With Islamic finance industry expected to maintain its rapid growth over the coming years, Standard & Poor’s Ratings Services (S&P) expects total GCC banking assets, including conventional and Islamic, to rise to $2 trillion by year-end 2015 from $1.7 trillion at year-end 2013.
The global ratings agency said banking credit stock in the GCC is also expected to climb by around 10 in 2014 and 2015.
GCC Islamic banks have continued to increase their market share in the region. Although S&P expects the growth of Islamic banks to gradually converge with that of their conventional peers over the next decade, the market share of Islamic banks will continue to rise in the next few years, it said.
S&P believes 2014 sukuk issuance is on course for a five per cent growth from last year.
“Refinancing needs from maturing sukuk and the good economic prospects for the GCC underpin our expectations,” it said in a statement.
Despite mixed results across sectors in 201, the GCC Islamic Finance industry is expected to maintain its rapid growth over the coming years, S&P said.
The ratings agency believes that the Islamic Financial Services Board’s (IFSB) revised capital adequacy standard could give the industry an opportunity to resolve some of its long standing structural weaknesses. The introduction of new capital buffers under the new requirements may make the GCC Islamic finance industry more resilient to cyclical fluctuations by strengthening its capitalisation.
“The industry’s expansion is expected to be driven by the GCC’s robust economic prospects, continued infrastructure needs and rising issuance from governments and government-related entities,” it said. Current and expected trends in Islamic finance, especially the increasing role of regulation in shaping market development will be key themes of a conference to be hosted by S&P in Dubai on Tuesday. Prospects for the sukuk sector will be one of the event’s key themes. The sector has registered healthy volumes in 2014 with $20.3 billion worth of issuances in the GCC as of 5th of October, 27.3 per cent higher than the same period last year.
“The fall in the issuance of corporate and infrastructure sukuk by almost a third compared to the same period in 2013 was more than compensated by higher issuance from governments and financial institutions,” S&P said.
“We remain upbeat on the outlook for the GCC Islamic Finance industry, but we have seen mixed fortunes across sectors this year and a broad spectrum of structural issues continuing to pose challenges. Despite growth, the industry remains a demand-driven market, with limited supply,” said Stuart Anderson, managing director and regional head, Middle East, S&P.
The expansion and enhancement of existing Islamic Finance centers in the GCC, and a more transparent regulatory environment are critical to accelerate growth. S&P’s 3rd Annual Islamic Finance Conference will discuss the outlook for the industry with a focus on the role of regulation in facilitating its development.”
“Islamic banking growth is being driven by strong economic growth, recovering corporate asset quality cycle and ample financing opportunities. We believe Islamic banks will continue growing visibly faster than their peers, particularly in countries that have the highest domestic credit growth prospects,” said Anderson.
In contrast to the Islamic banking sector, the takaful sector in the GCC underperformed their conventional peers. Continued resistance to the concept of insurance has left the market dominated by compulsory lines of business and weakened by fierce price competition. S&P estimates the GCC takaful sector to generate just over 10 per cent of total market premiums. The sector is dominated by medical and motor insurance while the provision of life savings products, the mainstay of mature markets, is still undeveloped in the region.
