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S&P Global Ratings expects real GDP growth in the GCC economies to slow significantly in 2023-2024 compared to 2022, mainly due to lower oil production.
“However, we believe that the performance of Saudi Arabia’s banking system will continue to underpin a significant portion of the expanding Islamic finance industry, which will grow globally by about 10 percent,” S&P said.
The GCC countries, mainly Saudi Arabia and Kuwait, fueled 92% of the growth in Islamic banking assets. In Kuwait, this was mainly due to the acquisition of Ahli United Bank (AUB) by Kuwait Finance House (KFH).
abide by sharia law
Over the next few years, S&P expects the latter to convert its traditional activities to Shariah compliance under its acquisition plan. In Saudi Arabia, the implementation of Vision 2030 and continued growth in mortgage lending supported performance in 2022.
In its report, Islamic Finance 2023-2024: Growth outside core markets remains elusive, S&P said in the absence of a new major government investment cycle in other GCC countries, growth of around 5% appears to be is reasonable.
Meanwhile, sukuk issuance continues to spur expansion in the sector despite a slowdown in overall issuance. “While we generally expect fewer issuances in 2023, we still believe that new issuances will outstrip maturing sukuk, leading to another positive contribution from the sukuk market to industry growth in 2023.”
structural weakness
Still, structural weaknesses limit the sector’s wider geographic and market appeal. “As we have stated in our previous reports, we believe that progress towards greater standardization – such as partial support for the digitization of sukuk issuance – could enhance the sector’s structural growth potential.”
At the same time, core Islamic finance players are increasingly focusing on topics related to sustainable development, which will create new opportunities for the industry. S&P expects the contribution of sustainability-linked Sukuk to continue to increase over the next 12-24 months, albeit from a low base.
favorable dynamics
Despite forecasting a slowdown, S&P sees global Islamic financial assets growing in 2023-24, largely due to favorable dynamics in some core markets.
Islamic funds and the Islamic insurance sector are also likely to continue to expand. S&P continues to exclude Iran from its calculations due to non-disclosure by Iranian banks.
Still, structural weaknesses limit the sector’s wider geographic and market appeal.
Corporates are likely to contribute to circulation, especially in countries where governments have announced transformational plans. This is the case in Saudi Arabia, where the ability of the banking system to finance multiple projects related to the implementation of Vision 2030 will be constrained.
Sukuk Program
Issuers with high financing needs, such as those in Egypt and Turkey, may also use the Sukuk market as part of their strategy to mobilize all available resources. Egypt, for example, established a $5 billion Sukuk program and issued its first sukuk in early 2023, totaling $1.5 billion.
“We know this has attracted significant investor interest, with demand exceeding $6 billion, with 59% allocated to investors in the Middle East and North Africa. The yield on the three-year sukuk was set at 10.875%, which was then compared to 2026 Yields on Egyptian conventional bonds to maturity are roughly the same.”
Overall, S&P believes new issuance will continue to outstrip maturing sukuk. S&P noted that foreign currency-denominated sukuk issuance has fallen sharply over the past 12 months, but mainly due to lower global liquidity and higher costs. Additionally, the market continues to be impacted by uncertainties around regulation and standardization.
underlying asset revaluation
For example, the challenges associated with the adoption of the AAOIFI Standard59 in the UAE have led to a sharp decline in foreign currency-denominated Sukuk – from around US$10 billion per year in 2018-2020 to around US$4 billion per year in 2021-2022. The introduction of an underlying asset revaluation mechanism may be one of the next hurdles the market may face.
S&P will continue to consider any future developments related to regulation and standardization and how they may affect future offerings. Should Sukuk become an equity-like instrument, S&P believes investor and issuer appetite and pricing mechanisms could change significantly.
Sustainability and digitization can help the Sukuk market underpin future contributions to the Islamic finance industry. — trade arab news agency
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