Solid Demand Will Contribute To Islamic Finance’s Growth

Sukuk issuance will moderate from record highs, takaful premiums will rise steadily and Islamic funds will grow annually at 4%-5%

Islamic banking, sukuk and takaful will benefit from supportive government policies in many countries and strong demand for Shariah-compliant products despite pandemic challenges, according to Moody’s Investors Service in a newly published report.

“We expect Islamic finance to continue rising in 2021 and beyond, maintaining its now long-established growth trend. The industry generally remains underrepresented in countries with large Muslim populations, providing ample room to expand,” says Ashraf Madani, a Moody’s Vice President and Senior Analyst.

Penetration in the core Islamic financial markets of the Gulf Cooperation Council (GCC), Malaysia (A3 stable), Indonesia (Baa2 stable) and Turkey (B2 negative) rose to 32.8% in September 2020, from 31.4% in 2019 and 25.5% in 2013.

“We forecast global sukuk issuance will stabilise in 2021 to around $190 billion-$200 billion, following record issuance of nearly $205 billion in 2020,” adds Madani.

GCC sovereigns will increasingly turn to sukuk issuance given high financing needs due to moderate oil prices and wide fiscal deficits. Corporate issuance, however, will remain limited because of more attractive conventional market opportunities, while new financial institutions will boost sukuk issuance in the sector.

Moody’s also expects the takaful (insurance) market to expand steadily as premiums rise moderately in the next 2-3 years in newly penetrated markets. Conducive digitisation and regulatory improvements will also help to lift growth.

Meanwhile, growth in global Islamic funds under management will continue at a likely annual rate of 4%-5% in 2021-2022, boosted by the growth of Shariah capital markets and resilient demand for Shariah-compliant investments.

Mergers between Islamic and conventional banks in the GCC (where surviving entities are Islamic banks) could also drive one-off increases in assets. Saudi Arabia (A1 negative) will remain the world’s largest Islamic banking market, while the sector will continue to expand in Malaysia. Oman (Ba3 negative) and Turkey will also continue to grow rapidly in Islamic banking.

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