Currently, the Islamic finance market is subject to global economic dynamics of high inflation, rising interest rates and potential recession. Nevertheless, the presence and impacts of these dynamics differ from one economy to another. As such, Market Data Forecast research predicts the Islamic finance market to reach US$3.2 billion by 2027 with a predicted compound annual growth rate of 10.2% during 2023–27. Hence, what was the Islamic private banking focus during 2022? Which markets should Islamic private banking target during 2023?
Review of 2022
Islamic private banking, as part of retail Islamic banking, focuses on managing the wealth of high-net-worth families. Many Islamic banks launched investment funds for such a purpose. Some of these funds invest in different financial assets including Sukuk whether sovereign or corporate. Sukuk have an advantage of providing a fixed income stream that is considered a safe tool in increasing the net worth of Islamic private banking clients.
As depicted in Chart 1 and by the end of 2022, Sukuk issuance might witness a slight growth of around 3% if annualizing the first half (H1) figures of 2022. This is considered a lower growth rate if compared with 2021 where Sukuk issuance recorded a growth of around 8.2%. The 2021 growth could be explained in the context of Sukuk playing a critical role in achieving economic recovery from COVID-19 impacts for some developing countries. This was conducted through stimulus packages provided by some GCC governments and international organizations, namely the IsDB.
On the other hand, the annualized performance of 2022 could be reasonable in light of the increasing interest rates globally especially in the US. In addition, the sovereign debt capacity of some countries is another factor that should be taken into consideration combined with the IMF warning of a slower economic growth for the world economy.
Higher oil prices could be good news to oil exporters and bad news to importers, reducing the latter’s capacity of issuing fixed income instruments including Sukuk. Fortunately, most of the Islamic finance market is located in the GCC area. Such an area is considered net energy exporters.
Hence, it is crucial to provide GCC countries with a cash flow surplus to continue developing spending and at the same time provide ample room to issue Sukuk to curb any spillover impact such as inflation or recession from the global economy.
Consequently, one could assume that 2022 could witness a higher growth rate for Sukuk issuance. This assumption is also based on another reason. Saudi Arabia recently announced its intentions to issue dollar denominated bonds and Sukuk in the second half of 2022. Recently, it launched its US$10 billion green fund to invest in green projects by 2026. Last November, it raised US$3 billion in green bonds as a contribution to this fund.
That being said, clients of Islamic private banking could perceive this fund as an appealing investment opportunity since Islamic Shariah and ESG investing share numerous common principles. This definitely depends on the fund prospectus’s compliance with Islamic Shariah especially in the governance compliance aspects.
Preview of 2023
As mentioned earlier the negative impacts of global economic dynamics will differ from one country to another. For example, Malaysia is an Asian tiger expected to achieve strong economic growth during 2022 and 2023. Some international reports are predicting an economic growth of around 5–7%.
In addition, Moody’s Investors Service anticipates that Malaysia’s Islamic banking is expected to grow faster than conventional banking with growth driven by retail banking during 2022 and 2023. Hence, Moody’s has maintained a growth projection of 4–5% for the Malaysian banking sector.
Another piece of good news for Islamic banking in Malaysia could be found in the Economic Outlook 2023 report released by the Malaysian Ministry of Finance. The report stipulated Islamic banking’s resiliency by the continuous introduction of Shariah compliant products. Last March, Malaysia introduced the Malaysia Islamic Overnight Rate, MYOR-I, which is a fully Shariah compliant rate which will enhance transparency and achieve efficient pricing across all financial instruments.
That being said, Islamic private banking in Malaysia could witness an increasing growth in 2023. Such growth not only stems from a domestic boost but also from attracting international private banking clients and funds. Launching more innovative indices, seeking more transparency and embarking on commercial projects could all be seen as supportive factors for such a conclusion.
Moreover, inflation in Malaysia is currently within reasonable boundaries. Such a strong Islamic banking industry especially in the retail side is good news in case of any increased or imported inflation. Islamic private banking through fixed rate Murabahah products could ease any inflationary negative impact on households and high-net-worth families.
Conclusion
Islamic private banking clients could achieve lucrative profits in 2023 if they allocated their funds to a rising dark horse which is the Malaysian economy.
Samar Abuwarda is an experienced professional in structured transactions with multiple organizations in Egypt and internationally. She can be contacted at [email protected].