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Crossroads for Islamic Finance in 2016
2016 will be a crossroads for Islamic finance, according to Standard &Poor's (S&P). Factors that could cause a downward trend include the impact of much lower oil prices and the prevailing low interest rates in most developed countries, the agency added.

"The Industry is trying to overcome these challenges and in particular the decline in oil prices. To date this has had relatively little impact due to the continued investments in core markets specifically Malaysia and the GCC (comprising Bahrain, Kuwait, Saudi Arabia, Oman, Qatar and UAE)", said Mohamed Damak, the Global Head of Islamic Finance for S&P, during a round table discussion of the Islamic Banking Industry for 2016.

"After 20 years of solid growth, the industry has achieved significant progress in facing increasing challenges, but the reality of declining oil revenues could impact negatively on government budgets and economic growth in core markets for Islamic finance." He added.

Key positive factors during the last two years that could reduce some of the negatives facing the industry are the unification of Islamic banking services and the standardization of products and Sukuk structures being used across different countries. These could help to attract more customers whilst the implementation of bank resolution regimes regarding traditional forms of liabilities will become easier to apply to Islamic banking." Damak highlighted. He also pointed out that the global Sukuk issuance volume fell by about 40% since the start of 2015, due to the decision by the Central Bank of Malaysia to move away from Sukuk and to use other liquidity management tools for Malaysian Islamic banks, adding that "Islamic finance has continued to attract much interest due to its highly ethical nature.

" Damak added that the penetration of Islamic finance into non-Muslim countries had stalled mainly due to regulatory obstacles and the low interest rates available making other sources of financing more attractive".


The biggest challenges to Islamic finance, according to the Islamic Banking World Conference held in Bahrain in December 2015, are the weakness of China's economy as the largest consumer of primary commodities and the monetary policies of the US in raising interest rates. Both will directly impinge on the Islamic finance industry in 2016.
According to the report "Islamic finance prospects 2016" issued by Global Advisor, the effects will be a fall in growth rates, profits and the liquidity of the Islamic finance industry. It concluded that Islamic banks will suffer less than traditional banks due to them having no non-performing loans, a high liquidity ratio and their intrinsic capital adequacy.


The questionnaire produced by the organizers of the report showed that 49.3% of those Islamic banking officials expressed their fears regarding the decline in global crude prices will harm their industry growth whilst 21.1% cited US financial policy in particular interest rates change. After these, 16.2% voiced concern regarding variations in the prices of primary commodities, 9.2% are concerned by the fragile state of the Chinese economy and, 4.2% have fears regarding the European debt crisis.

"The significant decline of primary commodities especially oil will affect the growth of the core banks involved in Islamic finance by reducing liquidity in the domestic markets of commodity exporting countries especially, The Gulf and Malaysia which are the largest Islamic markets." Sayed Farouk, the vice president of Global Advisor, added.