The Islamic Financial Services Industry Sustains Its Growing Market Share in 2016 Amidst a Shifting Global Economic Landscape

Kuala Lumpur, 11 May 2017 

The fifth edition of Islamic Financial Services Board’s (IFSB) annual Islamic Financial Services Industry Stability Report 2017 examines the implications of the recent economic developments and changes in the global regulatory and supervisory frameworks on the global Islamic financial services industry (IFSI).

Amidst a challenging external environment brought on by the changing policy directions and uncertainties in the global economic landscape, institutions offering Islamic financial services (IIFS) have continued to grow and gain market share, particularly in their home jurisdictions. However, the previously observed double-digit growth rate of the global IFSI has slowed down to single-digit growth.

Addressing a number of global regulatory developments and emerging issues, the Report publishes the findings of an IFSB study on stress testing of Islamic banks conducted in early 2017, to identify the linkages between macroeconomic and financial variables of Islamic banks that provides a preliminary idea of plausible quantitative dimensions that can be used for stress testing of Islamic banks. The empirical findings provide an indication of important linkages between four macroeconomic variables; interest rates, unemployment, real estate prices and oil prices – and Islamic banks’ non-performing financing (NPF) ratio, deposits, financing and assets.

The Report also provides an insight into Fintech in the Islamic finance space, the development of which poses a number of legal, regulatory and Shariah issues. Discussions on Fintech focus on two areas that have attracted much attention: the distributed ledger technology, which is at the core of cryptocurrencies (e.g. Bitcoin) and smart contracts, and multi-sided internet platforms, which are the basis of crowdfunding. The Report highlights several issues that have to be addressed by regulators and Shariah authorities in this still-evolving regulatory environment.

The IFSI Stability Report 2017 provides an in-depth analysis of the performance and stability of the IFSI in 2016, focusing on the three main sectors, banking, capital market and the takaful.

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Growing market shares of Islamic banks

The developments in the Islamic banking sector in 2016 were more dynamic than implied by the moderate growth rate observed in total banking sector assets, illustrated by a shift in the regional composition of global assets and reasonable levels of growth in assets, financing and deposits of Islamic banks in most jurisdictions. More notably, the market shares of Islamic banks increased in 18 jurisdictions, providing a strong indication of a growing acceptance of Islamic finance in jurisdictions with dual financial systems. Jurisdictions’ where Islamic finance has achieved domestic systemic importance has also increased to 12 in the past year.

The banking sector has generally seen sustained returns in most jurisdictions

The Islamic banking sector has generally sustained its return on assets and return on equity as a whole in the last two years, but there are considerable differences on jurisdictional levels as some markets have witnessed declines in returns. With respect to asset quality, while the NPF ratios of the IFSI globally and for most jurisdictions have decreased, a few jurisdictions exhibited higher NPF rates.

The capitalisation in the industry at a Tier-1 level was 9.71% in 1H2016, remaining above the Basel III/ IFSB-15 minimum regulatory requirements of 6%. However, an area of continued concern is the short-term liquidity health of Islamic banks. Overall, conditions varied significantly between countries, with each jurisdiction exposed to its unique set of domestic conditions.

The Islamic capital market performed better in 2016 than in 2015

2016 saw an increase in sukuk issuances, while Islamic stocks continued to generate profit. The volume of annual sukuk issuances reached USD 75 billion in 2016, bringing the volume of outstanding sukuk close to USD 320 billion, with 79% of the issuances originated from sovereigns, including GREs and multilateral organisations, while only 21% were corporate issuances.

Shariah-compliant Equities and Islamic Funds

In contrast to previous years, Shariah-compliant equities generated lower returns in comparison to conventional equities. The equity markets suffered in 2015 and during most of 2016 due to political uncertainties, slow growth, depressed oil prices and volatile commodity prices. While  the unexpected election outcome in the US triggered a stock market rally in the latter part of 2016, Islamic equity and fixed income funds benefited from the good performance of the Islamic equity indices and the improved sukuk yields. Positive results of Islamic commodity funds are mainly due to an increase of the oil price at the end of the year.

High growth in the takaful sector

The global takaful industry recorded a growth in contributions of 12% while conventional insurance premiums only grew by 4%. Despite the high growth rate, takaful is by volume still a small industry with total contributions of USD 25 billion and 305 takaful and retakaful operators and windows. The GCC accounts for 47% of the contributions and 31% of the takaful operators, followed by MENA (excluding GCC) with 33% of contributions and 22% of the operators, and Asia with 18% of contributions and 15% of the operators. The insurance/takaful penetration in most OIC countries is relatively low. While this indicates untapped market potential, there is strong competition for market shares. As many takaful undertakings lack scale for efficient operations, it is expected that the consolidation of the industry through mergers and acquisitions will continue in Southeast Asia and the GCC.

Global outlook for the IFSI

The outlook for the global IFSI is generally positive, with concerns that fiscal deficits will contain spending by governments, which could have an adverse impact on Islamic banks. While the industry has shown resilience and satisfactory performance in 2016, the era of weak growth and external uncertainties facing the industry indicates the growing need for the global IFSI to build long-term resilience.

The IFSB IFSI Stability Report 2017 will be released on 16 May 2017. The softcopy will be available at  the IFSB website.

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About the Islamic Financial Services Board (IFSB)
The IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. The IFSB also conducts research and coordinates initiatives on industry-related issues, as well as organises roundtables, seminars and conferences for regulators and industry stakeholders. Towards this end, the IFSB works closely with relevant international, regional and national organisations, research/educational institutions and market players.

The members of the IFSB comprise regulatory and supervisory authorities, international inter-governmental organisations and market players, professional firms and industry associations.

For more information about the IFSB, please visit www.ifsb.org.

© Press Release 2017