Higher oil prices in 2019 are set to drive improved GDPs in the region, financing growth and stability for Islamic banks in the region
Sunday 23, December 2018 BY KUDAKWASHE MUZORIWA
The Islamic finance sector continues to demonstrate positive growth. Fitch Ratings’ 2019 Outlook: Gulf Cooperation Council Islamic Banks report has forecasted a stable outlook for GCC Islamic banks, reflecting stronger economic growth due to higher oil prices, which is expected to significantly contribute to credit fundamentals. Islamic lenders are slated for weaker credit growth averaging at five per cent, which remains above financing growth levels for conventional banks.
Islamic banks’ credit growth is set to increase in most countries that offer Shari’ah compliant financial products. Redmond Ramsdale, Head of GCC Bank Ratings at Fitch Ratings, said, “Fitch forecasts a more stable operating environment for GCC Islamic banks in 2019 as higher oil prices support growth and maintain strong liquidity in the region.” There is an expectation that the asset-quality metrics of Islamic banks will deteriorate slightly, however the liquidity of Islamic banks is believed to remain strong.
The ratings agency expects capital levels to remain mostly unchanged in 2019. GCC Islamic banks have achieved sustainable improvements in their credit risk profiles in the previous years and these improvements are supported by the banks’ better underwriting standards and risk management practises, a more diversified loan book, as well as higher profitability rooted in their operating environments.
Earnings are set to remain high in the upcoming year, benefiting from increasing interest rates in most countries. UAE’s Abu Dhabi Islamic Bank (ADIB) raised AED 1 billion through a rights issue aimed at supporting the bank’s growth strategy in November 2018. September saw the announcement of a potential merger between Abu Dhabi banks, Abu Dhabi Commercial Bank (ADCB), Al Hilal Bank and Union National Bank (UNB) to form a new Islamic lender after the consolidation of ADCB and UNB’s privately-held Al Hilal Bank.
Regulation amongst Islamic lenders in the GCC differ from one country to the other. However, there is a push towards standardisation of Shari’ah-compliant products. Standardised supervision of Islamic banks should lead to greater market confidence but pose challenges in terms of implementation and adoption, particularly in realigning existing products, said Ramsdale.
The joining of forces between the AAOIFI and the IFSB, which have traditionally worked separately on their respective mandates in the past will create an enabling environment for the growth of Islamic lenders in the GCC. The AAOIFI focuses on accounting and auditing standards on one hand, while the IFSB develops prudential rules in areas including capital adequacy and disclosure requirements.
The stable outlook on all rated Islamic banks in the GCC predominantly reflects stable state ability to provide support to domestic Islamic banks in the region. The UAE set an example in the region towards much-needed standardisation in the Islamic finance space by the establishment of the Higher Shari’ah Authority.
Overseen by the central bank, the Higher Shari’ah Authority is a national regulator entrusted with overseeing the Islamic financial sector, approve financial products and set rules and principles for banking transactions in accordance with Islamic jurisprudence. The national regulator will approve new products that have already received approval from individual Shari’ah boards.
The Higher Shari’ah Authority has since ordered the Shari’ah boards of financial institutions in the UAE to apply the Shari’ah Standards issued by AAOIFI as of September 2018. According to Fitch, all issuer default ratings (IDRs) assigned to Islamic banks in the GCC are investment grade, 89 per cent of which are driven by potential sovereign support and 11 per cent by the banks’ standalone credit worthiness.
Sovereign driven issuance
The Saudi Arabian Monetary Authority’s (SAMA) debt management office completed its first Sukuk issuance under the primary-dealer programme on 26 July 2017. In the new primary-dealer system, the Saudi debt management office appointed five local banks to act as primary dealers for local government securities, namely National Commercial Bank, Samba Financial Group as well as Saudi British Bank, Bank Al-Jazira and Alinma Bank.
Jonathan Parrod, an Associate Analyst at Moody’s, said that the issuance, which totalled at SAR 3.5 billion is positive for the development of Islamic debt capital markets in Saudi Arabia, because it broadens the investor base for government Sukuk securities in the primary market and supports liquidity in the secondary market.
The availability of Shari’ah-compliant liquid instruments is said to remain a challenge in 2019, however, the situation is expected to improve over time. Fitch noted that SAMA’s Saudi riyal-denominated Sukuk programme in 2017 was a positive development for Islamic banks.
Higher oil prices in 2019 are set to drive improved GDPs in the region as well as financing growth. According to Citigroup, oil prices are set to increase for the rest of the year as demand from refineries rise November and December. The outlook comes as OPEC and its allies send mixed supply signals to the market, with Russia suggesting it could push output to a record and an OPEC committee signalling that the group will cap supply again in 2019.
In November, oil reached an average price of $80 a barrel, with spikes up to $90; it could have touched the $100 mark if further disruptions worsen a supply crunch amid rising consumption, suggested Citigroup. Additionally, benchmark Brent crude topped at $85 on concerns that US sanctions on Iran would create a shortage but the prices have since dropped back to $65 a barrel. The positive GDP growth forecast across GCC has been projected at three per cent in 2019 due to oil output increases, and higher oil prices are likely to result in moderate government spending, which is a major source of growth in the GCC.