Challenges ahead for Islamic finance as crude prices drop

Dubai - Standard and Poor's Ratings Services said Islamic finance growth will drop to single digits in 2016.

The fast-growing Islamic finance industry is facing headwinds from the oil price plunge amid rapid regulatory changes, and lack of integration, Standard and Poor's Ratings Services said on Monday.
"We think Islamic finance growth will drop to single digits in 2016 from between 10 per cent and 15 per cent over the past decade," S&P said in a report. The ratings agency said that such rapid growth had seen the Islamic finance industry exceed an estimated $2 trillion in value.
"But we now think the industry faces challenges from the decline in oil prices, changes in the global regulatory framework for banks and insurance companies, and its own fragmented nature," said S&P global head of Islamic finance Mohamed Damak.
However, Islamic finance will have the impetus to continue progressing and maintain some growth, S&P said. "We expect the industry will be worth $3 trillion sometime in the next decade. Islamic finance stakeholders' efforts and the industry's contribution to development of the real economy will likely fuel growth," said Damak.
Governments in core markets see Islamic finance as a tool to maintain their investment spending, somewhat countering the negative impact of oil prices on their budgets, the report said.
It added that regulatory changes could help the industry in resolving issues related to the lack of liquidity management instruments and applying more stringently its principle of profit and loss sharing.
"Standardisation of documents and Shariah ruling could enhance industry integration and free stakeholders' capacity to focus on innovation. This development is capturing the interest of major financial institutions, such as the International Monetary Fund and the World Bank, and some advanced countries," S&P said.
Islamic finance is widely recognised as an attractive growth sector for the international financial industry. Islamic funds under management are forecast to grow from $60 billion currently to at least $77 billion by 2019, while research suggests that latent demand could reach $185 billion in the same period.
According to the Thomson Reuters study, world Islamic finance market is set to almost double by 2020 from the current $1.81 trillion to $3.25 trillion, led by banking and Takaful assets.
A recent study entitled "State of the Global Islamic Economy 2015-16" said commercial banking contributes to about $1.34 trillion, while $33.4 billion is contributed by takaful insurance, while sukuks contribute to about $295 billion of the world Islamic finance market.
"It is growing at about 10 per cent per annum, with the significant concentration of wealth in Islamic banking," said Mustafa Adel, acting head of Islamic finance at Thomson Reuters, adding that commercial banking assets is projected to reach $2.6 trillion by 2020.
- issacjohn@khaleejtimes.com