Sukuk issuance is expected to maintain its position as a major growth driver for the Islamic finance industry after seeing record-breaking issuances over the past year, according to new research.
Alpen Capital (ME) Limited and Alpen Asset Advisors Limited said in a report that while the industry slowed during the year after experiencing record growth in 2019, it showed resilience amid the ongoing global coronavirus pandemic.
Total Islamic finance assets in 2020 are estimated to match the previous year’s figures, it added.
“Islamic finance and wealth management industry faced the dual shocks of adjusting to the pandemic and historically low oil prices in 2020. While the industry slowed down during the year after experiencing record growth in 2019, it showed resilience,” said Sameena Ahmad, managing director, Alpen Capital (ME) Ltd.
“Technology adoption has become one of the most critical drivers of survival. The adoption and integration of new and emerging technologies is likely to streamline the Islamic finance market and broaden the service offerings. An optimistic outlook by the IMF on global economic recovery is expected to spur a recovery within the sector,” Ahmad noted in the report.
Hameed Noor Mohamed, executive director, Alpen Capital (ME) Ltd, added: “Sukuk is expected to maintain its position as a major growth driver for the Islamic finance industry. Sukuk has witnessed record-breaking issuances over the past year, and this is likely to continue. Concepts such as ESG/sustainable investing, and green sukuk are also rising in prominence and gaining investor interest.
“The sector has also seen strong M&A activity in both banking and takaful sectors, and consolidation is expected to continue amid weak economic conditions.”
According to the report, Covid-19 disrupted global financial markets at an unprecedented scale, and the impact has tested the resilience of Islamic finance markets in equal measure.
Factors including a growing Muslim population seeking Shariah-compliant financial instruments, rising adoption of technology and the industry’s ability to demonstrate a higher level of ethical credibility have been driving growth.
Islamic banking accounts for majority of the total global Islamic finance industry assets. In 2020, assets recorded a higher percentage growth compared to conventional banking assets across select economies like the UAE, Saudi Arabia, Oman, Kuwait and Malaysia.
The report noted that the global market for sukuk has developed significantly over the years and in 2019, it contributed 19 percent to global Islamic finance industry.
Despite initial concerns about the impact of the pandemic on Islamic capital markets, sukuk issuances in 2020 matched the levels seen in 2019.
Alpen Capital and Alpen Asset Advisors said they expect the Islamic industry to continue to grow on the back of robust drivers. The emergence of new avenues such as green sukuk and socially responsible investing (SRI) is likely to boost growth.
Going forward, core markets across the MENA and SE Asia regions as well as non-core markets such as Kazakhstan and Uzbekistan could see higher issuances, the report added.
While the global Muslim population remains one of most significant drivers of growth for the Islamic Finance industry, the global trend of ethical consumerism is leading to higher appeal of Islamic products. This uptick is likely to attract a new class of consumers driven by social consciousness, trickling down to higher demand for Islamic finance services and platforms, Alpen said.
It added that governments across the globe have taken measures to support the Islamic FinTech ecosystem, encourage digitalisation of banks, boost tokenisation of sukuks and bolster markets that are rising in prominence such as Islamic social finance and ESG.
The Covid-19 pandemic highlighted the Islamic finance industry’s susceptibility to exogenous risks, as it was exposed to the severe implications of the pandemic in equal measure as its conventional equivalent.
Even though the total Islamic assets in 2020 are expected to be similar to the previous year’s figures, the industry slowed down after experiencing 14.4 percent growth in 2019.
A speedy and effective response has now become crucial to ensure profitability, as well as spur recovery and growth which has been muted during the last year, the report said.
Alpen highlighted that the next surge of growth for the Islamic finance industry is expected to be driven through innovation, standardisation and M&A activity. Newer markets are likely to drive growth as the core Islamic countries grow towards maturity.
Investment activity is expected to be skewed towards the FinTech sector as digital capabilities become more critical due to Covid-19, it added.
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