The 2017 report finds that despite subdued economic growth conditions and the impact of new geopolitical developments, the global IFSI has been able to sustain its total assets value at approximately US$1.9 trillion in 2016. While the overall performance of Islamic finance in 2016 has been satisfactory, the IFSB says that the industry needs to build long-term resilience amidst the prevailing era of weak growth and uncertainties.
Acting Secretary-General of the IFSB Zahid ur Rehman Khokher, said, “The issuance of the Islamic Financial Services Industry Stability Report 2017 comes during a time of growing external challenges for the financial system, including lower economic growth outlooks and global political uncertainties. While the Islamic financial services industry has, in many respects, withstood the challenging operating environment, it has however moved away from the double-digit growth trajectory witnessed in previous years. This slowdown underscores the importance, more than ever, of strengthening the resilience of the Islamic financial system and addressing internal weaknesses and vulnerabilities through appropriate policy responses.”
A key feature of the 2017 report is that data from the IFSB’s Prudential and Structural Islamic Financial Indicators (PSIFIs) database has been utilised for the first time in the report’s Islamic banking sector analysis. The use of this data has enriched the report by providing:
- Strengthened reliability of data as it is sourced directly from regulatory and supervisory authorities;
wider geographical coverage, with data covering 18 countries in comparison to 10 countries analysed in the 2016 report; - Holistic coverage of each jurisdiction as the PSIFIs data covers the aggregated domestic Islamic banking sector including data of Islamic banking windows. Previous reports had used sample data from selected full-fledged Islamic banks; and
- Additional financial indicators, e.g. value of shari'ah-compliant financing by economic sectors, that are included in the PSIFIs database.
The report shares the findings of an IFSB study on stress testing of Islamic banks conducted in early 2017 to identify the connections between macroeconomic and financial variables of Islamic banks to provide 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 shari'ah 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 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 takāful:
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 also increased to 12 in the past year.
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 non-performing financing (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 1H16, 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 sukūk issuances, while Islamic stocks continued to generate profit. The volume of annual ṣukūk issuances reached US$75 billion in 2016, bringing the volume of outstanding ṣukūk close to US$320 billion, with 79% of the issuances originated from sovereigns, including government-related entities (GREs) and multilateral organisations, while only 21% were corporate issuances.
Shari'ah-compliant equities and Islamic funds
In contrast to previous years, shari'ah-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 ṣukūk 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 takāful sector
The global takāful industry recorded a growth in contributions of 12% while conventional insurance premiums only grew by 4%. Despite the high growth rate, takāful is by volume still a small industry with total contributions of US$25 billion and 305 takāful and retakāful operators plus windows. The GCC accounts for 47% of the contributions and 31% of the takāful 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/takāful penetration in most Organization of Islamic Cooperation (OIC) countries is relatively low. While this indicates untapped market potential, there is strong competition for market shares. As many takāful 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 IFSI Stability Report 2017 is available for download