The outlook for the global Islamic finance market remains strong despite its taking a drubbing last year because of the global financial crisis. According to Standard & Poor’s Islamic Finance Outlook 2009, which was released last week, the Sukuk market suffered heavily in 2008. The global Sukuk issuance more than halved to $14.9 billion in 2008 from $34 billion the previous year but the outlook for asset-backed Sukuk remains positive despite doubts raised by the disruption in global financial markets and in structured finance.
Shariah-compliant assets now total about $700 billion after growth exceeding 10 percent annually during the past decade, S&P said.
“When economies begin pulling out of the downturn, we expect Islamic finance to resume its rapid growth. The long-term pipeline for Sukuk issuance is healthy, and the market is attracting interest from an increasing number of issuers in both Muslim and non-Muslim countries,” S&P said in its report.
The Islamic finance market has gained strength over the past decade, driven by a push by Gulf Arab nations. Initially, the growth of the Islamic finance industry was more concentrated in the Middle East, whereas now it is expanding globally.
According to the Shariah-Fortune database there are currently 810 companies in 50 countries offering Shariah-compliant financial products and services worldwide.
The highest growth segment amongst all is for Sukuk. Sukuk can be better understand as asset-based capital market securities, which are quite similar to asset-backed securities in the conventional financial system. It is estimated at $70 billion and is expected to reach $100 billion in 2010.
Sukuk is Shariah-compliant and hence does not guarantee returns explicitly. These contracts are based on Special Purpose Vehicles (SPV) in which investment is made in real economic activities, which are religiously sanctioned. The largest segment for corporate issuance of Sukuk is in the financial services sector which, for the year 2007, constituted 31 percent of the total volume, followed by real estate and utilities at 25 and 12 percent respectively.
Recently, a substantial portion of growth in Sukuk issuance has been led by Asia, primarily by Malaysia. Asia accounted for 90 percent of global Sukuk issues in 2004.
The Middle East is by far the biggest market and covers more than half (around 56 percent) of the Islamic finance market. Around 450 companies are located in the region.
Asia has a market share of about 20 percent and, in particular Malaysia is in top position, aiming to become the major center for Islamic finance worldwide. About 114 companies located in Europe offer Islamic finance services, which accounts for some 14 percent of the global market. Clearly the UK is the leading nation and with its strong immigrant population has found a large client base for its Islamic products, boosted by the Financial Services Authority’s (FSA’s) regulatory initiatives.
Compared to its global importance, North America takes only a small part in the listing for Islamic finance.
Around 44 companies have been screened in the US and Canada.
Africa, Australia and South America are hardly represented in the Islamic financial world and have only a marginal market share.
The companies have been divided into six different categories: Banking & financing, investment, insurance, real estate, asset management and other services.
Islamic finance has provided a reliable new way to move funds from surpluses in the Middle East to other parts of the world. Soaring oil prices until recently helped increase the average incomes in the GCC region by a great margin and Islamic finance has been an effective vehicle for fund transfers.
Though there is a dearth of news instruments in the market, the growth of the market is forcing banks and institutions to develop sophisticated new instruments.
The Islamic finance market is a niche market at present, with excellent growth prospects for the future, considering the fund investment requirement of the world’s 1.4 billion strong Muslims. This population includes high net worth individuals who need to channel their funds in an effective and Shariah-compliant way, thus creating a strong growth potential for the market.
