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Industry’s assets likely to surpass $2 trillion in 2014 Growth driven by demand and supply factors

KUWAIT CITY, May 2: Global Islamic finance assets are expected to surpass the USD2tln mark in 2014. The proposition for Islamic finance manifests itself in the robust growth of assets from USD150.0bln in the mid-1990s to approximately USD1.8tln as at end 2013. The industry’s strong performance over the years will be further augmented by the growing participation of the international financial community, particularly in the Islamic banking sector, as well as by the support of various key multilateral development entities in the efforts to spur the growth of the industry.

We expect the industry will continue to chart positive growth in 2014 for all sectors, underpinned by the following factors:

* Governments’ aggressive spending on infrastructure projects.

* Growing interest in Islamic finance & supply side dynamics by financial institutions.

* Active role played government and regulatory agencies; multilateral bodies and industry players to promote the development of Islamic financial markets in their respective countries and globally.

* The increase of global trade flows in MENA and OIC countries.

The industry will continue to grow driven by both demand and supply factors, and further facilitated by government agencies and financial regulators. In part, governmental and economic policies have also become the key drivers that influence the optimistic outlook of Islamic finance. The expansionary policies in the GCC and Asian countries followed by a massive governmental spending for mega projects to boost employment and investment opportunities will be of advantage to the Islamic banking sector. Islamic financial institutions will stand a chance to offer financing support to meet respective countries’ developmental needs. In addition, Islamic banks are well-placed to take advantage of the sizeable trade flows in the OIC countries and MENA where Islamic finance is making strides. Trade flows in MENA and OIC countries represents a promising opportunity for Islamic trade finance to become an alternative to conventional trade financing. 2014 will also be another exciting year for sukuk market.

This year, more jurisdictions are expected to debut in the global sukuk market including sovereign issuances from the United Kingdom, Luxembourg, South Africa, Oman and Senegal.  A number of sukuks have already been announced and are in the pipeline for 2014, thus presenting promising prospects for the fastest growing segment of the global Islamic financial industry. Expectations are also build up on a debut sukuk issuance from the multilateral Asian Development Bank (ADB).  In parallel with growth and participation of various entities in the Islamic finance industry, catalyst institutions like research and advisory houses that promote innovation, business advancements and sharing of resources are also emerging to complete the value chain of the overall industry.

Spill-over effects into ancillary and professional services that were seen in 2012 and 2013 — offering education, training, consultancy, information platforms — will expand further in these coming years.  At global level, multilateral organisations, regional development banks and other international organisations have been supporting the development of the global Islamic financial industry. Global linkages and cooperation are vital for creation of a comprehensive ecosystem given the nascent stage of Islamic finance and its small share domestically in most jurisdictions.  Over the years, these entities have been strengthening cooperation and enhancing their synergy to fulfil their common agenda. Among others, below are several cooperation and agreements that have been initiated to support the Islamic finance industry, and more joint initiatives of these kinds will further propel the growth of the industry. 

* The World Bank and Islamic Development Bank (IDB) signed a Memorandum of Understanding (MoU) in October 2012 to set out a framework for collaboration between the two parties and to lend support to global efforts in the development of Islamic finance.

* The African Development Bank (AfDB) and the International Islamic Liquidity Management Corporation (IILM) inked an MoU build robust partnership to promote liquidity management. This MoU will offer benefits to the AfDB and its Regional Member Countries.

* The IILM entered into an MoU with the Asian Development Bank to strengthen cooperation between the two organisations in promoting global cross-border Shari’a compliant liquidity management. The pursuit to develop a robust regulatory framework and setting up an enabling environment for Islamic finance to propel are the other important components towards greater success of the industry. Apart from the regulatory developments in the GCC and Malaysia, emerging jurisdictions such as North African countries and the Commonwealth of Independent States (CIS) have also expressed their intentions to introduce legislations that will provide better foundation for the establishment of Islamic banking in the country. These, in addition to the aim to preserve financial stability, will remain as key directions ahead.

Islamic banks are likely to re-examine their portfolio against Basel III capital requirements and other strategic priorities. In 2014, the merger and acquisition activities are likely to intensify as mid-sized banks will seek asset growth, while smaller banks will look for scale. Regulation and compliance will dominate the attention of banks’ strategic planning units. The banks will have to strategise through a wave of new rules covering capital, liquidity, consumer protection and risk management. Basel II rules and various other governmental regulations in certain countries will further complicate the regulatory landscape. Overall, we expect 2014 will be directed to both industry’s performances and building the necessary frameworks and synergies for long term success of the Islamic finance industry.

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