|
Kuwait Finance House is optimistic of the growth prospects of the Islamic finance industry globally, estimating the Shariah compliant assets worldwide at US$800 billion in 2007 compared to US$150 billion in the mid-1990s, with annual growth rate of 23.5% over the past five years.
The potential for the Islamic finance industry is huge as the Muslim population worldwide is expected to increase to 2.5 billion in 2020 from the current 1.5 billion. Islamic banks are expected to manage between 40% and 50% of total savings of the Muslim population in eight to 10 years, while the potential for Islamic financial services is estimated at US$4 trillion by 2020.
Most Islamic financial institutions are highly liquid, and are seeking new asset classes and markets to diversify. Project finance requirements are estimated at US$500 billion in five years and expected to increase to US$2 trillion in 10 to 15 years.
Total assets under the management of Islamic funds were estimated at US$59 billion as at end-2007. The overall Islamic funds industry has more than doubled in size, with 345 new funds launched between 2005 and 2007. By end of 2008, the total number of Islamic funds is projected to reach 700, with 100 new funds launched this year.
A total of 34% of Islamic funds originated from Gulf Cooperation Council (GCC), partly due to an adherence to legacy investments and continued appetite for GCC economies. There is a bias toward smaller-sized funds, partly due to the local focus of most fund managers. The average fund size in Saudi Arabia is US$170 million, Kuwait at US$100 million, Malaysia at US$44 million and Indonesia at US$10 million. Islamic fund returns averaged at 23% in 2007.
There is an increasing trend in the global Sukuk issuance. In 2006, the issuance increased to US$26.8 billion and surged to US$32.65 billion in 2007. The global Sukuk issuance is forecast to reach US$40 billion in 2008 and is projected to increase to between US$45 billion and US$50 billion in 2009.
In 2007, the Sukuk issuances were dominated by the UAE with 43%, followed by Malaysia (30%), Saudi Arabia (18%), Bahrain (5%) and Kuwait (3%). To date, the Sukuk that have been issued and announced in 2008 are estimated at US$39.8 billion.
In the Takaful sector, there is a growing demand for Shariah compliant products as existing Islamic banking customers look for an ever-broader range of Islamic financial instruments. The growing trend toward the gradual reduction of state welfare benefits encourages Takaful operators to start analyzing and targeting the respective needs of the different customer segments.
The higher levels of foreign direct investment in the infrastructure and real estate sectors are expected to contribute to higher premiums written in the GCC. The growing support from the government and regulators has created a conducive environment for Takaful to grow and thrive.
There is a growth in the capacity of the reTakaful industry as international reinsurers are allowed to operate in local markets. The availability of the new distribution channels allow Takaful operators to offer their product lines via the Internet or hooking up with a bank.
However, KFH foresees some challenges in the Islamic finance industry. Product diversification even at large Islamic financial institutions remains narrow with most credit portfolio allocations dominated by Ijarah and Murabahah, accompanied to a lesser degree by Istisna structures, which target exclusively corporate borrowers, especially the larger ones.
The absence of standards pertinent to Islamic banking and finance has also resulted in uncertainties in accounting principles involving revenue realization, disclosures of accounting information, accounting bases, valuation, revenue and expense matching.
There needs to be greater communication and cooperation between governments, regulators and multilateral organizations, such as the International Monetary Fund, Islamic Financial Services Board, the Accounting and Auditing Organization for Islamic Financial Institutions and the Islamic Development Bank, which have the capacity to provide assistance to governments and supervisory agencies to help them understand Islamic banking standards and best-practice guidelines for the industry.
The speed and degree of success with which Islamic banking is integrated into conventional systems will, to a large extent, depend on whether the sector is perceived to be transparent and well regulated. The shortage of human capital could turn out to be the main impediment to growth if not addressed immediately.
KFH sees huge growth prospects for Islamic finance globally, with positive developments in the industry. The robust economic landscape in the GCC and Asia, coupled with rising wealth and strengthening demand for Shariah compliant investments, will lead to immense potential for further growth of the industry. The encouraging demographics and the proactive measures taken by jurisdictions worldwide will promote the development of Islamic finance.
KFH Research is based in Malaysia.The research team provides core value propositions to KFH’s clients, sharing its knowledge and understanding of global economics and Islamic markets. |
