The Islamic finance industry would slow down until next year as the coronavirus pandemic prompts an economic slump, S&P Global Ratings said.
“The significant slowdown of core Islamic finance economies in 2020, because of measures implemented by various governments to contain the Covid-19 [coronavirus disease 2019] pandemic, and the expected mild recovery in 2021, explain our expectations,” Mohamed Damak, S&P Global Ratings head of Islamic finance said.
Governments across the globe have been imposing lockdowns and banning travels in a bid to contain the virus. However, these measures have induced massive economic downturn in the world as businesses scaled down operations, closed temporarily or shut down permanently.
To recall, S&P said that the sector had a strong performance in 2019 on the back of a robust sukuk market.
Sukuk is an Islamic financial instrument that complies with Islamic religious law. Proceeds from the issuance of sukuk are allocated for asset acquisition, wherein each investor holds partial ownership.
While the industry has long-term potential yet to be unlocked, the credit-rating agency said that sukuk issuance was time-consuming and deemed more complicated than conventional instruments.
“Furthermore, industry players have been discussing the potential use of social instruments to help companies and individuals economically affected by the pandemic,” S&P said.
“With the right coordination between different Islamic finance stakeholders, we believe the industry could create new avenues of sustainable growth that serve the markets,” Damak added.
Earlier this year, Moody’s Investors Service said that the Philippines might potentially venture to sukuk issuance, especially after passing an Islamic finance and banking law.
The Bangko Sentral ng Pilipinas (BSP) signed Circulars 1069 and 1070—which cover the establishment of Islamic banks and approval of the Shariah Governance Framework—before 2019 ended to ensure compliance to banking requirements.
Republic Act 11439 (“An Act Providing for the Regulation and Organization of Islamic Banks”) was signed into law in August last year, which the BSP welcomed as potentially boosting Islamic financing and inclusive growth.
Moody’s said that proceeds could fill in the financing needs of the country for its ambitious infrastructure drive. The massive “Build, Build, Build” program of the government, for one, is expected to improve the country’s infrastructure and connectivity while shoring up the construction industry with higher spending and more job opportunities.
BSP Governor Benjamin E. Diokno earlier said that three conventional banks expressed interest in establishing Islamic banking units. While the Central Bank did not provide names, it noted that these were two local banks and one foreign bank.
The potential market for Islamic financial instruments is seen to be dominated by Moslems who accounts for around 10 percent of the country’s population.
Global sukuk issuance might rise to $75 billion in 2020 from $71 billion last year, Moody’s Senior Vice President Christian de Guzman said. The bulk of the issuance is expected to come from Saudi Arabia, Qatar, Malaysia, Indonesia and Turkey.
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