Darkest before dawn

As we were wrapping up 2019, the editorial tone was rather optimistic. After a year of what many would have described as challenging, it was encouraging to see challenges in 2018 being turned into opportunities in the following year, translating into positive developments for the global Islamic finance landscape as the industry experienced a stronger Sukuk market, a banking sector which was becoming more streamlined, the introduction of a number of supporting regulations and the increasing proactive alignment of the Shariah finance community with the principles of sustainability, and of course, the tantalizing promise of greater convergence between the Islamic finance sector and the Halal industry.

Such progress was rooted mostly in stronger energy prices and some semblance of stability or at least, less uncertainty, as the US and China finally settled on a ‘phase one’ agreement which would ease some trade war tensions. Demand for Sukuk rose by 6% to US$130 billion according to Moody’s Investors Service after a 10% volume contraction in 2018, as issuers and investors alike breathed a sigh of relief at the conclusion of the Dana Gas Sukuk scandal which shook market confidence the year before. The scandal, which was one of the most significant internal challenges the industry faced in recent years, drove home the urgent point for Shariah standardization and stronger governance models for Islamic banking and finance. As Islamic financial organizations revised their procedures, markets such as Morocco and the Philippines also took the steps to introduce new Islamic finance frameworks in 2019 while industry stalwarts Malaysia and the UAE confirmed intentions of enhancing Shariah oversight and Indonesia released its five-year Shariah economy masterplan.

2019 also witnessed high-profile Islamic banking consolidations which resulted in more robust operations in an overbanked GCC market. Abu Dhabi Commercial Bank, Union National Bank and Al Hilal merged; Dubai Islamic Bank acquired Noor Bank; Abu Dhabi Financial Group concluded its amalgamation with SHUAA Capital; and Barwa Bank combined with the International Bank of Qatar; while Kuwait Finance House agreed to buy Ahli United Bank.
The US$2 billion green sovereign Sukuk by the Indonesian government and the world’s first dollar benchmark green Sukuk by a corporate — the UAE’s Majid Al Futaim — were vindication of the Islamic finance industry’s sustainability and ethical DNA. And with Indonesia, Malaysia and the UAE aggressively pushing to integrate Islamic finance into their larger Halal economy to create end-to-end Shariah compliance for the Halal supply chain, Islamic financial institutions have been jumping to meet the Halal finance gap.

All these laid the foundation for a rather upbeat outlook for 2020. Then the coronavirus hit. And the effects of COVID-19 began to cripple economies. Wildly unprepared for a global pandemic which has been spreading at unprecedented levels, governments across continents began to close their borders as many entered into lockdown mode as they attempt to flatten the infection curve and not overburden their healthcare system, while struggling to strike a balance between keeping its economy alive, collective safety and individual freedom.

With millions infected and deaths in the hundreds of thousands in less than six months, the paralyzing financial and economic impacts of the novel coronavirus are likely to last many months after the situation has stabilized. The equity markets have been greatly affected, and banks are already making provisions preparing for steep losses as businesses come to a grinding halt. The upbeat outlook was overturned.

It will be a challenging 2020.

But the Islamic finance industry is no stranger to challenges. Ups and downs are characteristics of the financial markets and any economy. The Islamic finance community is responding swiftly, adapting and adopting new strategies — anchored in technology — to overcome the barriers imposed by the pandemic. New solutions are in the pipeline — after all, it is said that necessity is the mother of invention.
The industry is not oblivious to the herculean task of recovery and the challenges that lie ahead. Remaining pragmatic, many are looking for a silver lining during this dark storm. The industry will be tested yet again. But as you read this year’s annual guide, you will notice a thread of cautious realistic optimism as industry participants continue to keep their heads up high — as they have done through countless moments of economic troughs.
On that note, I sincerely hope that the IFN Annual Guide 2020 would be read as a sign of our industry’s resilience as we go through such troubled times together.