Islamic Finance 2021-2022-TOWARD SUSTAINABLE GROWTH

S&P Dr. Mohamed Damak Senior Director & Global Head of Islamic Finance

S&P Global Ratings believes the global Islamic finance industry will expand 10%-12% in 2021-2022. The expansion of Islamic banking assets in some Gulf Cooperation Council (GCC) countries, Malaysia, and Turkey and sukuk issuances exceeding maturities explain this expected performance. Islamic finance expanded rapidly in 2020 with total assets increasing 10.6% despite the double shock from the COVID-19 pandemic and drop oil prices. We expect oil prices to stabilize at $60 per barrel and a modest economic recovery for most core Islamic finance countries in 2021-2022. However, we think the industry will position itself toward more sustainable growth. More specifically:

1- We believe that we could see some advancement in the standardization and integration of the industry.Over the next 12 months, we could see progress on a unified global legal and regulatory framework for Islamic finance that Dubai and its partners are developing. More importantly, we believe that standardization must be inclusive to avoid situations like those issuers faced with the adoption of the Accounting and Auditing Organization for Islamic

Financial Institutions (AAOIFI) standards in some core countries.

2- We may also see more frequent issuance of dedicated social Islamic finance instruments and green sukuk as the industry realizes and leverages its alignment with environmental, social, and governance (ESG) values. The aftermath of the pandemic and the agenda for core countries’ energy transition could create opportunities to expand these products. We expect adoption will remain slow, however, given the additional complexity related to these instruments and core Islamic finance countries’ slow implementation of policies to manage the energy transition.

3- We think that higher digitalization and fintech collaboration could help strengthen the industry’s resilience in more volatile environments and open new avenues for growth. COVID-19 has demonstrated how the capacity of a company or a bank to shift its business online is critical for its continuity. In our

opinion, accessing bank services digitally, issuing sukuk on a digital platform using blockchain technology, and enhancing cyber security will be the three main factors to help improve the industry’s resilience. With the right coordination between different Islamic finance stakeholders, we believe the industry can create new sustainable growth opportunities and contribute to shared prosperity. We hope you enjoy the 2022 edition of our Annual Outlook For Islamic Finance, and as always, we welcome and encourage your feedback on our research and insights.