The global economy remains deeply depressed going into 2023 and is suffering another blow from the ongoing Russia–Ukraine war, exploding inflation and interest rate hikes while recovering from the setback caused by the COVID-19 pandemic. While the extent of the impact of this confluence of factors on the global economy is not predictable at this juncture, there is a rise in the news reporting on Sukuk issuance, fintech, cross-countries partnership to streamline the trade and remittance system and multinational organizations committing to fund and aid the growth and development of a country, indicating growth and dynamics in the finance market.
Review of 2022
In 2022, Malaysia, Saudi Arabia and Indonesia remained the largest Sukuk issuers. With even more uncertainty in 2022, the global Sukuk market was still surprisingly optimistic and registered a strong though slightly lower issuance of US$100.9 billion in the first half of 2022 (H1 2022) compared with the US$104.2 billion of H1 2021. The slowdown in H2 2022 was mainly due to smaller issuances by the Saudi Arabian government, whose funding requirements were reduced amid soaring oil revenues.
The issuance momentum during H2 2022 slowed down as a result of the Russia–Ukraine conflict which led to a surge in oil prices and a subsequent global monetary tightening cycle by the US Federal Reserve and other central banks (Jinan AlTaitoon, Refinitiv IFG-Sukuk Perceptions and Forecast Study 2022).
As with the conventional fintech start-up industry, the Islamic fintech start-up industry suffered a drop in funding to a nine-quarter low in the second quarter of 2022 due to the global political and macroeconomic shocks. Notwithstanding that the business failure rate of the fintech start-up is as high as 90%, the industry continues to attract new players into the market. As of the 15th October 2022, there is a growth in the number of players to 338 globally, which is an increase of 29% from last year.
In the last 12 months, we have seen governments of the key Islamic financial jurisdictions establishing a robust regulatory framework to cater for the emerging fintech industry (IFN Monthly Review: July — New Islamic banks in the market).
There was also an increase in the number of cross-border collaborations between financial institutions and non-financial institutions, particularly in light of geopolitical and macroeconomic events. These initiatives are aimed at, among others, supporting economic recovery after the COVID-19 pandemic, establishing and implementing a non-exclusive framework for the cooperation of market participants in economic development and financial inclusiveness and working on a framework aimed at enhancing international trade and intra-Arab trade.
Preview of 2023
According to market researchers, the Global Islamic Finance Market was worth US$2.2 billion in 2021 and is anticipated to reach a valuation of US$3.02 billion by 2027 (Global Islamic Finance Market Research Report — Segmentation By Financial Sector (Islamic Banking, Islamic Insurance – Takaful, Islamic Bonds ‘Sukuk’, Other Islamic Financial Institutions (OIFI’s) and Islamic Funds) and Region – Industry Forecast 2022–2027). GCC banks’ earnings are expected to recover almost to the pre-pandemic level in 2022, due to stronger economic activity and higher interest rates.
Despite slower growth, market researchers predict that compounded annual growth rate over the next five years may be over 6.8%, reaching US$257 billion in 2027 (Jinan AlTaitoon, Refinitiv IFG-Sukuk Perceptions and Forecast Study 2022.)
The banking industry is expected to face tougher conditions in 2023 but market researchers believe that incumbents have increased their resilience over the past decade by improving capital and liquidity positions, as well as exiting non-core activities and markets.
New fintech players will unfortunately face difficulties in securing funding as investors are more careful with how they spend their dollars. Notwithstanding, market surveys suggest that most Islamic fintech CEOs and founders are surprisingly optimistic about the growth projection of the industry.
The International Finance Corporation suggests that 40% of the micro SMEs in developing nations face an annual financing gap of US$5.2 trillion. The emerging Shariah compliant P2P platform in the fintech market may potentially narrow the financing gap. Given that SMEs account for some 90% of businesses and over half of the employment worldwide, the funding demand will fuel the growth of Islamic fintech (‘SMEs and entrepreneurship: Technology to narrow finance gap’, 16th Aug 2022). We hope to see governments continue to take initiatives to support fintech innovation and enhance the relevant regulatory frameworks.
Conclusion
In light of the COVID-19 pandemic, rampant inflation and now the Russia–Ukraine war, predicting the market outlook during a period of uncertainty is always a challenge. If the war continues, it may push oil prices even higher and thereby lead to a slowdown in economic growth. With the US Federal Reserve and other central banks hiking interest rates further in 2023, this could possibly raise the risk of stagflation. We will only know the true extent of the effect as we move through the year.
Salman Ahmed is a partner and Sylvia Sze is the associate at Trowers & Hamlins. They can be contacted at [email protected] and [email protected] respectively.