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Alpen Capital (ME) Limited and Alpen Asset Advisors Limited announced the publication of their report on Islamic Finance and Wealth Management. The report provides insight into the global Islamic finance and wealth management industry and presents an overview of the market, along with a perspective of the COVID-19 impact on the industry. The report also covers the various instruments driving the market, along with demand drivers and challenges, emerging trends, and an outlook for the sector.

The report was launched at NASDAQ Dubai over a panel discussion featuring Dr. Amin Fateh, General Manager, Minhaj Advisory and Member, Shari’ah Board, Alpen Capital and Alpen Asset Advisors; and Hameed Noor Mohamed, Executive Director, Alpen Capital (ME) Limited, which was moderated by Tahir Mahmood, Head of Business Development of NASDAQ Dubai and DFM.

Islamic finance and wealth management industry faced the dual shocks of adjusting to the pandemic and historically low oil prices in 2020. While the industry slowed down during the year after experiencing record growth in 2019, it showed resilience and total Islamic finance assets in 2020 are estimated to match the previous year's figures. Technology adoption has become one of the most critical drivers of survival. The adoption and integration of new and emerging technologies is likely to streamline the Islamic finance market and broaden the service offerings. An optimistic outlook by the IMF on global economic recovery is expected to spur a recovery within the sector, says Sameena Ahmad, Managing Director, Alpen Capital (ME) Ltd.

Sukuk is expected to maintain its position as a major growth driver for the Islamic finance industry. Sukuk has witnessed record-breaking issuances over the past year, and this is likely to continue. Concepts such as ESG/sustainable investing, and green sukuk are also rising in prominence and gaining investor interest. The sector has also seen strong M&A activity in both banking and takaful sectors, and consolidation is expected to continue amid weak economic conditions” says Hameed Noor Mohamed, Executive Director, Alpen Capital (ME) Ltd.

COVID-19 has disrupted global financial markets at an unprecedented scale, and the impact has tested the resilience of Islamic finance markets in equal measure. Factors like growing Muslim population seeking Shariah-compliant financial instruments, rising adoption of technology and the industry’s ability to demonstrate a higher level of ethical credibility have been driving growth.

Islamic Banking accounts for majority of the total global Islamic finance industry assets. The segment has developed at a steady pace in the share of Islamic Banking assets as a percentage of total banking assets has continued to expand year on year. In 2020, Islamic Banking assets recorded a higher percentage growth as compared to conventional banking assets across select economies like UAE, Saudi Arabia, Oman, Kuwait and Malaysia. The global market for sukuk has developed significantly over the years and in 2019, it contributed 19% to global Islamic finance industry. Despite initial concerns about the impact of the pandemic on Islamic capital markets, sukuk issuances in 2020 matched the levels seen in 2019. Within the fast growing Islamic funds segment, Shariah-compliant equity investing provided better protection against the downward risk during the pandemic – the two factors contributed to the outperformance of Shariah-compliant indices were sector allocation (overweight on technology and healthcare sector) and exclusion of highly leveraged companies.

Demand Drivers

Alpen Capital and Alpen Asset Advisors expect the Islamic industry to continue to grow on the back of robust drivers. IMF projects the global economy to rebound and accelerate at a pace of 6.0% in 2021, followed by a growth of 4.4% in 2022. Stimulus packages, fiscal and monetary easing, and liquidity support by major Islamic governments and Central banks; are likely to drive post-pandemic recovery and demand for Islamic finance assets.

Sukuk as the flagship Islamic capital market instrument will continue to drive growth. The emergence of new avenues such as green sukuk and Socially Responsible Investing (SRI) is likely to boost growth. Going forward, core markets across the MENA and SE Asia regions as well as non-core markets such as Kazakhstan and Uzbekistan could see higher issuances.

While the global Muslim population remains one of most significant drivers of growth for the Islamic Finance industry, the global trend of ethical consumerism is leading to higher appeal of Islamic products. This uptick is likely to attract a new class of consumers driven by social consciousness, trickling down to higher demand for Islamic finance services and platforms.

Additionally, governments across the globe have taken measures to support the Islamic FinTech ecosystem, encourage digitalization of banks, boost tokenization of sukuks, and bolster markets that are rising in prominence such as Islamic social finance and ESG. The continuous adoption and integration of new and emerging technologies is likely to accentuate and streamline the Islamic finance market, as digital solutions offer improvements in accessibility and efficiency, along with assisting Islamic finance entities to enhance and broaden their service offerings.

Industry Outlook

The COVID-19 pandemic highlighted the Islamic finance industry’s susceptibility to exogenous risks, as it was exposed to the severe implications of the pandemic in equal measure as its conventional equivalent. Even though the total Islamic assets in 2020 are expected to be similar to the previous year’s figures, the industry slowed down during 2020 after experiencing 14.4% y-o-y growth in 2019. Thus, a speedy and effective response has now become crucial to ensure profitability, as well as spur recovery and growth which has been muted during the last year.

Governments of major Islamic finance markets have been spearheading recovery through initiatives aimed at reforming the industry. Although the industry lacks in terms of global standardization, governments are likely to focus more towards infrastructure development in the near-term. Amid these efforts, technology integration remains the key in fueling recovery and growth in the Islamic finance industry. There remains growing room for further innovation and collaboration, paving the way for higher profitability for Islamic finance institutions.

The sukuk market is expected to gain momentum, fueled by its applications as a financial tool to raise funding for governments as well as corporates. Rise in Islamic FinTech’s popularity is prompting a surge in FinTech-focused investment funds, which are likely to accentuate the market and create opportunities for Islamic FinTechs to expand services. This coupled with digital innovations is expected to enhance market attractiveness and further strengthen the industry. Several new avenues have opened up within Islamic investment, such as charitable trusts, private equity, exchange-traded sukuk funds, Shariah-compliant Mortgage Investment Funds, Halal Mutual funds, etc. Such wide offerings are likely to appeal to a broader consumer base, thus improving demand prospects for Islamic instruments.

The pandemic has highlighted the prominence of Islamic Social Finance tools. Social impact-focused investments that are consistent with ESG considerations and sustainable goals are expected to witness rising demand. Regional and global humanitarian and development agencies such as the UNICEF, UNDP and UNHCR, are increasingly deploying Islamic social funds through initiatives such as cash transfers, start-up capital, funds for providing interest-free loans, micro-takaful and other forms of microfinance. Going forward, Islamic Social finance tools are likely to play a significant role in ensuring financial safety nets to accentuate the recovery for economies.

The next surge of growth for the Islamic finance industry is expected to be driven through innovation, standardization, and M&A activity. Newer markets are likely to drive growth as the core Islamic countries grow towards maturity. Investment activity is expected to be skewed towards the FinTech sector as digital capabilities become more critical due to COVID-19.

The COVID-19 induced slowdown as well as financial vulnerability in jurisdictions where Islamic banking is practiced are envisaged to put the industry’s resilience to test in 2021 and beyond. Nevertheless, an optimistic outlook by the IMF on global economic recovery coupled with innovation, standardization, M&A activity and prudent measures by the governments are expected to spur a recovery.

Please click here to access Alpen Capital’s latest report on the Alpen Capital Islamic Finance Industry.

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