x Abu Dhabi, UAEFriday 28 July 2017

World Islamic Economic Forum shows Islamic finance is a global force

The World Islamic Economic Forum starts in London on Tuesday, held for the first time outside Asia. The attention the event has mustered is testament to the growing influence of Islamic finance and how the wider world is taking note.

Stuart Anderson, MD of Standard and Poor's in the Middle East. Pawan Singh / The National
Stuart Anderson, MD of Standard and Poor's in the Middle East. Pawan Singh / The National

As the first World Islamic Economic Forum outside Asia starts in London on Tuesday, Islamic finance is now a major force in global economics.

Standard & Poor’s forecasts the industry will double to US$2 trillion from 2011 to 2015, aided in part, by more sukuk issuances by GCC players and the faster growth of Islamic banks.

Once considered an obscure corner of global banking, Islamic finance is now gaining traction. Here, Stuart Anderson, the managing director and regional head of Standard & Poor’s Middle East, and Timucin Engin, an associate director at S&P, talk about the challenges for the industry.

What is the outlook for global Islamic finance?

Mr Anderson: “We remain upbeat on the outlook for the global Islamic finance industry but are increasingly conscious that, as it achieves critical mass, the industry will be exposed, more than ever, to the volatility of international markets. While growth has continued, we have seen mixed fortunes across sectors and a broad spectrum of structural problems continue to pose challenges.”

What about the sukuk market?

Mr Anderson: “The global sukuk market remains limited in size and a handful of large issuances can transform what appears to be a slowdown story in an upbeat one. In the past two years, several ‘jumbo-sized’ issuances, in excess of US$3 billion to $4bn, have significantly accelerated growth. Good economic growth and faster recovery in GCC and Asia – the twin engines of the sukuk market – are expected to continue driving rapid growth.”

What is holding back the sukuk market here from faster growth?

Mr Engin: “Capital markets here are really in their infancy. In the US, around two-thirds of credit is with capital markets. If you look at the GCC, around one third of the credit is with capital markets. Globally, there is a trend of more credit being taken by capital markets, versus banks. If you look at the GCC, the total banking system is $1.6bn. If you look at the outstanding bonds sukuk, it is less than $200 million; take out the sovereign issuances it is less than $120m. Gradually, capital markets in the GCC will see growth.”

What’s in the pipeline this year?

Mr Anderson: “We have a pipeline of new ratings we’re working on and one trend we’re seeing is a willingness of new to market issuers prepared to think of going for the first time for a sukuk. That might not have been the case previously. But also generally, a greater willingness to consider a sukuk as the default option in this market in this region so long as it meets their criteria, for example, the coupon is at the right price point and they can see the demand there. We’re seeing a good momentum of issuers willing to see a sukuk as the default option.”

How significant is the Islamic banking sector in the region?

Mr Engin: “In terms of potential growth for Islamic banking in the region we don’t have specific data. We expect overall banking growth to remain strong, much stronger than in the developed market. We expect Islamic banks to grow faster than the conventional banking system. It’s hard to pinpoint the exact size of the system as you have conventional banks also providing Islamic services in some countries but we believe Islamic finance assets are around a quarter of the total system. And we think this will continue to grow.”

You’ say a significant portion of Islamic finance transactions in this region falls below the radar. What you mean by this?

Mr Anderson: “There’s a huge shopping list of challenges and to-dos for the Islamic finance industry globally and one of them is the point of scale and the fact it is still a very small part of the global financial system. If you take the example of international banks in the region like HSBC, Standard Chartered and RBS they’re advancing significant Islamic banking products to corporates on a club, syndicated basis. So it’s not all about the sukuk market. There’s a huge amount of commercial lending by regional and international banks and the challenge for the industry is that a lot of those transactions are not being reported or captured accurately. “

How have GCC Islamic banks fared since the global financial crisis?

Mr Engin: “The UAE was one of the countries hit the most in terms of asset quality and financial performance since 2008. There were various reasons behind that, like exposure to government-related entities, particularly in Dubai. The lending growth decelerated since then as banks were trying to digest the growth. Abu Dhabi grew faster than Dubai because they were in a better place. That translated into lower growth for Islamic banks, take the case of banks in Dubai like Emirates Islamic Bank, Dubai Islamic Bank, Noor Islamic Bank. They all had to significantly decelerate the balance sheet growth but that does not mean that the long term opportunities are not bright.”

What is behind the strong performance of GCC Islamic banks?

Mr Engin: “We believe that GCC Islamic banks have grown very fast because of significant direct and indirect support from governments and authorities and we expect this to continue. For example, the granting of banking licences is a discretionary power of the state authorities and most of the new banks in the GCC region are Islamic. State authorities also control the system allowing conventional banks to change into Islamic ones – Bank of Kuwait & The Middle East, Sharjah Islamic Bank, and Dubai Bank have all done this. In addition, the authorities control the opening of dedicated business lines in Saudi Arabia, Qatar and the UAE, and the acquisition of Islamic banking subsidiaries.”

tarnold@thenational.ae