Islamic Finance

The global Islamic finance industry has been experiencing rapid asset growth, primarily concentrated in a few key markets. This trend is expected to continue throughout 2024, with positive contributions from all components of the industry.

However, the sukuk market may face headwinds due to a new standard adoption that could slow issuance expansion from 2025 onwards. While sustainability and digitalisation offer new growth avenues, their adoption has been relatively slow.

The total assets of the global Islamic finance industry have been on a steady upward trajectory. S&P Global Ratings anticipates high-single-digit increase for 2024-2025, following an 8% growth in 2023. The sukuk market demonstrated healthy but moderating growth in issuance volumes.

Global sukuk issuance is projected to reach USD 160 billion to USD 170 billion in 2024, slightly down from USD 168.4 billion in 2023 and USD 179.4 billion in 2022. By the end of March, total sukuk issuance reached USD 46.8 billion, compared to USD 38.2 billion a year earlier. The Islamic funds and takaful sectors are also poised for further expansion.

REGULATORY CHALLENGES

The industry continues to grapple with familiar challenges, including concentration in a limited number of countries and the complexity of transactions and standards.

Islamic finance has struggled to attract interest beyond its core markets, limiting the industry's geographic diversification. The evolving standards, such as the exposure draft on sukuk (Standard 62) by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), could exacerbate this issue. If adopted as proposed, these standards could present new challenges from 2025 onwards.

In 2023, the Islamic finance industry continued to expand, with assets growing by 8%, driven largely by banking assets and the sukuk market. Islamic banking assets contributed 56% to this growth, a decline from 72% in 2022, while financial institutions across the Gulf Cooperation Council (GCC) accounted for 86% of the asset growth, with Saudi Arabia being the main contributor.

The UAE also showed stronger contribution in 2023, thanks to the non-oil sector's impressive performance. Other regions, such as Türkiye and Indonesia, showed some growth, although Malaysia and Türkiye's performance had been tempered by currency depreciation.

“We expect activity in Saudi Arabia to continue supporting the growth of Islamic banking assets in 2024-2025. In other GCC countries, mid-single-digit growth appears plausible in the absence of new major investment cycles,” S&P said in a recent report.

The agency expects the Islamic banking industry in Asia-Pacific to deliver high-single-digit growth over the next couple of years.

GROWING SAUDI MARKET

Saudi Arabia's sukuk and debt capital market posted a growth of 7.9% since 2019, according to the Capital Market Authority (CMA). The growth has primarily been driven by unlisted issuances, which have grown at an annual rate of 9.6%.

The market's expansion was accompanied by an increase in the number of issuers. The unlisted sukuk and debt capital market has grown by approximately SAR 33 billion since 2019, reaching about SAR 105 billion in 2023, up from SAR 72 billion in 2019.

The CMA is developing the sukuk and debt capital market as a key financing alternative for public and private sector projects. Recognising the market's critical role in economic growth, the Financial Sector Development Program (FSDP) established the Sukuk and Debt Instruments Market Development Committee to unify efforts and set strategic directions for market development.

Since its formation, the committee has implemented several initiatives to enhance market liquidity and depth. These efforts led to significant growth in the number of issuances and issuers, increased liquidity, and a more diverse investor base. The corporate sukuk and debt capital market size reached SAR 125 billion by the end of 2023, up from SAR 95 billion at the end of 2019. Additionally, the number of companies issuing debt instruments tripled by the end of 2023 compared to 2019.

The market has also seen rapid growth in trade value and transaction numbers, with traded value rising to SAR 2.5 billion in 2023 from SAR 0.8 billion in 2019, marking a record number of executed transactions. The CMA aims to make the sukuk and debt capital market attractive for both governmental and non-governmental issuances and is working on enhancing its legislative and regulatory environment.