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Moody's Sukuk issuance slowed, but Islamic banking growth still strong
"Continuing retail demand for Syariah-compliant financial services in Muslim majority countries has driven strong financing growth of around 6 percent in core Islamic markets for the first six months of 2016," it said in a report.
Growth was recorded at around 13 percent for 2015.
It attributed most of the growth in Islamic banking assets to proactive government legislation.
"Key is the potential in some jurisdictions to attract more rural, orthodox populations into the financial system, promoting greater inclusion for these under-banked segments."
Oman is a notable success story as it has achieved a level of Islamic banking penetration that is higher than countries with a far longer history of the sector.
In the case of Malaysia, the percentage of banking assets that are Islamic stand at around 25 percent, with the government targeting an ambitious 40 percent of financing (loans) to be Islamic by 2020.
Sukuk volumes have however remained flat for the first half of 2016 at around US$40 billion.
"This is mostly driven by lower short-term issuances by the Malaysian government, more difficult economic conditions in emerging markets."
It also said the current GCC drive to tap liquidity from conventional international investors has reduced the attractiveness of the sukuk format for Gulf issuers.
It however expects the longer term outlook to be promising.
"We expect increased sukuk issuance into 2017 from sovereigns, banks and corporates in the Gulf, as regional financing needs increase amid lower oil prices."
Muslim-majority countries, such as Malaysia, Indonesia and the GCC countries account for around 90 percent of total sukuk issuance, and the contribution is likely to remain unchanged going into 2017.
"While Malaysia has traditionally been the largest issuer by volume, the reduction in domestic issuance from the central bank, Bank Negara Malaysia, coupled with the deficit financing needs of the GCC members and their drive to promote Islamic finance, means that we expect the GCC to take an increasing regional share of overall issuances into 2017."
Bank Negara Malaysia is continuing the trend of reduced issuance of short-term sukuk begun in 2015, against a backdrop of tightening liquidity in the banking sector, related to emerging market volatility, and increased fiscal consolidation.
A key local development was a move to earmark around US$25 billion of the Employees Provident Fund for Syariah-compliant assets.
"At around 15 percent of the US$170 billion total, this will create a substantive new pool of Islamic liquidity that will help drive the demand side of the sukuk equation to the point pricing may be consistently more favourable for international issuances of such instruments."
Growth in the takaful insurance sector has also slowed but Moody's expects to remain at double digit levels into 2017, driven by the Gulf countries and Southeast Asia.
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