In terms of overall market share, Shariah compliant bank debt and loan financing has grown quickly over the past years and will continue to rise in the future. Along with Sukuk, it makes up the greatest share of global Islamic finance assets. SARA CARMODY probes the two main drivers for the rapid growth in Shariah compliant bank debt and loan financing, neither of which is likely to change.
Firstly, Muslims make up around 23% of the world’s population and Islam is the world’s fastest growing religion. Many of these Muslims (whether as individuals or as owners or investors in companies) will, where given a choice, opt for Shariah compliant financing products. At present, the global Islamic finance industry does not have a representative market share, relative to the Muslim population.
Secondly, Shariah compliant financing products have an appeal outside of the Islamic community. Businesses and people make their decisions based on the best financial products to meet their needs. Where there is a benefit for taking out Islamic bank debt and loan financing, such as being able to target a bigger pool of investors or better economic terms, this drives growth in the industry. Within the GCC, where there are a plethora of Islamic financial institutions, many non-Muslim individuals and companies have Shariah compliant bank debt and loan financing in place as these products are the most competitive for their needs. Similarly, many conventional banks have Islamic divisions in order to participate in syndicated loans structured on a Shariah compliant basis.
Review of 2015
According to an IMF report released in March 2015, Islamic finance assets still account for less than 1% of global financial assets, with the GCC, Iran and Malaysia accounting for the largest market penetrations for Islamic finance assets. During 2015, what was interesting to note was a shift in industry focus to emerging markets and also the change in political attitudes toward Iran, which is one of the more mature Islamic markets. Many of the emerging markets with the highest growth potential have a substantial Muslim population without access to basic banking and financial services.
During 2015, many Islamic finance institutions announced a focus on Africa and several international organizations had their first Africa-specific Islamic finance events in Africa. This is logical, as it is estimated that around 45% of the population of Africa is Muslim. Access to banking and financial products in Africa is significantly underdeveloped with two-thirds of the population lacking a bank account, much less access to bank debt and loan financing.
The participation of international conventional banks, acting by their Islamic divisions, into international Islamic syndications is also notable. As an example of this, during June 2015, when the Islamic Corporation for the Development of the Private Sector secured US$300 million Murabahah facilities, the participants included Mizuho Bank (Malaysia) and Mizuho Bank Nederland.
Preview of 2016
We can anticipate there being growth in Islamic debt and loan finance from customers outside of the usual markets (the GCC, Iran and Malaysia) as customers look to Islamic finance to obtain funding. As an example of the types of deals we can expect to see, during September 2015 it was announced that HNA Group, the owner of Hainan Airlines, is planning the first Islamic financing deal by a mainland Chinese company. They plan to raise up to US$150 million in Islamic loans in order to buy ships. The driver for this large Chinese company in turning to Islamic finance is the high cost of funding in China relative to the pricing available in the Islamic market. They also plan on issuing a Sukuk.
The GCC, which has seen some of the most rapid growth in Islamic bank debt and loan financing, is experiencing a number of economic factors which may slow growth during the coming year. As one of the key markets, any events which affect the GCC will potentially impede the growth of Islamic finance.
A report issued by S&P in October 2015 stated that the growth in the industry would slow to single digits during 2016, owing to a number of factors. Factors cited in the S&P report as the drivers for lower growth included the fall in oil prices, rapid changes in the global regulatory framework for banks and insurance companies and the currently fragmented nature of the industry. Two of these factors apply equally to conventional bank debt and loan financing so that, although the outlook for Islamic bank debt and loan financing may not be double-digit growth, Islamic finance is still likely to outstrip growth in the conventional market overall.
Conclusion
The large potential markets for Islamic bank debt and loan financing, coupled with Islamic bank debt and loan financing becoming capable of being truly competitive in the market, make a fertile ground for future growth in Islamic bank debt and loan financing.
Sara Carmody is the legal director at Addleshaw Goddard (Middle East). She can be contacted at [email protected].