Strong demand for Islamic banking products

PETALING JAYA: The Islamic banking industry in South-East Asia is expected to expand by 8% over the next few years underpinned by a robust demand for Islamic products and services as well as low penetration rate particularly in Indonesia.

S&P Global Ratings said the projection was made despite the economic slowdown seen in major markets including Malaysia and Indonesia.

“In both markets, we expect Islamic banking to continue to gain market share as growth outpaces conventional banking,” said the financial intelligence solutions provider in a report recently.

On a global scale, S&P Global Ratings expects the Islamic finance industry to register a 10% growth in 2023 to 2024 following a similar expansion rate last year.

“The Gulf Cooperation Council countries – notably Saudi Arabia and Kuwait--largely fuelled this performance, supported by a large, one-off acquisition in the latter. Elsewhere, growth was either muted or held back by local currency depreciation,” it said.

Despite the overall decline in volumes, sukuk issuance is still likely to be another driver to the industry’s growth, added S&P Global Ratings.

Nevertheless, new issuances are expected to surpass maturing sukuk this year.

“We believe that sukuk issuance volumes will continue to fall in 2023, albeit at a slower pace than in 2022.

“The expected higher new issuances will result in another positive contribution of the sukuk market to industry growth in 2023. The Islamic funds and takaful sectors are also likely to continue to expand,” the agency said.

It also cautioned against factors such as lower and more expensive global liquidity, greater complexity related to structuring sukuk, and reduced financing needs for issuers due to fiscal surpluses from higher oil prices in some core Islamic finance countries that are likely to deter the sukuk issuance market.

Contributions to sukuk issuance volumes are likely to come from corporates especially in countries where governments have announced transformation plans like Saudi Arabia.

“Issuers with high financing needs, such as those in Egypt and Turkiye, are also likely to tap the sukuk market as part of their strategy to mobilise all available resources.

“For example, Egypt has established a US$5bil (RM22.3bil) sukuk programme and issued its first sukuk in early 2023 for a total of US$1.5bil (RM6.7bil).

“We understand that this attracted significant investor interest, with more than US$6bil (RM26.8bil) demand and a 59% allocation to investors from the Middle East and North Africa,” S&P Global Rating said.

Lower and more expensive global liquidity as well as uncertainty surrounding the regulation and standardisation of the market continues to project a slowdown in foreign currency-denominated sukuk issuance over the past 12 months.

“Introducing mechanisms for the revaluation of underlying assets could be one of the next obstacles that the market may face.

“If sukuk became an equity-like instrument, we believe that investor and issuer appetite, as well as pricing mechanisms, would likely change significantly,” said S&P Global Ratings.

Notably, sustainability and digitalisation can potentially bolster future contributions in the sukuk market to the Islamic finance industry.

“We believe that progress toward greater standardisation – in part supported by the digitalisation of sukuk issuance for example – could enhance the industry’s structural growth potential.

“However, having adequate physical and non-physical infrastructure in place, along with the necessary supervision and regulatory framework, would be prerequisites for success in this area,” it said.

There will be higher volumes of sustainability-linked sukuk in the next one to two years, albeit from a low base with issuers meeting investors’ demand in lowering carbon footprint and support global energy transition, according to S&P Global Ratings.

“Many Islamic finance countries are pursuing strategies to help them transition to greener economies.

“We believe this indicates growth potential for green sukuk issuance and expect to see greater activity in this space as issuers tap global investor interest.

“We also expect green products and services for corporate and retail customers will contribute to the growth of Islamic banking assets,” it said.