Double-digit record growth awaits the Islamic finance industry, thanks to digitalization and the appeal of sustainable solutions. This time last year, the Islamic finance industry was reeling from the overwhelming economic impact of the COVID-19 pandemic. The fog has cleared as we head into 2022, with forecasts estimating double-digit growth across the sector. As mentioned in The Future of Trade, our flagship report assessing the impact of geopolitics, technology and economic trends on global trade, the outlook for the entire Islamic finance industry is much more positive.
Review of 2021
Islamic finance markets have largely shown resilience over the past year. The recovery continued into 2021, thanks to vaccination campaigns and fiscal measures by central banks across the Islamic markets.
• Islamic banking has expanded year-on-year. Asset growth in the GCC, Malaysia and Turkey has fared well and the sector has performed robustly in Egypt, Bangladesh and Pakistan.
• Sukuk issuance gained momentum over the first half of 2021, reaching US$100 billion as compared with US$88.7 billion over the same period last year. The year saw increased issuance from the GCC — notably the landmark US$6 billion Sukuk from global oil major Saudi Aramco, which was oversubscribed 10 times. With Malaysia, Turkey and Oman returning to the market, 2021 issuance could total US$200 billion — just short of the US$205 billion in 2020.
• Takaful and funds are on course to expand 5–10%, partly prompted by shifts toward environmental, social and governance (ESG) and sustainable investments, and values-based approaches to Takaful. Shariah compliant equity funds offered better protection against downward risk during the pandemic, thanks to technology and healthcare allocations, and their exclusion of highly leveraged companies.
• The picture in precious metals and other commodity markets, on the other hand, has been more volatile — a situation reflected on the Islamic bourse. High prices have augured well for key export markets. The World Bank projects that energy and metals could end the year a third higher than in 2020, with agriculture seeing a 14% growth.
Preview of 2022
The IMF estimates post-pandemic recovery to drive worldwide economic expansion of 6% in 2021 and 4.4% in 2022. With increases of 8% and 4.7% respectively, trade will be a major contributing factor as indicated by Dubai Multi Commodities Centre (DMCC)’s Future of Trade report. Islamic finance assets, like their conventional counterparts, will benefit from continuing stimulus packages and government liquidity support, while traditional consumer demands for safe and sustainable assets in uncertain times could buttress the sector.
However, core Islamic economies remain dependent on commodities and services, although the current outlook for commodity prices is optimistic.
• Overall, the Islamic finance industry could clock double-digit growth of between 10% and 12% in 2021–22, thanks to banking asset growth in the GCC, Malaysia and Turkey, and as Sukuk issuances exceed maturities.
• Competitive pressures within Islamic banking could spell a year of consolidation. Return on assets could stay low, but strong demand and ample liquidity could offset that stress.
• Financing growth within key GCC markets will likely remain very strong. Events and projects will underpin mortgages and corporate lending across the region, thanks to national plans such as the Saudi Vision 2030 and the UAE Projects of the 50, as well as Expo 2020 Dubai.
• Sukuk will continue to spur industry-wide expansion as governments seek to raise more funds. Beyond issuances in new markets, innovative products such as ESG and green Sukuk are likely to find favor.
• Precious metals are expected to remain near historical highs throughout 2022. Gold in particular looks set to perform well, with market uncertainty, low interest rates and inflation concerns in major markets — particularly the US and Europe — on the table.
• DMCC research shows that pandemic-linked digital acceleration could prompt a wider acceptance of financial technology (fintech) solutions. Fintechs and existing players will find new ways to reach consumers and businesses, offering innovative investment and trading solutions and bringing in the unbanked. Blockchain, for example, is fast becoming a back-end technology in commodities. Fintechs are consequently expanding worldwide to target millennials and Gen Z individuals who are interested in Shariah compliant products, a market forecast to be worth US$128 billion in 2025, or a 161% growth from 2020.
With a strong rebound underway, the coming year could prove to be a turning point for the Islamic finance industry. That said, the road ahead is not without hurdles.
Perhaps the biggest challenge facing the Islamic finance industry is the lack of unified global regulatory standards. Yet, that too may be about to change.
The Dubai Islamic Economy Development Centre and its partners are working to resolve the lack of standardization and harmonization that the Islamic finance industry has faced for decades.
Such a framework could incorporate Maqasid values into the architecture of operational Islamic financial services, providing a robust foundation for future growth and offering the opportunity for dedicated social Islamic finance instruments and green Sukuk. The industry will thus be able to further expand its already successful reputation for delivering widespread sustainable finance.