The decline in global oil prices and the weak oil price outlook for 2015 and 2016 are already seen a taking toll on both Islamic banking and the Islamic financial services sector, according to analysts.
Rating agency Fitch has warned that the global Islamic financial services industry could face further pressure in terms of low demand for sukuk issuance due to a combination of factors such as fall in oil prices, potential rise in global interest rates and contraction across global emerging markets.
Fitch Ratings said in a recent report that total new bonds and sukuk (with a maturity of more than 18 months) from the GCC, Malaysia, Indonesia, Turkey, Singapore, Pakistan, Sri Lanka, and Taiwan (GCC+7) declined 27 per cent in the first half of 2015 from a year ago.
Data for the first six months of the year shows bonds were down 30 per cent and sukuks by 16 per cent. In the second quarter of 2015, sukuks accounted for 20 per cent of total new issuance, marginally up from 18 per cent in the second quarter of 2014. In the first half of 2015 GCC sukuk and bond issuance declined 25 per cent year on year.
Global sukuk issuance in July stood near $1.2 billion (Dh4.40 billion), however over the year to the end of July overall issuance volume slipped by 20 per cent as corporations reduced their borrowings. The sovereign issuance is down by 38 per cent year to date, while quasi-sovereign issuance is down by 78 per cent.
The sharp decline in issuance is attributed to a pullback by Bank Negara Malaysia (BNM), which saw a drop in sukuk issuance by 42.5 per cent compared with the same period a year earlier. In addition, the impact of falling oil prices on recurring government spending and investment projects in core markets such as the GCC and Malaysia is attributed to the contraction in deal flows.
While Islamic capital markets are already facing the impact of the economic dynamics of oil price decline, according to global rating agency Standard & Poor’s, Islamic banks in the Gulf region face a gradually weakening operating outlook in 2015-2016, largely due to declining oil revenues.
S&P analysts expect deterioration in the operating conditions for Islamic banks across the GCC region. “After several years of improving returns and strong growth we expect a gradual change in the operating conditions for Islamic banks in the Gulf in 2015–2016, largely as a result of the weakness in oil prices and its effects on regional economies,” said Standard & Poor’s credit analyst Timucin Engin.
Although credit growth is expected to remain largely unchanged for 2015, analysts said deposit growth will slow somewhat due to relatively weaker liquidity conditions and asset quality will gradually deteriorate in line with the economic slowdown.
Global oil prices have plummeted since June 2014, and S&P expects them to remain relatively weak through 2016. Specifically, the agency has forecast Brent crude to average $55 per barrel in 2015, $65 in 2016, and about $75 in 2017.
Given the importance of oil-related revenues to the region’s economies and the ensuing gradual weakening in economic conditions across the GCC economies, analysts expect weakening of credit quality and profitability of Islamic banks.
“These factors will in our view gradually increase credit losses at Islamic banks in 2015, leading to lower net income growth than in 2014,” added Standard & Poor’s credit analyst Suha Urgan.
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