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Islamic finance and the securities market outlook for 2023

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17 Apr 2023

Home > News > Industries > Financial institutions and investor groups > Islamic finance and the securities market outlook for 2023
What is driving the ascent of Islamic finance and what solutions are integral in supporting the market moving forward?

Islamic finance on the ascent

The global Islamic finance industry currently boasts assets of around USD2.2 trillion. Experts anticipate this could grow to USD4.94 trillion by 2025, fuelled by capital inflows into Islamic exchange traded fund (ETF) products.1

Sukuk issuances have been equally buoyant. As many governments turned to the debt markets in 2020 and 2021 for emergency funding during the pandemic, Sukuk issuances reached record levels in 2021, with USD196.5 billion being raised.2

Although Sukuk volumes declined very marginally in 2022, it was still an excellent year and the second best on record, with total issuances reaching USD193.9 billion.3

“The majority of Sukuk issuers are located in the Middle East, although we are seeing increasing activity in Asia, particularly from Malaysia and Indonesia,” comments Sabir Ahmed Shakir, Executive Director, Islamic Banking at Standard Chartered. Within the Gulf Cooperation Council (GCC) region itself, Saudi Arabia is the leading Sukuk issuer – raising USD28.1 billion in the first half of 2022, with use of proceeds being earmarked mostly for major infrastructure projects.4

Fuelling demand for these products are a combination of Islamic banks together with Shariah-compliant sovereign wealth funds, asset management companies, pension funds and family offices.

“Demand for Sukuks is strong and comes primarily from institutional investors in the GCC region and Asia. We are also seeing investor appetite in the UK and Switzerland for Sukuk products, as Shariah-compliant funds domiciled in these jurisdictions look to tap into the Sukuk market,” says Shakir.

Looming risks facing the Sukuk market

Nonetheless, the Sukuk market is facing some challenging headwinds ahead. In the short-term, the high oil prices could result in a marginal drop off in Sukuk issuances in some of the commodity exporting countries. However, others counter that Sukuk activity will likely increase over the mid-to-long term as sovereigns will still want diversified sources of funding amidst the volatility.5

“The Islamic finance market is not immune to the rising interest rates either,” notes Shakir. This comes as aggressive monetary policy tightening across a number of countries could result in Sukuk issuance levels dipping as issuers avoid debt capital markets.

Although Sukuk issuances might be facing some tough times ahead, the secondary market has been robust, says Shakir. “Secondary market liquidity in Sukuks has improved and is proving to be resilient,” he adds.

Refinitiv data found the global Sukuk secondary market expanded by 4.4 per cent in the first half of 2022 to reach USD726.8 billion, with the bulk of the activity being concentrated in Malaysia, Saudi Arabia and Indonesia. Collectively, these three markets account for more than 80 per cent of the value of Sukuks outstanding.6

Marrying Islamic finance with ESG

There is also growing interest in sustainability and environmental, social and governance (ESG) throughout Islamic finance circles. “Governments in the region are signing up to net zero pledges, and this is resulting in institutions looking to incorporate ESG into Islamic financial products,” says Shakir.

In 2022, ESG Sukuk issuances totalled USD8.1 billion, compared to USD6 billion in 2021 corresponding to a 35 per cent year-on-year growth.7 Refinitiv notes that Saudi Arabia is arguably the leader in ESG Sukuk issuances, followed by Indonesia, Malaysia and the UAE.8

There has also been an uptick in Islamic syndications and loans being used to fund ESG initiatives, along with a number of ESG-linked Islamic fund launches.9 “It is self-evident that Islamic finance is in an excellent position to support ESG causes,” says Scott Dickinson, Regional Head of Financing and Securities Services in Africa and the Middle East at Standard Chartered.

Finding the right service provider

With Islamic finance becoming increasingly entrenched in capital markets, providers of securities services – including here at Standard Chartered – have taken note and are building Shariah-compliant solutions to support the investment needs of Islamic institutions.

So what exactly do these Shariah-compliant services look like? Put simply, Islamic Securities Services at Standard Chartered broadly mirrors its traditional securities services model in that it offers conventional solutions such as custody, fund administration, performance reporting, order execution, cash management and foreign exchange. The only difference being that all these services comply with Shariah law principles.

Such solutions will be integral in supporting the thriving Islamic finance market moving forward.

1 Khaleej Times – June 6, 2022 – $2.2 t Islamic finance industry set for 10% expansion in 2022
2 Refinitiv – Sukuk perceptions and forecast study 2022
3 Refinitiv – February 6, 2023 – Green and ESG sukuk enjoy rapid growth in 2022
4 Refinitiv – Sukuk perceptions and forecast study 2022
5 Fitch – October 10, 2022 – Sukuk market activity slow but pipeline is building up
6 Refinitiv – Sukuk perceptions and forecast study 2022
7 Refinitiv – February 6, 2023 – Green and ESG sukuk enjoy rapid growth in 2022
8 Refinitiv – March 9, 2022 – How is Islamic finance responding to the drive towards sustainable investing
9 Refinitiv – March 9, 2022 – How is Islamic finance responding to the drive towards sustainable investing