Oman blazing the trail, Indonesia and Bahrain fixing rules

Islamic finance expanding faster than conventional nance, says Moody’s


Oman is blazing the trail. Indonesia has seen some ambitious government push, while Bahrain has introduced new Shariah governance regulations.

These are some key developments in the Islamic financial space high- lighted by a recent report by international rating agency Moody’s Investors Service.

Oman has been listed as the fastest-growing Islamic banking market, logging a growth rate of 20% in the first nine months of 2017.

“This rapid growth is being driven largely by the country’s late entry into Islamic banking,” said Moody’s VP/senior analyst Nitish Bhojnagarwala in a statement accompanying the agency’s report entitled “Cross-Sector — Islamic Finance: Strong Longer-term Growth Prospects Despite Relatively Flat 2018”.

Oman, which introduced the Islamic financial services in 2012, now has two standalone Islamic banks and six Islamic windows at conventional banks offering Islamic services.

As a result, the report noted that the sector’s market share has gone from zero to around 13% of banking system financing assets as of September 2017 and still has “potential for further growth”.

In Turkey and Indonesia, the penetration of Islamic banking remains relatively low, at around 5%-10%.

“Despite the introduction of Islamic banking more than two decades ago in both countries, Islamic banks have historically struggled to push beyond 5% market share of Islamic banking assets because they lacked regulatory support. This support may now be forth-coming,” according to the report.

In Turkey, it noted that the sector’s overall share of the banking market dropped to 5% of total financing assets in 2015 and remained at that level.

“However, we expect the creation of new government-sponsored Islamic ‘participation’ banks with vast customer reach could double the size of the sector in less than a decade,” it said.

The report made note of Indonesia’s “ambitious, wide-ranging government plan” to drive growth in the sector, which includes a 10-year national Islamic finance master plan released last year.

In June 2017, Indonesia’s Financial Services Authority launched a new three-year Shariah finance roadmap, followed by the formation of the National Committee for Islamic Finance in July, it added.

“Both Turkey and Indonesia have significant pent-up demand for Shariah-compliant financial services, particularly among the relatively under-banked rural populations that seek products that are more aligned with their ethical and moral principles,” according to the report.

Bahrain Moves Ahead

For Bahrain, the report noted that a “key development” in the market last year was the Central Bank of Bahrain’s announcement of new Shariah governance regulations applicable to its wholesale and retail Islamic banks.

The report has listed Oman as a success story as it is attracting more rural, orthodox populations into the financial system. In Moody’s assessment, Oman had achieved a level of Islamic banking penetration that was higher than countries with a far longer history with the sector.

Bahrain’s new regulations aimed to establish a more consistent and robust system for ensuring Shariah compliance for Islamic products, and most importantly, for sukuk issued in Bahrain.

“As a result of these changes, the possibility of issuers citing Shariah non-compliance as a defence for non-payment should reduce. Effective June 2018, these new regulations in Bahrain will make Islamic banks subject to an Independent External Shariah Compliance Audit to ensure that all Islamic bank activities are Shariah-compliant,” the report said.

Additionally, it noted that all internal Shariah board rulings will be made public for banks’ clients and investors.

“The regulations set guidelines for banks’ internal Shariah boards: Their role and responsibility to ensure full independence from commercial activities within the bank, and to address any conflicts of interest that arise from their compensation from banks for vetting their products.

“The regulations call for the presentation of the first full externally audited Shariah report in 2020 based on 2019 activities. We expect these new regulations to support further growth in Islamic banking in Bahrain,” the report added.

Stable at the Core

Globally, the report noted that the growth of the Islamic finance sector will continue to outstrip the growth of conventional assets across core Islamic finance markets in coming years, as demand for Shariah-compliant financial instruments rises.

Islamic banking penetration in the Gulf Cooperation Council (GCC) increased to 45% of the total bankingmarket, as of September 2017 from 31% in 2008.

During the same period, annual sukuk issuance more than doubled to US$100 billion (RM391 billion) from US$42 billion, it said in the same statement.

“The Islamic finance sector will be supported by governments, whose objective is to grow the Islamic finance industry both domestically and globally, as well as by continued demand for Islamic products from individuals,” said Nitish.

Despite the sector’s strong performance and prospects, Moody’s expects flat growth in the remainder of 2018 for the sukuk market, and stability in the takaful market as insurance premiums pick up in newly penetrated markets.

“We also expect growth in Islamic banking in most of the core Islamic markets to remain stable,” the report added.

The core markets comprise GCC nations — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates — as well as Malaysia, Indonesia and Turkey.