Islamic banks may be bolstered by a nearly doubling of assets
within five years, as borrowers seek alternative methods of
financing due to a cutback in lending at European and US banks, a
media report says.
Quoting a report by Deutsche Bank, Arab News reported that
the bank expected that mortgage financing, particularly in Saudi
Arabia, could provide $100 billion in assets to the overall
Analysts at Deutsche Bank predicted in the report that global
Islamic banking assets could reach $1.8 trillion by the end of
2016 – up 90 percent on the $939 billion of assets in 2010.
The bank report forecasts that there is over $2 trillion of
deleveraging in the US and Europe, creating a financing glut for
both struggling countries and countries in developed markets.
"There are two factors that could potentially drive the issuance
of Islamic bonds. First, the number of companies and countries
that have issued sukuk has already risen significantly and
includes countries outside of the Muslim world. There is no reason
to expect this trend to reverse.
"Second, there is likely to be a
general increase in bond financing, both conventional and Islamic.
With bank financing becoming more difficult to secure owing to the
problems that continue to affect the global banking industry,
companies may well issue more bonds as an alternative way to raise
revenue," Paul Gamble, head of research at Jadwa Investment, told
The $50 billion Islamic bonds industry, which currently makes up
only 1 percent overall debt issuance, is increasingly drawing
issuers, providing significant fee income growth prospects for
Islamic financial institutions, Reuters said.
Sukuk issuances have dominated the Gulf region in recent months.
However, Gamble said, in the GCC, bonds are underrepresented as a
source of corporate financing compared with banks and equity, the
other main sources.
"Furthermore, the impact of new banking regulations on project
financing mean that bonds will be increasingly used for this as
well. All these factors could lead to a significant increase in
sukuk issuance," Gamble added.
Jarmo T. Kotilaine, chief economist at the National Commercial
Bank, said: "As much as Islamic finance, somewhat unfairly, has
been criticized for failing to capitalize on the opportunities
created by the financial crisis in the West, it is increasingly
clear that things are beginning to change."
He said regulatory changes and another period of market turbulence
are increasing the pressure on many Western institutions,
especially in Europe, and their focus will be on capital raising
rather than new credit. This is creating more space in some market
segments for new players.
Kotilaine said while Islamic financial institutions have by no
means been spared from the crisis, especially in cases where they
have had excessive exposures to speculative real estate bubbles,
their position is generally much better by comparison. They tend
to be located in fast-growing and macroeconomically stable
emerging markets. They typically operate in a rigorous regulatory
environment and further benefit from their relatively mainstream
focus on fairly basic products. This partly a result on the
principles underpinning Shariah-compliant finance, partly due to
the fact that Islamic finance is still a growth industry which is
far from having saturated many markets and product segments. This
has shielded them from the kinds of riskier practices one might
observe in a more saturated and competitive market.
"It is clear that Islamic financial institutions right now can
also benefit from a benign environment for raising funding,
especially in the area of sukuk. While sukuk earlier during the
crisis were disadvantaged as compared to conventional bonds due to
concerns over appropriate structures, as well as a lack of clear
precedents and standards for dealing with stress points, e.g.
default-type situations, the sukuk risk premium has now
disappeared and even been reversed. At the same time, Western
appetite for emerging market bonds has in some cases waned due to
risk considerations and the tougher market environment," Kotilaine
He added, this year has already seen an all-time record for
primary sukuk issuance globally. In recent months, sukuk even in
the Gulf (which has generally trailed markets such as Malaysia)
has solidly outpaced conventional bond issuance. There is a clear
appetite for quality sukuk on the part of Islamic institutional
investors and even conventional investors seeking to diversify.
This should create opportunities for strong issuers. Some of the
strong growth is coming from the take-off of sukuk in new markets,
such as Indonesia and Turkey. In a growing number of countries,
regulators have eliminated tax and other disadvantages associated
with sukuk issuances and in some cases, e.g. Indonesia, the
governments have been active issuers.