Data issued by “Moody’s” Agency for Investors Services, covering the period from 2019 to the third quarter of 2021, showed that the Kuwaiti Islamic banks recorded the fourth best growth rate in financing operations in the world, and their performance was better than traditional banks in this regard during Corona.
The agency stated in a recent report that Kuwait is the fifth largest major market for Islamic finance in the world, while Saudi Arabia still dominates the first place, pointing out that the adoption of the Public Debt Law may enhance the issuance of sovereign sukuk, given the importance of sukuk in the Gulf.
While Moody’s expected the law to pass sometime this year, a local Arabic daily stressed, there is a clear possibility that it will face further delays, given the track record of parliamentary stalemate, stressing that the law will ease ongoing liquidity pressures.
On the other hand, the report stated that in 2021, global long-term sovereign sukuk issuances declined, including those of multilateral development banks, due to the sharp decline in the financing needs of the main sovereign issuers of sukuk, explaining that this decline came in the wake of the record sovereign sukuk issuance volumes in 2020, and it is expected that issuances will witness a further decline in 2022 in light of the continued shrinking of the government deficit, amid high oil prices, a decrease in expenditures related to Corona and an acceleration of economic activity in the countries issuing basic sukuks.
The report added that the volumes of long-term sovereign sukuk issuances decreased by 22 percent to $88 billion in 2021, as the sukuk-issuing governments witnessed a decrease in their total financing needs, noting that Saudi Arabia, Malaysia and Indonesia still dominate sovereign sukuk issuances, as they together accounted for about 77 percent of sovereign sukuk issuances until the end of last year, while all of these governments recorded lower fiscal deficits in 2021.
Moody’s expected that the growth of Islamic finance will continue despite expectations of a decrease in sukuk issuance, and it is also likely that an acceleration in the economic recovery will occur, and that high oil prices and decisions to raise interest rates will have an impact on the Islamic finance industry this year.
The report indicated that Saudi Arabia and Malaysia maintain their leading position as the two largest markets for Islamic finance, expecting an increase in penetration of this industry in the short and medium term.
The report also indicated that in 2021, sukuk issuances fell by 12% to $181 billion, which reflects the decline in sovereign financing needs in the Gulf countries and Indonesia as a result of high oil prices and economic recovery, expecting that issuances will decline this year to 160-170 billion dollars with continued support for high oil prices.
Moody’s expects the continuation of moderate growth in Takaful insurance premiums over the next 2-3 years, due to the increasing demand for health insurance with an increasing number in the Gulf, Africa and Southeast Asia implementing compulsory health insurance.
With regard to highly competitive markets, such as the Gulf markets, the agency suggested that operators, which currently lack sufficient size, will accelerate their investments in technology and seek mergers and acquisitions to build large conglomerates.
The agency also expected that the issuance of long-term sovereign sukuks would drop to $73 billion in 2022 and $75 billion in 2023, noting that in the Gulf, with the exception of Kuwait, the total financial surplus will grow to $50 billion in 2022 from about $13 billion in 2021, which compensates for the significant increase in scheduled sukuk repayment.
According to agency estimates, the total fiscal deficit of the major sukuk-issuing governments (Saudi Arabia, Malaysia, Indonesia and Turkey) will decrease to $92 billion in 2022 from $118 billion in 2021 and $194 billion in 2020.
Moody’s affirmed that the economic recovery in major Islamic finance markets will boost credit growth and demand for Islamic Sharia-compliant products, with the expectation that the assets of Islamic banks will continue to grow to a level that exceeds their conventional counterparts.
At the same time, the report suggested that high oil prices would lead to a decline in sukuk issuances this year, primarily due to lower financing needs in the Gulf Cooperation Council countries.
With regard to the growth of Islamic finance assets, Moody’s expected it to remain strong and to continue to outperform the growth of conventional assets for factors including:
(1) The economic recovery associated with higher oil prices and increased production coupled with the easing of lockdown measures, which will boost credit growth.
(2) The continued focus of sovereign funds on encouraging the Islamic finance industry.
(3) Elastic and increasing demand for Sharia-compliant products.