DOHA: Growth in Islamic finance industry is set to slow down next year over the sharp fall in oil revenues and regulatory changes, Standard and Poor’s Ratings Services said yesterday.
“The industry has achieved critical mass — Islamic finance assets worldwide exceed $2 trillion by our estimate. But we now think the industry faces challenges from the decline in oil prices, changes in the global regulatory framework for banks and insurance companies, and its own fragmented nature,” said Standard & Poor’s Global Head of Islamic Finance Mohamed Damak.
The Ratings Services in a report published yesterday, “Islamic Finance To Still Grow In 2016 But With A Sag” said its expects Islamic finance growth will drop to single digits in 2016 from between 10 percent and 15 percent over the past decade. Islamic finance is facing the fall in the oil price, rapid regulatory changes, and lack of integration current headwinds could result in more stringent application of the profit and loss sharing principle and higher standardisation.
Still, Islamic finance will have the impetus to continue progressing and maintain some growth. Governments in core markets see in Islamic finance a tool to maintain their investment spending, somewhat countering the negative impact of oil prices on their budgets.
The regulatory changes could help the industry in resolving issues related to the lack of liquidity management instruments and applying more stringently its principle of profit and loss sharing. Standardisation of documents and Sharia’h ruling could enhance industry integration and free stakeholders’ capacity to focus on innovation, the report said.
S&P expects the industry will be worth $3 trillion sometime in the next decade. “Islamic finance stakeholders’ efforts and the industry’s contribution to development of the real economy will likely fuel growth,” added Damak.
This development is capturing the interest of major financial institutions, such as the International Monetary Fund and the World Bank, and some advanced countries.
“We are currently witnessing the end of the global commodities super-cycle that started in 2005, which we think will drag down economic growth in some core markets and consequently reduce opportunities for Islamic finance. Standard & Poor’s now assumes that oil prices will average $63 per barrel between 2016 and 2018,” said Damak.
The decline in oil prices is taking a toll on oil exporting countries governments’ public finances, and most of these countries are core markets for Islamic finance. “Positively, we expect governments in Gulf Cooperation Council countries will protect their investment spending to support growth. Still, if oil prices fall much below our current expectations and government balances weaken further as a result, we think GCC governments will increasingly cut investment spending,” the research note said.
The rapid changes in the global regulatory environment for banks and insurance companies are also affecting Islamic finance. In particular, Basel III for banks and Solvency II and the implementation of bank resolution regimes implementation in major EU countries are raising the bar for Islamic financial institutions to keep pace with developments in conventional finance.
The Peninsula
