S&P: Islamic Finance to Witness Mild Recovery in 2021

Published June 16th, 2020 - 10:30 GMT
S&P: Islamic Finance to Witness Mild Recovery in 2021
After a strong performance in 2019 explained by higher-than-expected Sukuk issuance, the report said, “We believe Islamic finance industry growth will slow in 2020-2021 due to lockdown measures and ensuing recessions in Islamic finance core countries.” (Shutterstock)
Global Islamic finance industry will return to slow growth in 2020-2021 after a strong performance in 2019 underpinned by a more dynamic Sukuk market, S&P Global Ratings has said in a report released on Monday.

“The significant slowdown of core Islamic finance economies in 2020, because of measures implemented by various governments to contain the COVID-19 pandemic and the expected mild recovery in 2021, explain our expectations,” the report said.

S&P, however, said, “In our view, COVID-19 offers an opportunity for more integrated and multifaceted growth with higher standardisation, a stronger focus on the industry’s social role, and greater use of fintech. This can be achieved through higher coordination between the industry’s different stakeholders.”

After a strong performance in 2019 explained by higher-than-expected Sukuk issuance, the report said, “We believe Islamic finance industry growth will slow in 2020-2021 due to lockdown measures and ensuing recessions in Islamic finance core countries.”

“At the same time, we see an opportunity in the current environment for accelerating and unlocking the long-term potential of the industry. Stakeholders are realising the importance of standardisation as government coffers are depleted and access to Sukuk remains time-consuming and more complicated than conventional instruments. Lockdown measures have also shown the importance of leveraging technology and creating a nimbler industry,” the report said.

Furthermore, industry players have been discussing the potential use of social instruments to help companies and individuals economically affected by the pandemic.

“With the right coordination between different Islamic finance stakeholders, we believe the industry could create new avenues of sustainable growth that serve the markets,” it said.
“We expect Islamic banking to show at best stable total assets or low-single-digit growth. This follows 6.6 percent growth in 2019 thanks to good performance in the Gulf Cooperation Council (GCC), Malaysia, and to a lesser extent Turkey and Indonesia,” the report said.

In 2020, the report said, “We expect a slowdown spurred primarily by measures implemented by various governments to control the COVID-19 pandemic. This slowdown will be somewhat counterbalanced by strong liquidity injections from various central banks to help their banking systems navigate the difficult environment.”

“However, this, together with complexity and lower investor appetite, will contribute to a Sukuk market slowdown in 2020. We project the volume of issuance will reach $100 billion in 2020 compared with $162 billion in 2019 when Turkey, returning GCC issuers, Malaysia, and Indonesia supported the market,” it said.

“The market was, in fact, poised for good performance in 2020 but the pandemic and lower oil prices changed the outlook. Amid tougher conditions, we also don’t see core Islamic finance countries using Sukuk as a primary source of funding despite their higher financing needs,” the report said.

However, the report said, “We think that Turkey might try to tap the market aggressively in 2020 to use all of its available funding options. More broadly, we continue to see the takaful sector expanding at mid-single-to-high-digit rates. Overall, we believe low-to-mid-single-digit growth for the overall industry is a fair assumption over the next two years.”

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