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Islamic banking assets could reach $1.8 trillion by end of 2016

Source:By KHALIL HANWARE | ARAB NEWS/Nov.17/2011

Islamic banks may be bolstered by a nearly doubling of assets within five years, as borrowers seek alternative methods of financing due to a cutback in lending at European and US banks, according to a report by Deutsche Bank.

The bank expects that mortgage financing, particularly in Saudi Arabia, could provide $100 billion in assets to the overall industry.

Analysts at Deutsche Bank predicted in the report that global Islamic banking assets could reach $1.8 trillion by the end of 2016 – up 90 percent on the $939 billion of assets in 2010.

The bank report forecasts that there is over $2 trillion of deleveraging in the US and Europe, creating a financing glut for both struggling countries and countries in developed markets.

"There are two factors that could potentially drive the issuance of Islamic bonds. First, the number of companies and countries that have issued sukuk has already risen significantly and includes countries outside of the Muslim world. There is no reason to expect this trend to reverse. Second, there is likely to be a general increase in bond financing, both conventional and Islamic. With bank financing becoming more difficult to secure owing to the problems that continue to affect the global banking industry, companies may well issue more bonds as an alternative way to raise revenue," Paul Gamble, head of research at Jadwa Investment, told Arab News.

The $50 billion Islamic bonds industry, which currently makes up only 1 percent overall debt issuance, is increasingly drawing issuers, providing significant fee income growth prospects for Islamic financial institutions, Reuters said.

Sukuk issuances have dominated the Gulf region in recent months. However, Gamble said, in the GCC, bonds are underrepresented as a source of corporate financing compared with banks and equity, the other main sources.

"Furthermore, the impact of new banking regulations on project financing mean that bonds will be increasingly used for this as well. All these factors could lead to a significant increase in sukuk issuance," Gamble added.

According to Jarmo T. Kotilaine, chief economist at the National Commercial Bank, said: "As much as Islamic finance, somewhat unfairly, has been criticized for failing to capitalize on the opportunities created by the financial crisis in the West, it is increasingly clear that things are beginning to change."

He said regulatory changes and another period of market turbulence are increasing the pressure on many Western institutions, especially in Europe, and their focus will be on capital raising rather than new credit. This is creating more space in some market segments for new players.

Kotilaine said while Islamic financial institutions have by no means been spared from the crisis, especially in cases where they have had excessive exposures to speculative real estate bubbles, their position is generally much better by comparison. They tend to be located in fast-growing and macroeconomically stable emerging markets. They typically operate in a rigorous regulatory environment and further benefit from their relatively mainstream focus on fairly basic products. This partly a result on the principles underpinning Shariah-compliant finance, partly due to the fact that Islamic finance is still a growth industry which is far from having saturated many markets and product segments. This has shielded them from the kinds of riskier practices one might observe in a more saturated and competitive market.

"It is clear that Islamic financial institutions right now can also benefit from a benign environment for raising funding, especially in the area of sukuk. While sukuk earlier during the crisis were disadvantaged as compared to conventional bonds due to concerns over appropriate structures, as well as a lack of clear precedents and standards for dealing with stress points, e.g. default-type situations, the sukuk risk premium has now disappeared and even  been reversed. At the same time, Western appetite for emerging market bonds has in some cases waned due to risk considerations and the tougher market environment," Kotilaine said.

He added, this year has already seen an all-time record for primary sukuk issuance globally. In recent months, sukuk even in the Gulf (which has generally trailed markets such as Malaysia) has solidly outpaced conventional bond issuance. There is a clear appetite for quality sukuk on the part of Islamic institutional investors and even conventional investors seeking to diversify. This should create opportunities for strong issuers. Some of the strong growth is coming from the take-off of sukuk in new markets, such as Indonesia and Turkey. In a growing number of countries, regulators have eliminated tax and other disadvantages associated with sukuk issuances and in some cases, e.g. Indonesia, the governments have been active issuers.


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