Islamic finance gains more recognition on a global scale

After a resilient performance in 2020, the international Islamic finance sector fared positively in 2021 as an improved economic environment and a rise in the number of large projects combined to drive demand for services. Despite the twin challenges of the Covid-19 pandemic and the fall in international oil prices that affected many of the world’s heavyweights in Islamic finance, the global sector’s assets grew by 10.6% in 2020, according to ratings agency Standard & Poor’s (S&P). Although this was down from the 17.3% growth recorded in 2019, it was a strong performance in light of the global recession.

Building on this, in May 2021 S&P forecast that the global Islamic finance industry would grow by 10-12% annually in 2021 and 2022. This projection was largely based on the expected economic recovery in key Islamic markets in the Gulf and South-east Asia – driven by the rollout of large infrastructure projects in countries like Saudi Arabia and Qatar – and an increase in sukuk (Islamic bond) issuance, which the agency expected to reach $140bn-155bn in 2021, up from $139.8bn in 2020.

Market Share

Perhaps unsurprisingly, the continued growth of Islamic finance is translating into increased prominence in international markets, particularly in Muslim-majority countries. For example, in the GCC sharia-compliant banking assets as a proportion of total banking assets have grown significantly in recent years. GCC countries represent the world’s largest Islamic finance market, with a combined 45% share of global assets.

In Qatar, the share of Islamic finance assets grew from 19.7% of the total in 2018 to 26.6% in 2020, while in Malaysia – the world’s third-largest Islamic finance market – the proportion of sharia-compliant finance increased from 22.8% to 30.1% over the same period. However, this trend is not universal: Islamic banking assets in the UAE experiencing a slight fall in terms of their share of overall assets, and the corresponding figures in Bahrain and Oman expanded by a small margin.

Consolidation

The increases in asset value and market share have naturally led many conventional banking institutions to turn their attention to Islamic finance. Coinciding with a broader trend of mergers and acquisitions (M&A) in the Gulf, a number of conventional players have sought to acquire or merge with Islamic banks in recent years.

For example, in 2019 Abu Dhabi-headquartered Islamic finance institution Al Hilal Bank combined with Abu Dhabi Commercial Bank and Union National Bank in the region’s largest tie-up to date. The merged entity became the UAE’s third-largest bank, with an estimated $114.4bn in assets. M&A activity continued into 2020, with the National Bank of Bahrain (NBB) acquiring a 78.8% stake in Bahrain Islamic Bank in January of that year, while in July Oman Arab Bank completed a takeover of fellow Omani institution Alizz Islamic Bank. “On a strategic level, the integration of conventional and Islamic banks provides stronger balance sheets through a robust risk-management framework,” Yaser Alsharifi, group chief strategy officer of NBB, told OBG.

Green Sukuk

The demand for green or socially responsible sukuk has increased recently. Following the first issuance of a green sukuk by Malaysian company Tadau Energy in 2017 interest in the product has grown steadily. In February Saudi Arabia’s Riyad Bank closed a $750m sustainability sukuk, the latest in a wave of high-profile issuance across different regions. It was an additional Tier-1 sukuk, and 4.3 times oversubscribed at $3.2bn. This followed Saudi National Bank’s $750m debut sustainability sukuk in January, the proceeds from which will fund projects that meet the criteria of the bank’s Sustainable Finance Framework, such as renewable energy facilities.

Nevertheless, in January 2022 S&P Global Ratings forecast that global sukuk issuance overall was likely to be moderate during the year. Despite this, the outlook for green sukuk is promising as many analysts anticipate that the market for green sukuk will continue to grow.