Demand for syariah-compliant instruments rising

Moody’s said Islamic banking assets in key markets would continue to grow at a higher rate compared to conventional peers supported by robust economic activity in South-East Asia and the Gulf Cooperation Council. — Bloomberg

KUALA LUMPUR: Demand for syariah-compliant instruments is expected to continue to rise in 2023, supported by strong economic growth amid robust oil prices and ambitious development agendas in core Islamic markets, says Moody’s Investors Service.

In a research note yesterday, Moody’s said Islamic banking assets in key markets would continue to grow at a higher rate compared to conventional peers supported by robust economic activity in South-East Asia and the Gulf Cooperation Council (GCC), Bernama reported.

It said core Islamic markets, including the GCC, Malaysia, Indonesia and Turkiye, enjoyed strong economic growth in 2022, driven by robust commodity prices and increasing economic diversification that, in turn, supported demand for Islamic financing which is analogous to lending.

“As for previous years, the sector captured most of the market’s credit growth and outpaced conventional peers due to higher demand from both the consumer and corporate sectors.

“We expect growth to keep pace in 2023, driven by robust economic activity, continuous government and legislative support, as well as merger and acquisition (M&A) activity, particularly in the GCC region,” it said.

Moody’s said Islamic financing posted double-digit year-on-year growth in 2022, supported by robust economic activity across all core markets, and continued to outpace conventional credit growth.

As a result, it noted the market share of Islamic financing in core Islamic markets increased to 37.3% of total financing, including conventional bank loans in September 2022, from 34.9% in December 2021 and 33% in December 2020.

The research firm said Saudi Arabia remained the largest market for Islamic finance globally, with financing assets rising to US$496bil (RM2.22 trillion) as of September 2022 from US$438bil (RM1.96 trillion) in December 2021.

“Islamic financing in Saudi Arabia posted double-digit growth for the third consecutive year, as demand from both retail and corporate clients for syariah-compliant products remained steady given strong economic activity, growing by 5.2% in 2022 for the non-oil economy.

“The economic diversification agenda and a cultural affinity for Islamic finance fuelled demand for syariah-compliant financing. We expect Islamic assets in Saudi Arabia to account for 85% of system-wide loans over the next 12 to 18 months, from 83.3% in September 2022.”

Moody’s said Islamic banks in Malaysia are expected to continue growing, supported by initiatives outlined in the government’s Halal Industry Master Plan 2030 and Financial Sector Blueprint 2022 to 2026.

It said Malaysia aimed to become a global gateway for Islamic finance markets in Asia and the Organisation of Islamic Cooperation countries.

“In addition, two of five digital banking licenses were awarded under the Islamic Financial Services Act 2013 in 2022, which will help with the adoption of Islamic finance in Malaysia by tapping underserved or unserved markets,” it said.

Meanwhile, on the sukuk side, Moody’s expected issuance volumes to stabilise in 2023 after two consecutive years of decline, supported by rising financing needs from South-East Asian sovereigns, resilient activity on the banking and corporate side and the realisation of delayed issuances.

“We continue to expect some downward pressure on volumes as a result of lower demand from GCC sovereigns on the back of their strong fiscal positions,” it said.

Moody’s said sukuk issuance declined by 10% in 2022 to US$178bil (RM796il) due to unfavourable market conditions and lower sovereign funding needs in the GCC and South-East Asia, aided by higher commodity prices and robust economic growth.

“We expect issuance activity to level off in 2023, to US$170bil (RM760bil) to US$175bil (RM783bil), supported by financing needs from the Malaysian and Indonesian sovereigns, resilient activity on the banking and corporate side and realisation of delayed issuances,” it said.

All in all, Moody’s said Malaysia is expected to consolidate its dominant position in the market, followed by Saudi Arabia.

“We remain positive on the long-term prospects of sukuk, which benefits from strong fundamentals in core Islamic markets, with increasing government support for the sector’s development.

“New sovereign and private sector issuers will, over time, deepen the market and increase the attractiveness of Islamic instruments,” it said.

Moody’s said rising investor demand for syariah-compliant products would also continue to support inflows to Islamic funds.

For takaful, the research firm said premiums are expected to grow moderately in the next two to three years, helped by economic activity and ongoing rising demand for medical insurance as more GCC, African, and South-East Asian countries implement compulsory health cover.

“In highly competitive markets such as the GCC, we expect takaful operators that currently lack the scale to accelerate their technology investment and seek out M&A deals to build critical mass,” it added.

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