia interpretation and legal documentation that factors in the requirements of all stakeholders.

For issuers, inclusive standardisation would mean less complexity and time needed to put together their sukuk and tap the market, S&P said, adding that the process should be equivalent from a time, effort and price perspective to issuing a conventional bond.

For investors, inclusive standardization means the capacity to understand the risks related to their instruments and avoid situations where they lose money because they, or any other stakeholders have interpreted the legal provisions of sukuk contracts in a specific way.

For Sharia scholars, it means factoring the requirements of the market and creating some room for innovation.

The second accelerator according to S&P is Fintech disruption. The ratings agency argues that Fintech can help the industry in four ways:

-Ease and speed of transactions: particularly true for payment services and money transfers.

-Traceability of transactions: Could help reduce exposure to risks related to transaction security or identity theft.

-Greater accessibility of Islamic finance services: Fintech could help the industry broaden its reach and tap new customer segments currently excluded from the banking system.

-Improved governance: Regulatory technology could provide the Islamic Finance industry with robust tools to achieve compliance with regulations and Sharia requirements, assuming agreed Sharia standards are in place.

The third accelerator is ESG opportunities. Islamic finance shares links with ESG considerations and the broader aim of sustainable finance, according to the ratings agency.

As regulators and policymakers around the world seek to establish a more sustainable, stakeholder-focused, and socially responsible financial system, the ratings agency said that it sees areas where Islamic Finance and sustainable finance align.

(Reporting by Gerard Aoun; Editing by Mily Chakrabarty)


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