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Islamic finance growth contraction in GCC to continue

Economic policy reforms in the Gulf Cooperation Council (GCC) region at the outset of falling oil prices will not offer much help to the Islamic finance industry in the short term, according to a new report.


A forecast from credit rating agency Standard & Poors (S&P) Global Ratings says that the contraction in Islamic finance growth is likely to continue in 2017.


In its opinion, “modest growth will derive from subdued economic growth of Islamic finance’s core markets” in the countries in the region. Nonetheless, continuous demand from an expanding customer base will partly offset the decline.


“We think two factors will act as a brake in 2017,” says Mohamed Damak, Global Head of Islamic Finance at S&P Global Ratings, “The impact of policy responses to the decline of oil prices in core markets and the lack of standardisation in the industry.”


He adds: “While we have seen a policy response to the new normal of oil prices materialising in some GCC countries, including the United Arab Emirates and Saudi Arabia, in the form of spending cuts, lifting of subsidies and privatisation of government assets, we think the oil price environment will weigh negatively on economic growth in the GCC for the next two years.”


“The consequence for Islamic banks will be a slowdown in growth, deterioration of asset quality, and reduction of profitability,” Damak continues.


Nonetheless, the Islamic finance industry’s total assets will reach $2.1 trillion at year-end 2016 and will maintain a growth of roughly five per cent in 2017, according to S&P estimates.


“We expect that the industry will be worth $3 trillion sometime in the next decade,” says Damak.


Malaysia has been a strong contributor to the industry, while Iran, which opened its markets to the rest of the world after the US and the UN withdrew economic sanctions following a nuclear deal early this year, is expected to emerge as a new contributor, according to the rating agency.