S & P Global Ratings has projected that the global Islamic finance industry will see double-digit expansion again between this and next year after 10.2 per cent growth in total assets in last year.
In an executive summary by Senior Director, Financial Institutions Ratings, S & P Global Ratings, Dr. Mohamed Damak, S & P Global Ratings stated that Islamic finance 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 funds industry.
“This year, we think higher commodities prices will underpin a stronger recovery in many core Islamic finance markets,” S & P Global Ratings stated.
The report however noted that the Islamic finance industry is still held back by structural weaknesses, namely the complexity inherent to transactions and the correlation of performance with oil prices given concentration in commodities-exporting countries.
The report pointed out that sustainability and digitalisation could unlock growth opportunities provided some prerequisites are fulfilled.
S & P Global Ratings had in a previous review stated that the latest auditing standard set out by AAOIFI would help to strengthen governance and growth of the Islamic finance market.
In a review of the new standard, S & P Global ratings stated that external auditing of Sharia compliance will likely strengthen governance in Islamic finance.
According to the global rating agency, the new standard sets out criteria for external auditing of a financial institution’s Sharia compliance and provides some guidance on the key considerations, when performing this exercise.
Damak had noted that while there were no unified Sharia rules that all Islamic financial institutions must follow, the new standard by AAOIFI addresses this gap by creating a hierarchy of the existing standards and regulations.
“In our view, enforcing the new auditing standard should enhance Sharia governance and market discipline in Islamic financial institutions,” Damak stated.
He pointed out that while AAOIFI does not specify if the standard would apply to market instruments issued by entities that are not subject to internal Sharia audit, such as corporate or sovereign sukuk issuers, extending the practice of external audits to these instruments could also help strengthen their credibility.
Global Islamic finance assets had been projected to rise to $3.69 trillion by 2024 as latest data showed a major surge in Islamic finance activities.
The 2020 Islamic Finance Development Report had projected that global Islamic finance assets might rise to $3.69 trillion by 2024 after posting its recent highest growth of 14 per cent to close 2019 $2.88 trillion.
The 2020 Islamic Finance Development Report was a collaborative effort of the Islamic Corporation for the Development of the Private Sector (ICD) and Refinitiv, one of the world’s largest providers of financial markets data and infrastructure. ICD is the private sector development arm of the Islamic Development Bank (IsDB).
The report noted that Islamic finance assets increased 14 per cent to $2.88 trillion in 2019, the highest recorded growth for the industry since the global financial crisis.
According to the report, global Islamic finance assets increased by 14 per cent yearly totalling $2.88 trillion in 2019. Islamic Finance assets of Gulf Cooperation Council (GCC) reached $1.2 trillion in 2019, followed by Middle East and North Africa (MENA) at $755 billion, excluding the GCC, and Southeast Asia at $685 billion.
The Islamic banking sector contributes the bulk of the global Islamic finance assets. The sector grew 14 per cent in 2019, equating to $1.99 trillion in global assets. This compares with just one per cent growth in 2018 and an average annual growth of five per cent over the period from 2015 to 2018.
The report indicated that the top five developed countries in Islamic finance were Malaysia, Indonesia, Bahrain, United Arab Emirates (UAE) and Saudi Arabia. Indonesia recorded one of the most notable improvements in the Islamic Finance Development Indicator (IFDI), moving into second place for the first time due to its high knowledge and awareness ranking.
The report covered 135 countries and was based on five key metrics comprising of quantitative development, knowledge, governance, awareness, and corporate and social responsibility (CSR).
According to the report, green and socially responsible investments (SRI) increased in the UAE and Southeast Asia in 2020. The pandemic was a game changer as several Islamic banks reported losses and reduced profits throughout the year. The pandemic has also led to growth in some areas of the industry as some regulators turned to Islamic finance to mitigate the economic impact.
Corporate Sukuk issuance has also picked up after a cautious halt in the first quarter of 2020. The report indicates that companies are taking advantage of low borrowing costs to shore up their finances, while the pandemic continues to batter trade and economies.