ISLAMIC FINANCE AND ECONOMIC GROWTH ISLAMIC FINANCE AND ECONOMIC GROWTH 2014 saw global Islamic finance spur economic growth in many jurisdictions, including beyond the traditional Islamic economies, spurring the industry to greater heights. In advanced European economies the sukuk market became an attractive source of fund-raising among governments who needed to explore wider options from more competitive sources, and to establish themselves in the sukuk market to pave the way for corporate issuances in the future. European economies are also active in Islamic capital markets as investors in foreign sukuk, from GCC countries among others, and as a home to Islamic asset management funds. In South East Asia a diverse range of sectors utilising Islamic banking and sukuk have attracted record demand. The Islamic banking sector in Malaysia is set to transition into a more sophisticated market, spurred by evolving and forward-looking regulatory changes. In Africa the core principles that underpin Islamic finance risk-sharing, maximising profits, minimising inequality is supporting of real and sustainable economic activity. Apart from the sukuk market, several African countries benefitted from Islamic loan facilities for infrastructure development and other economic programmes. 14 January 2015 1
Mutually-beneficial prospects between Islamic finance and economic growth Economic growth in 2014 was characterised by a steady recovery and an ongoing shift to the new normal of more modest GDP growth in both advanced and emerging economies 1. Meanwhile, financial markets experienced bouts of volatility attributable to uncertainty on the timing of monetary policy adjustments in the advanced economies, as well as exogenous events such as region-specific geopolitical crises and the decline in oil prices towards the end of the year. While overall growth remained moderate, pockets of economic activity continued to expand in key real sectors such as infrastructure (including transportation, power and utilities and telecommunications), financial services, real estate and aviation. These activities continued to generate demand for financing and other related financial services, including the capital markets. In addition, important processes which facilitate the orderly functioning of the economy such as sovereign funding and financing of business and household transactions remained as important areas for Islamic finance to serve. In 2014, the key Islamic finance segments such as Islamic banking and capital markets continued to support economic growth across the globe by providing Shariah-compliant and ethical methods of financing. Regions that are home to Islamic finance activity such as the Gulf Cooperation Council (GCC) and parts of Asia have benefited significantly from the increasing availability and diversity of Islamic financial solutions to support both sovereign, corporate and household activity. Elsewhere, several advanced economies, including key financial centres, introduced benchmark-sized Islamic financing deals as a means of sovereign funding and to set the stage for future Shariah-compliant deals, including from the private sector. In addition, African nations have also engaged Islamic financial services during the year for government funding and infrastructure needs, amid stronger demand for retail banking. 1 International Monetary Fund (IMF) World Economic Outlook (October 2014) 1
Globally, Islamic finance is now a USD2.1tln industry 2, with Islamic banking and the sukuk market accounting for 95% of the industry s assets. In serving the real economy, the household sector in countries where Islamic finance has a solid presence (e.g. the GCC, Malaysia, Turkey, Indonesia, Pakistan, Bangladesh) have benefitted from the availability of Shariah-compliant financing for important needs such as home and vehicle purchases. Through the bancassurance channel, Islamic banks facilitated the expansion of takaful services to households in key markets such as Saudi Arabia and Malaysia 3, by widening the distribution channels for these protection services. In these more sophisticated markets, household demand for financial services extends to Shariahcompliant investments; Malaysia and Saudi Arabia are home to 300 and 194 Islamic funds respectively, and collectively account for 67% of total assets under management for the industry 4. Global Presence of Islamic Finance (2014) MENA (ex-gcc) Banking assets (593.9) Sukuk Outstanding (0.3) Islamic funds (0.4) Takaful assets (7.7) Total assets (602.4) Asia Banking assets (213.5) Sukuk Outstanding (177.2) Islamic funds (25.9) Takaful assets (3.78) Total assets (420.3) Others (North America & Europe) Banking assets (71.1) Sukuk Outstanding (6.4) Islamic funds (12.9) Takaful assets (0.01) Total assets (90.3) Mainstream Relevance Niche Presence Engaging with Regulators Conceptual Exploration *Values in USD bln as of 1H14 Sub-Saharan Africa Banking assets (22.9) Sukuk Outstanding (0.3) Islamic funds (1.7) Takaful assets (0.2) Total assets (25.1) GCC Banking assets (530.8) Sukuk Outstanding (85.3) Islamic funds (32.7) Takaful assets (8.23) Total assets (657.1) Source: KFHR In some of the more nascent Muslim-majority markets such as Djibouti and Afghanistan 5, the increasing availability of Islamic banks offering basic savings and financing services supported the overarching goal of enhancing financial inclusion, by catering to the demand for Shariah-compliant banking. 2 KFH Research estimate, total global Islamic finance assets as at end-2014 3 Cross-selling: Bancassurance has considerable potential for growth in the long run, Oxford Business Group (2014), Maybank expands into Bancassurance annuity market with Smart Retirement Xtra, Maybank (2014) 4 KFH Research 5 A Gallup poll (2011) on the relationship between account penetration and religiosity found that Muslims are more likely than non-muslims to report religion as a barrier to account ownership, including in Djibouti and Afghanistan. 2
These countries, which remain underserved by the financial sector, have taken concrete steps to support the development Islamic finance as a means to encourage the population to engage in formal financial services. Banking Account Penetration and Religious Reason for Not Having an Account sovereign issuances by non-oic countries such as the UK, Hong Kong and Luxembourg. Another important contribution by the sukuk market is the increase in cross-border issuances, which opens up more avenues of funding for the economy. Infrastructure Sukuk Issuances by Country (2001-3Q2014) Country Adults with account at formal financial institutions (%) Adults with no accounts due to religious reasons (%) 30000 25000 Afghanistan 9.0 33.6 Bahrain 64.5 0.0 Bangladesh 39.6 4.5 Djibouti 12.3 22.8 Egypt 9.7 2.9 Indonesia 19.6 1.5 Kuwait 86.8 2.6 Malaysia 66.2 0.1 Nigeria 29.7 3.9 Pakistan 10.3 7.2 Qatar 65.9 11.6 Saudi Arabia 46.4 24.1 Tunisia 32.2 26.8 Turkey 57.3 7.9 UAE 59.7 2.3 Source: World Bank Global Findex (2011), Gallup Poll, KFHR Similarly, sovereign and corporate funding needs were served by Islamic finance, via both banking and capital markets. Projects and economic developments were supported by both syndicated and bilateral Islamic financing, including facilities provided by the Islamic Development Bank (IDB); channelled mainly to the Middle East and North Africa (MENA) and South Asia regions. Between 2001-3Q2014, sukuk issuances for infrastructure building amounted to USD97.4bln; the main issuers were Malaysia, Saudi Arabia and the UAE. Meanwhile, the sukuk market continued to be dominated by sovereign entities; exciting developments for the year included the debut USD (mlns) 20000 15000 10000 5000 0 2001 2002 2003 Malaysia UAE Indonesia Pakistan Saudi Arabia Kuwait Brunei Iran Nigeria Source: IFIS, Zawya, Bloomberg, KFHR 2004 2005 2006 2007 Advanced economies: Sukuk market as an alternative source of funding; Europe tapping into Islamic investment opportunities The gradual improvement in advanced economies growth continued in 2014, with growth sufficient to warrant a tapering of the easy monetary policies of the past five years. Nevertheless, structural economic issues remain; one of which is the limited fiscal space available given still-high debt-to-gdp ratios and the need for further consolidation 6. As such, governments need to explore wider options from more competitive sources of funding, which includes from highly sought-after instruments such as sukuk. Another important motivation for the government of advanced economies involvement in the sukuk market is to create benchmarks and pave the way for corporate issuances in the future. 2008 2009 2010 2011 2012 2013 1H14 3Q14 1-3Q14 6 IMF World Economic Outlook (October 2014) 3
Debut Sovereign Sukuk Issuances by Advanced Economies (2014) Sovereign sukuk Issuance Date UK 25th June 2014 Hong Kong 18th September 2014 Structure Ijarah Ijarah Ijarah Currency GBP USD EUR Source: IFIS, Zawya, Bloomberg, KFHR Luxembourg 30th September 2014 Yield 2.036% 2% 0.436% Issue Amount USD339.5mln USD1bln USD271.73mln Tenure 5 Years 5 Years 5 Years The governments of the UK, Hong Kong and Luxembourg tapped the sukuk market with benchmark-sized issuances in 2014. All three sukuk were structured using Ijarah or underlying lease contracts. These three economies are home to global financial centres, which are vying to attract lucrative Islamic finance transactions in the future. The UK issued its debut sovereign sukuk, making it the world s first non-organisation of Islamic Cooperation (OIC) country to issue sovereign sukuk, raising GBP200mln (USD339.5mln) for the British Government while providing investors a profit rate of 2.036%. Order books totalled up to GBP2.3bln, which represents an oversubscription by nearly 12 times the issuance size. The first sovereign sukuk from the Far East was issued by Hong Kong in September 2014; a USD1bln Ijarah sukuk with a 5 year tenure. The large issuance by a highly-rated sovereign entity attracted a huge investor demand with books running up to USD4.7bln. The deal was closed at a tightened spread of 23bps over 5-year Treasuries (initial spread: 30bps), which translates to a 2.005% profit for investors. Elsewhere, Luxembourg issued a EUR200mln (USD253mln) 5-year sukuk, which was twice oversubscribed. Apart from issuing sukuk, European economies are also fairly active in Islamic capital markets as investors in foreign sukuk and as a home to Islamic asset management funds. The strong demand by European investors for selected have allowed issuers such as the IDB and other governments to issue sukuk with lower-thananticipated financing costs. For example, European investors accounted for 27% of total investments in the IDB s USD1.5bln (Middle East: 51%; Asia: 22%), which enabled the IDB to conclude the transaction at 23bps over mid-swaps which represents the IDB s tightest spread on record. Similarly, a USD750mln sukuk issued by the Dubai Government in April 2014 attracted an oversubscription by more than three times enabled the issuer to price the sukuk at the lowest end of its initial price guidance. A sizeable 28% of investments came from European investors, who took up a 28% share of the issuance (Middle East: 61%; Asia: 9%). On Islamic funds, Islamic funds domiciled in Europe held approximately USD11.9bln in assets under management (AuM) as at 17 September 2014, accounting for sizeable 16.3% of the global aggregate Shariah-compliant AuM, up from an 11.8% share as at end-2012. Apart from the offshore centre in Jersey, other key European players in the Islamic funds market are located in Luxembourg and Ireland. These funds invest mainly in global markets, as well as the Middle East and North Africa (MENA) region. Outlook In the near term, the role of Islamic finance is likely to be concentrated on capital markets, as the banking sector in most advanced economies are fairly mature and demand for Shariah-compliant banking remains nascent. While developments in UK and parts of Europe are encouraging, it will take many years before Islamic banking takes off in advanced economies. The sukuk market holds strong potential as a source of funds for advanced economies, and is likely to attract corporate issuers as well. As of 2014, Goldman Sachs, a leading investment bank in the US, had tapped the sukuk market for the first time. Meanwhile, European investors searching for alternative investments will continue to be a source of funds for sukuk issuances and the Islamic asset management industry, which supports economic activity of the recipients of these funds, namely sukuk issuers and investment funds especially in the Middle East. 4
GCC: Islamic banking continues to grow and serve the population; sukuk a major financing source for infrastructure needs The GCC economies have benefitted from the growth of Islamic banking, which is now a USD564.2bln industry in the region 7. Notably, the share of Islamic banking assets to the total financial sector in Saudi Arabia, Kuwait and Qatar are at systemically important levels of above 20% 8. Meanwhile, the UAE and Bahrain recorded double-digit shares of 17.4% and 12.7%, respectively. By sector, the commerce sector was the main recipient of financing in Saudi Arabia in as of 3Q2014 9, accounting for 20.7% of total financing 10, followed by manufacturing (12.8%) and construction sectors (6.8%). Elsewhere in Kuwait, 39.3% of total financing 11 is channelled to the household sector. By economic sector, the main recipient of financing are the real estate (25.9%) and trade (9.6%) sectors 12. GCC: Share of Islamic Banking Sector to Total Financial Sector (1H2014) % Share 60 50 40 30 20 10 0 51.3% Saudi Arabia 45.3% 25.1% 17.4% 12.7% 4.3% Kuwait Qatar UAE Bahrain Oman Source: Central banks and regulatory authorities, individual institutions, Bloomberg, Zawya, corporate communications, The Banker, KFHR 7 KFH Research estimate, 1H2014 8 In the Islamic Financial Services Board s (IFSB) Financial Stability Report 2014, the Islamic financial sector is considered as systemically important when the total Islamic banking assets in a country comprise of more than 20% of its total domestic banking sector assets or hold at least 5% share of the country s Islamic banking assets as a proportion of the global portfolio of Islamic banking assets. 9 Saudi Arabia Monetary Authority 10 Data is only available for total financial sector no segregation of data for Islamic banks. Nevertheless, a high 51.3% share of Islamic finance in the Saudi Arabian financial sector implies that overall trends would somewhat reflect Islamic financing trends. 11 Central Bank of Kuwait data. Similar to Saudi Arabia, Kuwait data is not segregated between Islamic and conventional finance. 12 Data for Kuwait as of 1Q2014 Meanwhile, sukuk issuances in the GCC served to support mainly sovereign funding and infrastructure plans. The biggest sukuk for the year was from Saudi Arabia, a USD1.2bln issuance by Saudi Electric in January, which will be utilised to improve power services in the kingdom. A newcomer to the GCC sukuk market is the Fawaz Alhokair Group which is a major retail franchise owner in Saudi Arabia, with a USD133.3mln issuance for the purpose of funding its massive expansion plans more than 400 new stores for the financial year ending March 2015, including expansion beyond Saudi Arabia. Meanwhile, the GCC financial sector, in efforts to comply with Basel III standards, issued several Basel III-compliant sukuk this year, including a perpetual sukuk by Al Hilal Bank. 5
Basel III-compliant Sukuk Issuances by GCC Financial Sector (2014) Source: IFIS, KFHR Sukuk Structure Country Issue Date Tenure (Years) Size Type of Capital NCB Tier 2 Sukuk Mudharabah Saudi Arabia 20th Feb 2014 10 years (Callable 5-years) Saudi Investment Bank Banque Saudi Fransi Combination Saudi Arabia 5th June 2014 10 years (Callable 5-years) Combination Saudi Arabia 18th June 2014 10 years (Callable 5-years) Al Hilal Bank Mudharabah United Arab Emirates 30th June 2014 Perpetual (Callable 5-Years) SAR5bln SAR2bln SAR2bln USD500mln T2 T2 T2 AT1 Apart from sukuk, some of the biggest Islamic financing deals in 2014 were from the GCC and channelled to the aviation and real estate sectors. Saudi Arabian Airlines signed a USD1.9bln syndicated financing deal in May 2014, to finance the purchase of 26 aircrafts. In the same month, Emaar Malls Group secured a USD1.5bln financing for the purpose of repaying a previous conventional loan. At the end of the year, Marafiq, a utility services provider to two industrial cities in Saudi Arabia, signed a USD666mln deal to finance its existing utilities projects. Outlook Infrastructure spending will continue to be a key theme for the GCC in 2015 and beyond, including improvements to transport infrastructure, as well as power and utilities. In addition, the recovery in the real estate market in Dubai is likely to spur more demand for housing and construction financing. In Saudi Arabia, the 2012 Mortgage Law is expected to spur more demand for mortgage financing as the ongoing changes to the law would prove more regulatory clarity on home financing. Overall, risks to the GCC market are mainly from the decline in oil prices, which impact both government coffers and private sector income. The GCC has recorded strong economic growth in the recent past, supported by rising oil prices, sound macroeconomic management, investments in health, education, and infrastructure, and an an increasingly business-friendly environment 13. Nevertheless, the focus on oil and gas, infrastructure and construction is not a sustainable source of growth in the medium-run; the IMF recommends transitioning to higher value-added activity such as manufacturing and services. In this regard, the Islamic finance industry in the GCC may facilitate these ongoing shifts by providing financial services for sectors such as manufacturing and services, including for Small and Medium Enterprises (SMEs). Southeast Asia: Diverse range of sectors utilising Islamic banking and sukuk in Malaysia; Indonesia sovereign sukuk attracted record demand The Southeast Asian Islamic finance industry is dominated by global leader Malaysia, and the upand-coming jurisdiction of Indonesia. Malaysia is the top issuer of sukuk globally, accounting for 64.6% of sukuk issued in January-November 2014 14, and is the second largest Islamic banking domicile after Saudi Arabia 15. Indonesia is the eighth biggest Islamic banking market globally, and the third largest issuer of sukuk 16. 13 Economic Diversification in the GCC: Past, Present, and Future, IMF (2014) 14 KFH Research 15 KFH Research; Iran is excluded from the sample 16 KFH Research, January-November 2014 6
Islamic banking holds a 25.7% share of the total assets of the banking system, including DFIs 17 in Malaysia. Financing provided by Islamic banks were utilised mainly to purchase cars and properties, as well as for working capital and investment in securities. In 2014 YTD (January to November 2014), 22% of financing disbursed were channelled for the purchase of transport vehicles (mainly passenger cars) while financing for purchase of residential properties and working capital amounted to a 24.5% and 24.4% share, respectively. Overall, about 61.6% of Islamic financing in 2014 YTD was utilised by the household sector implying strong potential for the Islamic retail banking products. There are a wide range of Islamic financing products available for property purchase, for example Musharakah Mutanaqisah (diminishing partnership via leasing), Ijarah (lease) and Commodity Murabahah. Meanwhile, a major telecommunication provider secured a USD766.3mln Commodity Murabahah syndicated loan to support its working capital and expansion plans. Malaysia: Islamic Financing by Purpose (November 2014) 2.9% 0.01% 0.6% 24.4% 9.7% 1.0% 8.4% * Includes financing for purchase of fixed assets, credit card, consumer durables, etc Source: BNM, KFHR 6.4% 24.5% 22.0% Residential Non-residential Fixed assets (excl. land & buildings) Personal use Credit card Consumer durables Construction Working capital Securities Vehicles On the business side, the key borrowers are diverse, ranging from manufacturing firms to the financial sector, as well as the private education and health industries. This illustrates the broad appeal of Islamic finance across real economic sectors which underpin Malaysia s solid growth prospects. As Malaysia s economy continues to expand, Islamic finance will play a key role in supporting economic activities. Malaysia: Islamic Financing by Sector (November 2014) 4.7% 5.1% 5.3% 4.1% 6.8% 4.1% Source: BNM, KFHR 1.6% 3.4% 2.0% 1.0% 0.5% Households Finance, insurance & business activities Manufacturing Education, health & others Construction Real estate Wholesale & retail trade, hotels & restaurants Transport, storage communication 61.6% Agriculture Others Power & utilities Mining Meanwhile, Malaysia s dominance of the sukuk market continued, which augured well to fuel economic activity across several sectors. Apart from the government, key sectors include financial services, power and utilities and construction. Similar to the GCC, financial sector issuances included several Basel III-compliant sukuk issued in 1H2014. In addition, a leading takaful operator issued the world s first sukuk from the takaful sector. Another notable development in Islamic project financing was the issuance of three perpetual sukuk in Malaysia towards the end of the year; in the transportation and real estate sectors. This development reflects confidence in the sukuk market as a long-term source of funds for key economic projects. 17 BNM data (2013) 7
Malaysia: Sukuk Issuances by Sector (January-November 2014) Indonesia: Islamic Financing by Type of Institution (1H14) 0.87% 0.53% 3.37% 2.16% 0.08% 0.02% 3.45% 0% 3% 18.82% 4.68% 66% Government Financial services Power & utilities Construction Real estate Transport Health care service Telecommunications Agriculture Education Retail 25% 72% Islamic Commercial Banks Islamic Banking Units Islamic Rural Banks Source: IFIS, Zawya, Bloomberg, KFHR Source:Otoritas Jasa Keuangan, KFHR As the top sukuk-issuing domicile, Malaysia s sukuk market had also facilitated foreign issuers in 2014, most notably the first JPY-denominated sukuk by Bank Tokyo Mitsubishi-UFJ. The financial entity issued a two-tranche sukuk in September 2014, the proceeds of which will be utilised for its operations in Malaysia. Other foreign entities which issued sukuk in Malaysia include two Singapore-listed plantations, as well as a Turkish bank. The highly liquid and well-regulated Malaysian market provided an opportunity for foreign issuers to tap into strong demand, including from domestic institutional investors. In Indonesia, Islamic commercial banks dominate financing activity, accounting for 72% of total Islamic financing in 1H2014. Rural Islamic banks, while accounting for a small 3% share, play an important role in improving access to financial services to the underbanked population. In terms of major Islamic financing deals, leading airline Garuda Indonesia secured a USD100mln Musharakah financing from Malaysia s Maybank Islamic. The bilateral deal was Indonesia s largest Islamic financing deal to date, and will be utilised to fund the airline s expansion plans. The deal marks Indonesia s fifth USD-denominated sovereign sukuk to date and was structured as an Sukuk was an important source of sovereign funding in 2014, as the government returned to the sukuk market in September 2014 (after a 1-year absence) to issue a USD1.5bln sovereign sukuk; which attracted an order book of USD10.2bln. The strong demand enabled the sovereign to beat its previous order book record of USD6.5bln set back in 2011, and tightened its pricing by 27.5bps, resulting in a final return of 4.35%. Amongst other Association of South East Asian Nations (ASEAN) countries, Singapore, Brunei and Thailand also leveraged on Islamic finance for economic activity. In Singapore, apart from plantation companies, witnesses two issuances by Sabana REIT; a Shariah-compliant investment vehicle in the country s vibrant property market. Meanwhile, Brunei s central bank issued short-term sukuk to facilitate liquidity management amongst its Islamic banks. As of 2014, Islamic banking deposits are estimated at 45% of total deposits 18 in Brunei s banking system. In Thailand, Islamic banks continue to serve the Muslim population in terms of basic banking needs. 18 Brunei s BIBD eyes benchmark-sized Islamic loan this year, Bloomberg (2014) 8
Outlook The Islamic banking sector in Malaysia is set to transition into a more sophisticated market, spurred by evolving and forward-looking regulatory changes. The implementation of the Islamic Financial Services Act (IFSA) 2013 will change the industry and is a conscious effort by the regulator towards achieving end-to-end Shariah compliance. For example, the Act requires Islamic banks to distinguish common deposit accounts and investment accounts such as Mudharabah and Musharakah. These steps towards improving clarity and conduct are expected to support consumer confidence in the industry, while setting clearer boundaries for product innovation; both of which will support the utilisation of Islamic finance for real economic activity. Meanwhile, the sukuk market in Malaysia will continue to be an important source of funds for the Malaysian government and corporates alike, due to competitive pricing and a ready pool of investors. The market is also expected to attract more foreign issuers, including from at least one Turkish financial institution which has expressed interest. Indonesia, with a highly populous and growing middle-income cohort is expected to expand its reliance on Islamic finance to facilitate economic activity. Islamic banking assets in Indonesia reached IDR250.1tln as at 1H2014, recording an impressive annual growth rate (CAGR) of 35.79% from 2005 through 2013 19. As of 1H2014, Islamic banking share of total banking assets remained low at 4.6%, signalling strong potential for growth. The authorities recognise this potential and are undertaking efforts to support Islamic finance. For example, Indonesia Financial Services Authority (OJK) has been promoting consolidation among Islamic banking institutions, by setting rules which require Islamic banking units to be converted into full-fledged listed subsidiaries by 2022. Larger banks would be better able to compete with regional banks and provide a wider range of services to Indonesian businesses and consumers. Africa: Budding growth in retail banking and sovereign sukuk The continent s presence in the global sukuk market was bolstered by two debut sukuk issuance in 2014, by the governments of South Africa and Senegal. The Senegalese government issued an XOF100bln (USD200.5mln) sukuk in July 2014, to support its budgeted spending for the year 20 ; while seeking new sources of financing. The government of South Africa also issued an Ijarah sukuk which benefited from strong Middle Eastern demand; allowing the maiden issuer to diversify its sources of funding. The USD500mln issuance attracted a substantial order book worth USD2.2bln 21, achieving an oversubscription by 4.4 times; with nearly 50% orders originating from the Middle East. Apart from the sukuk market, several African countries benefitted from IDB loan facilities provided to member countries for the purpose of supporting infrastructure development. In 2014, financing packages ranging from USD15mln to USD227mln were provided by the IDB to the governments of Niger, Cote d Ivoire, Egypt, Morocco and Senegal. Proceeds were utilitised to infrastructure sub-sectors such as air transportation and oil and gas extraction, as well as other economic programmes 22. 19 KFH Research 20 IFIS 21 IFIS 22 IFIS 9
Outlook Infrastructure funding needs in Africa are significant; recent efforts to tap the Islamic finance market have been met with positive responses and thus, may open the door for more collaborations. The African Development Bank s (ADB) Programme for Infrastructure Development in Africa (PIDA) will cost around USD360bln between 2011-2040, with much of this funding required by 2020. On the retail banking side, Islamic banks are expanding in selected African states. In Tunisia, El Wifack Leasing Company received approval to become the country s third Islamic bank in October 2014 23. Burkina Faso s Coris Bank International (CBI) has announced its decision to launch a Shariahcompliant window in 2015 24, paving the way for it to become the pioneering financial institution in the West African republic to offer Islamic banking services. Elsewhere, Morocco has passed a new Islamic banking law, which is expected to support the further development of Islamic finance in the country; the bill will allow for local and foreign banking institutions to set up Islamic banking branches in Morocco 25. Islamic finance: will continue to support economic activity in key jurisdictions The core principles that underpin Islamic finance risk-sharing, maximising profits, minimising inequality allude to a system that is supportive of real and sustainable economic activity. To date, the growth of the Islamic finance industry, especially in banking and capital markets, augured well for the financing of various sectors including those related to infrastructure, household spending on big ticket items and public finances. Key Islamic finance regions in the GCC and Southeast Asia likely benefitted the most, given the wide availability of banking products and the active Islamic capital markets. Meanwhile, selected advanced economies have engaged Islamic finance via the sukuk market, to take advantage of more diversified sources of funding and competitive pricing. Financial centres have also tapped the sukuk market as a means to establish themselves as leading Islamic finance destinations. Elsewhere, new Islamic finance frontiers in Africa have some retail presence, and have recently tapped Islamic capital markets for sovereign funding as well. Global Islamic Finance Assets (2009-2018F) USD (blns) 3500 3000 2500 2000 1500 1000 500 0 2009 2010 2011 2012 2013 2014E 2015F 2018F Source: Various, KFH Research Database USD2.4tlns USD3.4tlns Overall, the symbiotic relationship between Islamic finance and the economy is expected to spur the industry to greater heights Islamic finance assets, which has just surpassed the USD2tln mark in 2014, are expected to expand further to USD3.4tln by end-2018. Broadly, the key growth drivers are related to structural and demographic factors. Countries with significant Muslim populations represent a ready market for Islamic retail banking and takaful these include lower-income countries where the population is significantly underbanked due to lack of access or religious reasons. The ongoing economic recovery is broadly supportive for Islamic finance demand, though risks from lower oil prices may start to affect key oil producing countries. By country, growth will be spurred mainly by the leading domiciles of Malaysia, Saudi Arabia, the UAE, Qatar and Kuwait; new frontiers such as Indonesia and Turkey; as well as the expected entry into nascent markets in Africa and Central Asia. 23 Tunisia: Leasing company El Wifack to turn into an Islamic bank, Making Finance Work for Africa (October 2014) 24 Burkina Faso set to welcome first institution offering Islamic financial services next year, Islamic Finance News (October 2014) 25 Moroccan parliament approves Islamic finance legislation, Reuters (November 2014) 10
The expansion of Islamic finance will be characterised not only from a geographical standpoint; the market is expected to transition in to a deeper and more sustainable one. For example, leading jurisdictions and multilateral bodies have recently enhanced standards to guide Islamic finance institutions (IFIs ) operational and product development matters. In addition, product innovation and enhancements are expected to continue, especially in the more sophisticated Islamic finance markets. Meanwhile, cross-border transactions are expected to gain traction as governments and corporates seek more competitive sources of financing for economic activity. 11
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