In a new article called ‘Islamic finance in 2018: slow growth is the new normal,” S&P says it believes the Islamic finance industry will continue to expand this year, but lose some momentum in 2018.
The industry’s assets reached $2tn at year-end 2016. “Even though Sukuk issuance accelerated in the first half of this year and will likely stay strong in the second half, we don’t believe this growth rate is sustainable,” said S&P head of Islamic finance Mohamed Damak. “We think stronger growth is possible if, together, supervisory bodies and market participants achieve greater standardization, resulting in a truly global industry.”
The current economic situation in core Islamic finance markets and depreciation of local currencies have weighed on the industry’s performance in 2016 and 2017. The lack of product and market integration constrains growth as does the absence of standardised Shari’ah interpretation and legal documentation.
“Integration, standardisation and higher interest in responsible finance could be a game changer, but only in the medium term,” Damak said. Closer integration may also lead to increasing Sukuk issuance, which could reduce Takaful operators’ exposure to riskier real estate and equities investments or help banks manage their liquidity. Sukuk could also provide investment funds with additional fixed-income revenue, and encourage a shift toward more profit-and-loss sharing instruments.