Oil Wealth Fueling Boom In Islamic Finance
The rising oil-driven wealth of many Islamic countries is fueling strong growth in bonds that comply with Shari’ia rules. A timely report just released by Moody’s provides a comprehensive overview of the Islamic finance industry.
Islamic finance makes up a small part of the world finance industry, estimated by Moody’s to be worth around $700 billion globally. However, it has grown by around 15% in each of the past three years, partly as a result of the increased wealth in Islamic countries driven by high oil prices. This rapid growth shows no signs of slowing, Moody’s says in its 2007 Review and 2008 Outlook: Islamic Finance.
Within a large segment of Muslim societies and communities, the compliance of financial services with Shari’ah rules and principles is a primary concern for the users of these services. As such, efforts to enhance the access of Muslim communities and societies to financial services will hinge upon, among other factors, the compatibility of these services with Muslims’ religious principles.
While catering to such specific needs of society, Shari’ah-compliant financial services could also appeal to other segments of the population so long as the quality of these services is at least comparable to other alternatives, Moody’s says. Islamic finance covers all financial activity that enables Muslims to invest while conforming with Islamic law, or Shari’ah.
In practice, Islamic finance involves using traditional investment techniques and structures that comply with Shari’ah to create arrangements that work in ways that are comparable to modern conventional finance.
Sukuk (or Islamic bonds) are the fastest-growing segment of the Islamic finance market, which has seen phenomenal growth in the past six years. Global volume up to 2007 reached $97.3 billion, with the majority coming from Malaysia and the Gulf. Even though certain regions such as Europe and Africa did not produce any new issues during 2007, the expectations are high for 2008, including multi-jurisdiction issuances.
However, the Sukuk issuance market in H2 2007 demonstrated that despite its faith-based nature, it is not immune from the global financial system. A number of issuers have delayed the issuance of their planned Sukuk, including Ithmar bank and Amlak Finance; both are planning to issue their sukuk when the market stabilises.
Overall Sukuk issuance volume increased by 71% to $32.65 billion compared to 2006 The number of Sukuk transactions rose to 119 from 109 in 2006, while the average deal size increased to $269.8 million from $175 million.
Some 88 Sukuk deals were issued by corporates, compared to 31 deals issued by sovereigns This was influenced by buoyant government budgets, mainly in the Gulf Co-operation Council (GCC), over this period as fiscal and current account surpluses widened. Moreover, since the 2006 equity market crisis, corporates have shifted their funding focus more into debt markets. This trend continued into 2007, albeit the equity markets recovered significantly during the year.
The report covers the outlook for each major issuing country, and includes a handy Glossary of Islamic Finance Terms. Other Topics covered:
• Islamic Securitisation
• Islamic Funds and Private Equity
• Infrastructure and Project Finance
• Islamic Banking
• Islamic Real Estate Investment Trusts
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