Global Islamic Finance Assets Pegged At $1.9 tln As Of H1, 2014

 For the past fifty years, Islamic finance as an industry has been steadily widening its geographical outreach, serving both sovereign and corporate clients. Throughout this period, Islamic finance has displayed its ability to innovate which allowed the industry to increase in relevance across multiple economic sectors with different financing needs. The industry’s growth is evident in the increasing size of its financing deals and prevalence of cross-border transactions. On the consumer side, Islamic finance has been utilised as a strategic tool to tap the unbanked market, especially in Muslim-majority countries. These achievements have been supported by national Islamic finance specific regulations and strategic policies, as well as the infrastructural support for Islamic finance from multilateral institutions.

The global Islamic finance industry was valued at approximately $1.9 tln as of 1H2014. The industry’s assets have grown at a compounded annual growth rate (CAGR) of 16.94 percent between 2009 and 2013. Islamic banking and sukuk sectors dominate the industry, with respective 80 percent ($1.5 tln) and 15 percent ($286.4 bln) shares in aggregate assets as at 1H2014.

European Islamic Finance Industry

Although overall led mainly by Malaysia and GCC states, the Islamic finance industry has progressed gradually in Europe since its initiation in the early 1980s. The momentum has picked up post global financial crisis in view of Islamic finance’s sustained growth and increasing global traction. The development of Islamic finance has been beneficial for multiple stakeholders, both within and outside of the region. For example, the offering of Islamic banking products and services in Europe has made it possible for the Muslim population in the region to bank in a Shari’a compliant manner.

Although the overall magnitude of Islamic finance is still limited and fragmented, Islamic banking and Islamic funds sectors have made considerable progress in the region. Particularly, in recent years, Islamic funds have been gaining greater interest, and several European financial centres have taken a number of steps to facilitate the sector. Key factors contributing to the growth of the Islamic funds sector in the region are the long-standing European expertise in asset management, as well as the regulatory advancement and the operational efficiency.

Islamic funds domiciled in Europe held approximately $11.9 bln in assets under management (AuM) as at Sept 17, 2014. This accounted for 16.3 percent of the global aggregate Shari’a compliant AuM, up from an 11.8 percent share as at end-2012. The appeal of European domiciles for Islamic fund managers lies in the attractive combination of tax benefits, regulatory sophistication and operational efficiency. As an additional pull factor, being domiciled in Europe allows Islamic fund managers to outsource a number of their operational activities to experienced local service providers. The availability of this option has become especially valuable for the asset management industry in the present environment of heightened cost and regulatory pressures, which are bringing back into focus the core managerial competencies of product development and investment performance. Specifically for the benefit of Islamic fund managers, the financial regulators in a number of European states — from Ireland to France to Malta — have issued guidelines facilitating the registration of Shari’a compliant investment schemes in their territories.

The sukuk market has also stepped into the limelight recently owing to debut sovereign issuances by the United Kingdom — which earned the spot of the first non-Islamic sovereign sukuk issuer in the world — and Luxembourg. The sukuks by these countries have been welcomed by the global Islamic finance community: since both the governments are AAA-rated, their sovereign sukuks have contributed to the expansion of quality investment opportunities for Islamic investors around the world in general and for Islamic financial institutions in particular. These issuances should also raise the awareness of sukuk as a viable alternative capital raising mechanism among sovereign and corporate issuers in Europe and elsewhere.

Europe launched its very first sukuk programme in 2004, through a German federal state of Saxony-Anhalt. The following year, the United Kingdom issued the region’s first corporate sukuk; in 2010, Europe’s second corporate sukuk also came from the United Kingdom. The successive corporate issuances of sukuks in Europe originated from France, Germany, the United Kingdom and Luxembourg. This year’s debut sovereign sukuk issuances from the United Kingdom and Luxembourg have propelled the outstanding sukuk amount 112.2 percent up from the end of last year to $719.9mln as of 3Q2014, which accounted for approximately 0.24 percent of the global sukuk outstanding figure. We anticipate a gradual growth in the number of sukuk issuances coming out of Europe in the next few years, especially from European corporates that may follow in the footsteps of sovereign issuers and also because of European investors’ rising appetite for alternative investment opportunities.

In summary, Islamic finance has extended to Europe rather early since its global inception, and today the region boasts a thriving Islamic fund sector and a budding Islamic banking segment. Europe’s established financial infrastructure — in terms of both people and processes — is attracting much Islamic asset management activity to regional financial centres, offshore and onshore alike. Islamic funds domiciled in Europe held approximately $11.9 bln in AuM as at Sept 17 2014, accounting for 16.3 percent of the global Shari’a compliant aggregate. The prospects for the European sukuk market are also looking up, thanks to this year’s landmark sovereign issuances from the United Kingdom and Luxembourg. These Islamic programmes should widen the pool of quality investment opportunities for Islamic institutional investors around the world and also raise the awareness of sukuk as a viable alternative capital raising mechanism. Takaful is yet to take off on a large scale but, similarly to Islamic banking, carries a huge developmental potential in view of supportive European demographic factors and facilitative regulatory regimes within key economies. 

Originally published on www.arabtimesonline.com