According to recent studies, the spread of Islamic banking and finance is accelerating in the international financial markets as a result of the industry’s development efforts and global competition with conventional banking. Total industry assets were estimated at US$3.6 trillion in 2021, with a cumulative annual rate of 7.88% and 1,553 fully-fledged Islamic financial institutions and windows. The Islamic finance industry is expected to contribute, with assets reaching US$5 trillion by 2025. Furthermore, the global Islamic finance assets are a major component of the Islamic economy and include five sectors, namely Islamic banking, Islamic capital markets and asset management, in addition to Islamic insurance and trust (Waqf). Indeed, Islamic finance represents 66.4% of the global Islamic economy, while other sectors include Halal food (15.5%), Halal pharmaceuticals (8.2%), media (5%) and travel (4.9%).
Review of 2022
Regarding the recent improvements in the industry, the Islamic economy has risen to the top of the agenda in several countries and is now regarded as a critical component of economic recovery policies following the COVID-19 pandemic. This followed the national Islamic economic policies implemented prior to the pandemic’s arrival, most notably Indonesia’s mandatory Halal law.
Saudi Arabia, the UAE, Malaysia and Nigeria have all thrown their support behind growing the Islamic economy, particularly in sectors such as Halal food, Islamic finance and fintech. Pakistan, Qatar and Kuwait announced their plans for the new centralized regulations in the Islamic finance sector to improve governance.
Islamic finance is the key driver of the overall ecosystem. Malaysia has retained the top spot in the Global Islamic Economy Indicator for the ninth consecutive year. Malaysia is followed by Saudi Arabia, Bahrain, Kuwait, the UAE and Indonesia, as well as Iran, Oman, Qatar and Jordan.
Malaysia’s Islamic finance sector has expanded further, with a 9% increase in Islamic finance assets and a 20% increase in the value of Islamic funds. Saudi Arabia’s strength in the Islamic finance sector continues to grow in all sectors. Moreover, new players have entered the race, such as Pakistan, the UK, Singapore, Nigeria, Sri Lanka and Kazakhstan.
Based on several notable investments and the funding of OIC start-ups, Islamic finance is slowly recovering from the effects of the pandemic, with Islamic banks’ profitability rebounding after 2020 drops. Because of the pandemic’s weak effect and expansions of activities and works in financial markets, the profitability of Islamic financial institutions increased in 2021 and 2022.
In fact, the past year has been a watershed moment for the Sukuk sector, with new benchmarks established. The global Sukuk market is expanding, and corporate Sukuk issuances have increased. For example, according to the latest study by Refinitiv, Sukuk supply reached US$726.8 billion in the first six months of 2022 and is projected to increase to US$742.3 billion by the end of the year.
Malaysia, Saudi Arabia and Indonesia remain the largest issuance hubs for Sukuk, together accounting for 75% of the Sukuk issued in 2021 and the first half of 2022. Sukuk that are environmentally friendly and sustainable are gaining popularity around the world, thanks to the increased support from the IsDB and commitment from OIC member countries such as Indonesia.
Furthermore, the total value of outstanding Sukuk and Islamic funds reached US$630 billion and US$174 billion respectively. The IsDB is a major player in the Sukuk market and issued a US$2.5 billion sustainability Sukuk facility, and Malaysia issued the world’s first sovereign dollar-denominated Islamic finance sustainability-related commercial notes. The World Bank has acknowledged that Islamic finance supports the UN SDGs.
Preview of 2023
In 2023, the global Sukuk market and corporate Sukuk issuances are expected to grow. Islamic financing based on the Sukuk instrument also continues to bolster growth in real economy sectors such as construction, real estate and electricity, in addition to financing the government’s deficit in some countries. The IsDB has issued a Sukuk facility linked to the Secured Financed Overnight Rate (SOFR), a significant development given that most Sukuk are currently linked to the London Interbank Offer Rate (LIBOR) or its variants.
LIBOR is set to be phased out by 2023, with SOFR taking its place as the new global benchmark rate. Furthermore, Sukuk issuances will be directed toward sustainable investments, or ‘green’ investments, in addition to the usual Sukuk sectors.
Conclusion
Green and sustainability Sukuk are gaining market traction, indicating growing investor interest in actively balancing social impact with financial returns. Therefore, it is vital for regulators to have a governance structure that will control the norms of Islamic finance and ensure the good compliance of Islamic financial institutions with the Shariah rules issued by the legislative institutions. In summary, the commitment to good governance in the Sukuk industry will lead to a flourishing Islamic finance and Sukuk sector operating in accordance with best practices and in a way that ensures its continuity and sustainability, as well as no deviation from the right path.
Dr Nafith Alhersh Nazzal is an Islamic banking specialist based in Jordan. He can be contacted at [email protected].