Saudi Arabia and UAE drive quarterly rise
- Value of Islamic loans grows by 198 per cent in first quarter of 2015
- Sukuk issuance rose 13 per cent over the quarter
- Fitch Ratings calls for standardised legal structure for Islamic infrastructure financing
The value of Islamic loans grew 198 per cent between the fourth quarter of 2014 and the first quarter of 2015, according to the US Fitch Ratings.
They accounted for 20 per cent of new loans in the GCC and seven other Middle Eastern and Asian countries.
Saudi Arabia and the UAE were the two largest markets for Islamic loans.
The significant growth in Islamic loans contrasted with the rest of the borrowing market, as loans overall fell 25 per cent in the first quarter of 2015.
Sukuk (Islamic bond) issuance also rose by 13 per cent year-on-year up to the first quarter of 2015. Bond issuance rose by 47 per cent overall, compensating for a weak fourth quarter of 2014 due to falling oil prices and rising regional tensions.
The main issuers for Islamic bonds were corporates and sovereign entities, followed by financial institutions. Sukuk accounted for 26 per cent of total new issuance, slightly down from 31 per cent in the fourth quarter of 2014.
Fitch expects the Islamic finance market to continue its rapid growth, as new countries such as Jordan, Tunisia or even Egypt begin issuing sovereign sukuk.
Developing the use of sukuk for infrastructure investment would also expand the market significantly. So far, such financing has been local and ad hoc, with Qatar and Saudi Arabia pioneering issuances.
However, legal structures, which are acceptable to governments, investors and sharia boards, and which assess compliance with Islamic law, still need to be put into place, according to Fitch.
Infrastructure is an obvious candidate for sukuk, which must be backed by assets. But the lack of a framework means sovereigns are discouraged by the risk of losing control of the infrastructure asset.
We believe alternative structures could be found, but it would take longer to achieve and could see slower take-up, especially as innovative structures would have to be approved by a sharia board, says Bashar al-Natoor, global head of Islamic finance at Fitch. These challenges will probably lead to a longer time frame and higher costs than more established forms of infrastructure funding, at least until a standardised framework is established.
Several institutions are studying the matter. The G20 group of nations is examining the issue, while the Saudi-based Islamic Development Banks and the Asian Development Banks assistance to member countries and the Washington-based IMFs creation of a working group to build expertise in sukuk could lead to innovations and their wider use.