Islamic Finance Market - Growth, Trends, Covid-19 Impact, and Forecasts (2021 - 2026)

The Islamic finance industry’s performance is measured through five sub-sectors: Islamic Banking; Takaful; Other Islamic Financial Institutions (OIFIs) such as investment or micro-finance companies; Sukuk; and Islamic Funds. The global Islamic finance market is growing rapidly, because of the strong investments in the Halal Sectors, infrastructure, and Sukuk bonds, especially through electronic modes in all products and services. The factors driving the growth of the Islamic Finance market are directing investment toward the tremendous growth opportunities in the promising Islamic sectors. The industry’s total worth, according to key industry stakeholder organizations, across its three main sectors (banking, capital markets, and TAKĀFUL), global Islamic Finance assets increased by double-digit year-on-year totaling in 2019. The global Islamic banking sector is the main contributor to this market and is worth at USD 1.99 trillion growing at 14percent. Islamic banking has a 6 percent share in global banking assets.

Global SUKUK's outstanding value stood at USD 538 billion, as per industry sources, on the back of strong sovereign and multilateral issuances in key Islamic Finance markets to support respective budgetary expenditures. This included debut entries into the sovereign SUKUK market by Saudi Arabia and Nigeria, as well as the pan-African multilateral development finance institution, Africa Finance Corporation.

The pandemic has got a dent in the growth of the Islamic Finance market. Sukuk is one of the worst hit segments and will be in the slump of slow trend. The main reason being the longer regularization process of Sukuk made many choose regular bonds to raise money during the Pandemic.

Covid-19 pandemic and tumbling oil prices hamper Sukuk’s growth. The first two quarters of 2020 saw high levels of volatility in global markets as the Covid-19 pandemic took hold and oil prices crashed. Some of the largest sukuk issuers, often from oil-exporting countries, held off from issuing sukuk during the first quarter amid the market turmoil.

Key Market Trends

Islamic Banking is the Largest Segment

Islamic banking is the largest sector in the Islamic finance industry, contributing to 69%, or USD 1.992 trillion, of the industry’s assets. The sector is supported by an array of commercial, wholesale, and other types of banks. Yet commercial banking remains the main contributor to the sector’s growth. There were 526 Islamic banks in 2019. However, the number of players is not necessarily indicative of the size of the industry, In terms of assets. The top 3 markets of Iran, Saudi Arabia, and Malaysia contribute to 63% of the Global Islamic Banking Assets, and Morocco is the fastest growing market in Islamic Banking Asset where assets doubled in 2019.

Sector growth is likely to be muted in 2020 as Islamic banks around the world move to preserve their capital bases rather than expand operations as they face the economic fallout of Covid-19. Although the bottom lines of Islamic banks in core markets have taken a hit during the pandemic, this will be countered by liquidity injections from government bailout packages. As global economies recover over the next five years, Islamic banking assets are projected to reach US$2.44 trillion by 2024.

Islamic banking is commonly seen to have two advantages over conventional banking. The first is a perception that Islamic banks are bound to a higher moral standard. They will not take on irresponsible amounts of risk or pay outsize bonuses to their top bankers. The second is that earnings come from identifiable assets, not opaque combinations of derivatives and securities. Because Islamic banks cannot make money through interest, they rely on ties to tangible assets, such as real estate and equity, charging ‘rent’ instead of interest.

GCC and MENA Contributes 70% of Global Islamic Finance Assets

Shariah-compliant assets represent a significant portion of total banking assets of the GCC. While in the Middle East & North African (MENA) region, Islamic Banking assets represent 14percent of total banking assets. In the GCC, the market share of Islamic banking crossed the 25percent threshold, which suggests that Islamic banks have become systemically important in these countries.

The asset class rose 30 percent in 2019, in the GCC, with new launches of Islamic exchange traded funds (ETFs) in a number of countries and of ESG-related investment assets made available through digital media that appeal in particular to millennials.

GCC Islamic financial assets reached USD 1253 billion by 2019, amounting for 44 percent of overall assets, followed by the MENA at USD 755 billion and 26.3 percent share, the southeast Asia at USD 24 percent, Europe, Asia, America and Africa amounting for the rest. Islamic banking has acquired systemic proportions in Kuwait, Saudi Arabia, and the United Arab Emirates, in line with IFSB’s definition of systemic, at least 15 percent of banking system assets. Retail Islamic banking in Bahrain has reached systemic proportions with a 27 percent asset share in retail banking, and a 13 percent asset share in total retail and wholesale banking. Oman’s entry in Islamic Banking was in late 2012.

Covid-19 offers an opportunity for more integrated and transformative growth with a higher degree of standardization, stronger focus on the industry’s social role, and meaningful adoption of financial technology or fintech.

Competitive Landscape

The Islamic finance market is fragmented with a large number of players trying to grab a significant chunk of the developing market. In some regions, like Asia and Africa, it is moderately growing with the presence of a large number of local players and some major players. However, GCC is a highly competitive market, with the presence of large number of international players. Bank Al-Rajhi, Dubai Islamic Bank, and Kuwait House Finance, are among the major players present in the region.

Additional Benefits:

• The market estimate (ME) sheet in Excel format
• 3 months of analyst support