The two overriding features that defined the global Islamic finance industry in 2021 are resilience and growth.
The fallout of the COVID-19 pandemic will continue to impact the world for a few years to come as governments intensify efforts in the economic recovery to pre-pandemic levels.
The consensus is that economic recovery, especially in developing countries, will depend on access to and the timely rollout of vaccines and reducing risks of future waves of the pandemic and associated disruptions to economic activity.
The Islamic finance industry, in general, has played a commendable role in contributing toward COVID-19 mitigation and recovery through rescue packages, innovative financial solutions, payment holidays, de-risking tools, digitization and leveraging Sukuk as a fundraising and recapitalization option.
Equally encouraging is the embracing of sustainable development goals (SDG), environmental, social and governance (ESG), sustainability and climate action values by the industry, which are well entrenched in the faith-based ethos of Islamic finance.
The aforementioned scenario will continue through to 2022 and beyond. Six metrics dominate the global Islamic finance ecosystem — growth dynamics; COVID-19 response; Sukuk issuance; LIBOR [London Inter-Bank Offered Rate] cessation; digitization and fintech; and SDG/ESG/Green finance.
The growth dynamics of the global Islamic finance industry suggest an upward trajectory over the next few years. Refinitiv, in its latest Islamic Finance Development Report 2021, reports a steady increase in total assets under management (AuM) from US$2.96 trillion in 2019 to US$3.37 trillion in 2020 to reach a projected US$4.94 trillion in 2025.
Islamic capital market (ICM) growth has also been resilient. In September 2021, the Securities Commission Malaysia (SC) launched the country’s third Capital Market Masterplan 2021–2025, which will serve as a strategic framework for the growth of the capital market in the next five years.
In 2020, the size of the overall capital market despite the impact of the pandemic totaled RM3.4 trillion (US$806.55 billion), up from the RM3.2 trillion (US$759.1 billion) in 2019. The ICM accounted for RM2.3 trillion (US$545.61 billion) compared with RM2.03 trillion (US$481.56 billion) in 2019, or 65.85% of the total capital market.
Similarly, the market share of Malaysian Islamic banking assets in 2020 reached 34.2%, in line with the official aim of reaching a 50% parity with the conventional sector by 2030. Total Islamic banking AuM at the end of 2020 reached RM1.09 trillion (US$258.57 billion), up from the RM1.02 trillion (US$241.96 billion) at the end of 2019.
In Saudi Arabia, Islamic banking AuM are well on the way to breaking the US$1 trillion barrier. In September, Fahad Abdullah Almubarak, the governor of Saudi Central Bank (SAMA), speaking at an Islamic finance innovation webinar, confirmed that local Islamic AuM reached over US$565 billion in the first quarter of 2021.
In Turkey, according to the Banking Regulation and Supervision Authority, the market share of participation banks’ assets crossed 7.1% in 2020. The Turkish government’s stated target for the sector is 15% by 2025.
The response to the pandemic by the industry is commendable, led by the IsDB Group. Governments complemented this response with COVID-19 mitigation-specific financial measures with other industry bodies and the financial services sector with initiatives such as payment holidays, debt write-offs and the adoption of digitization to preempt branch visits.
On the back of its initial US$2.4 billion pandemic package in April 2020, the IsDB approved an additional US$1.2 billion in funding commitments in September 2021 to support post-pandemic economic recovery among its member countries.
The IsDB is also investing US$3.5 billion in developing the agricultural sector in sub-Saharan Africa, one of the hardest-hit regions, to develop commodity value chains for staple food and cash crops, improve productivity and connect local value chains to global ones.
In May, the IsDB launched an US$850 million IsDB COVID-19 Vaccine Access Facility. IsDB sister entities — Islamic Corporation for the Insurance of Investment and Export Credit, International Islamic Trade Finance Corporation and Islamic Corporation for the Development of the Private Sector — also launched stand-alone operations and co-financing arrangements across a range of sectors, including vaccine procurement, lines of financing to help the SMEs and private sector and de-risking solutions for development projects.
Sukuk market resilience
The Sukuk market has been exceptionally resilient. The consensus is that 2021 will prove to be another record year with total gross short- and long-term Sukuk issuance projected to reach near if not surpass the record US$205 billion in 2020. Moody’s Investors Service expects total Sukuk issuance in 2021 to reach between US$190 billion and US$200 billion.
Sukuk are dominated by sovereign issuers, especially Malaysia, Saudi Arabia and Indonesia. Nigeria in November was preparing to issue its fourth naira-denominated Sukuk. The UK issued a GBP500 million (US$663.11 million) Sukuk in 2021. New entrants in 2021 include Bangladesh, the Maldives, Kuwait and Morocco, with Egypt poised to issue its debut sovereign Sukuk in 2022.
The importance of Saudi Arabia as an issuer cannot be overstated. The National Debt Management Center (NDMC) of the Ministry of Finance raised SAR75.34 billion (US$20.06 billion) through 11 monthly Saudi-riyal-denominated Sukuk in 2021. NDMC also issues Sukuk in the international market as part of its diversified fundraising strategy. Similarly, Indonesia raised an equivalent US$12 billion through regular domestic Sukuk issuances.
Quasi-sovereigns such as the IsDB, Saudi Aramco, Cagamas and the International Islamic Liquidity Management Corporation (IILM) have all played vital roles in keeping the Sukuk momentum going in 2021. The IILM issued monthly short-term liquidity Sukuk totaling US$10.56 billion to date.
The IsDB raised US$4.6 billion thus far (at the time of writing) in 2021 through three issuances. Cagamas, the Malaysian National Mortgage Corporation, amassed RM12.25 billion (US$2.91 billion) through Sukuk and bond issuances, buying mortgages from the market for securitization purposes.
Corporates and banks also played a vital role in Sukuk issuance in 2021 as part of their fundraising diversification strategy to fund expansion, boost Tier I and Tier II capital, refinance existing more expensive debt and for general balance sheet purposes.
There is an estimated US$370 trillion of LIBOR-related activity globally, covering loans, bonds, derivatives, working capital and trade finance products. The transition will significantly affect how contracts are priced and how risk is managed by market participants, lenders, borrowers and guarantors who use LIBOR as their operating model.
In Malaysia, the current reference rate for the local Islamic finance industry is the Kuala Lumpur Islamic Reference Rate (KLIRR). Bank Negara Malaysia (BNM) is collaborating with industry bodies to develop a new Islamic benchmark rate to replace KLIRR during FH2022 “that adheres to global standards for financial benchmarks”.
Another innovation is the debut Secured Overnight Financing Rate (SOFR)-linked three-year US$400 million Sukuk issued in April by the IsDB. The SOFR for US dollar credit facilities is one of the new global benchmark rates replacing LIBOR and is a broad measure of the cost of borrowing cash overnight collateralized by US Treasury securities.
Digitization and fintech
The pandemic accelerated the digital finance revolution in the Islamic finance industry, albeit fragmented. The emphasis in 2021 seems to be testing central bank digital currencies (CBDCs), e-platforms for consumer finance and capital market products promoting ESG values.
The SAMA, for instance, is working to enhance the digital infrastructure of the financial sector and concurs that “the Islamic fintech space, in particular, offers exciting new growth opportunities for the industry”.
The Central Bank of Nigeria launched the eNaira CBDC in November 2021, preceded by Turkey with its Central Bank Digital Turkish Lira Research and Development Project. BNM, together with three central banks, teamed up with the Bank for International Settlements “to test the use of central bank digital currencies (CBDCs) for international settlements”.
In Malaysia, the SC and the UN Capital Development Fund launched the FIKRA Islamic Fintech Accelerator Program in May “to identify and scale relevant and innovative Islamic fintech solutions that can help address new ICM offerings, accessibility and social finance integration”.
Digital banks are fast gaining momentum. In July, the Saudi cabinet approved two digital banking licenses while BNM announced that it had received 29 applications for a digital bank license.
The SAMA has licensed 32 fintech companies under its regulatory sandbox and launched Sarie, an instant payment system that tracks and further develops the national infrastructure for digital payments.
Other developments in 2021 include virtual ‘Buy Now Pay Later’ prepaid cards, digital wealth portals, digital Islamic debit cards and biometric authentication for e-commerce transactions.
The pandemic also focused attention on SDG, ESG, sustainable and responsible investment (SRI), sustainability and ethical finance, and the agenda promoted by Islamic finance markets. In a recent survey of GCC fund managers, Moody’s forecasts strong growth over the next year supported by growing demand for Islamic products and ESG investment.
Green Sukuk issuance will accelerate as governments promote sustainable policy agendas and as demand for sustainable investments encourages new issuers to consider green Sukuk as an alternative financing tool. According to Fitch Ratings, the green and sustainable Sukuk outstanding volume increased by 31.7% in the first quarter of 2021 to reach US$11 billion, representing 9% of the total Sukuk portfolio.
The industry saw several sustainability Sukuk issuances in 2021, including the US$1.3 billion offering of sovereign Malaysia, the US$2.5 billion offering of the IsDB and the RM500 million (US$118.61 million) sustainability Sukuk of Malaysia’s SME Bank.
There has also been a measured proliferation of ESG funds, Waqf-featured funds and leveraging Islamic philanthropic instruments such as Zakat, Sadaqah and Waqf to develop the Islamic social finance sector.
Oussama Kaissi is CEO of the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC).