Nothing on the planet has avoided the impact of the COVID-19 pandemic, and the Islamic finance sector is no exception. As a working paper from the Islamic Financial Services Board (IFSB) reported earlier this year: “Although it is essentially a health crisis, the pandemic has had a devastating effect on the real sector – sectors that produce goods and services – to which the Islamic banking industry is highly exposed. There has been significant disruption to production and sales activities, as well as supply chains, due to movement and travel restrictions, job losses, reduced demand for goods and services, reduced commodity prices etc.”

Pre-Covid, the Islamic finance industry had returned to strong growth, with assets rising by 14 percent in 2019 to $2.88trn, after a slowdown in 2018, when the industry expanded by a more moderate two percent. That level of growth looks unlikely to be repeated in 2020, or 2021. Ayman Amin Sejiny, chief executive of the Islamic Corporation for the Development of the Private Sector (ICD), part of the Islamic Development Bank, said: “The COVID-19 pandemic will have a more severe and deeper impact on Islamic finance, as the current crisis is affecting aggregate demand, small and medium enterprises (SMEs), and low-income individuals particularly hard. Compared to conventional banking, Islamic finance has a larger exposure to SMEs, microfinance and retail lending, especially in Asia. With SMEs facing multiple issues – lower revenues, cash flow issues, high levels of leverage, short-term financing obligations, etc – this will increase the quantum of non-performing financings and vulnerability of Islamic banks’ portfolios.”

However, the comprehensive reforms introduced after the last major catastrophe to shake the world, the global financial crisis of 2008, meant that Islamic banks entered the financial emergency induced by the pandemic relatively better capitalised, more profitable and more liquid than they were 14 years ago. The prediction is that they are likely to exit the crisis stronger than ever, with Islamic finance continuing to expand in Islamic banking, sukuk, takaful and Islamic funds, helped by supportive government policies, strong product demand and deeper market penetration.

Ashraf Madani, a vice-president and senior analyst at Moody’s Investors Service in Dubai, said: “We expect Islamic finance to continue rising in 2021 and beyond, maintaining its now long-established growth trend. The industry generally remains under-represented in countries with large Muslim populations, providing ample room to expand. We forecast global sukuk issuance will stabilise in 2021 to around $190bn–$200bn, following record issuance of nearly $205bn in 2020.”

Moody’s said it expected the takaful insurance market to expand steadily as premiums rise moderately in the next two to three years in newly penetrated markets. Digitisation efforts by banks and regulatory improvements will also help to lift growth. It predicted that the growth in global Islamic funds under management will continue at an annual rate of four percent to five percent in 2021–22, boosted by the growth of Shariah capital markets and resilient demand for Shariah-compliant investments.

Picking up during the year
A report by the ICD and Refinitiv, the market data supplier, said that while there has been a slowdown in corporate sukuk issuance, as the pandemic has made them appear high-risk, issuance is expected to pick up again before the end of the year, given low borrowing costs and mounting economic pressure on corporate entities including Islamic financial institutions. The Maldives, for one, is considering issuing a sovereign sukuk to cushion the economic blow from massively reduced tourism.

All the same, the IFSB revealed that despite high demand for their services, the pandemic has meant that Islamic banks have needed help in coping with the pressures caused by the pandemic. “Regulatory forebearance” by banking authorities in different countries, for example allowing the temporary breach of capital, solvency or liquidity requirements, will ease the pressures on banks caused by the crisis.

The board said that despite the gradual easing of lockdown restrictions and the resumption of economic activities in many countries, most small and medium-sized enterprises’ operational resilience “is being put to the test and many have ceased operation completely.

Households that have been subjected to compulsory leave, pay cuts, job losses or constrained employment opportunities could also default. These implications will only crystallise when the moratorium period is over and governments ultimately withdraw their stimulus packages.” At that point, the IFSB said, Islamic banks “will face increasing non-performing finance volumes, rising costs of risk, declining asset quality and a likely consequential rise in risk-weighted assets, which could also have implications for capital adequacy.”

A changing landscape
The after-effects of the pandemic could also affect the Islamic banking sector in perhaps unexpected ways, the board warned. For example, increasing digitalisation and the wider adoption of the “new normal” of working from home will have substantial implications for the viability of the real estate and construction sectors, which account for about 12 percent of Shariah-compliant financing.

Working from home and digitisation will also directly affect Islamic banks themselves. A survey by the IFSB found that more than 90 percent of Islamic banks said the proportion of their spending on digital transformation was likely to increase because of the pandemic.

This, the board said, “will put immediate pressure on the cost-to-income ratios of the Islamic banking sector.” At the same time, it said, “the digital transformation process requires highly specialised human capital and domain experts. Therefore, Islamic banks will need to retrain and reskill existing talent – staff reduction at this time may trigger reputational risk – even as they make efforts to attract new ones that fit the imminent digital transformation of the banking workforce.”

The ICD-Refinitiv report revealed that several Islamic financial institutions have moved to offer their products via digital platforms so as to better serve their locked-down customers, speeding the advance of technology within Islamic finance. It also said that Islamic challenger or digital-only banks are emerging in non-core markets such as the UK, Malaysia, Kenya and Australia. A new insurance technology development in Malaysia uses blockchain to channel waqf (charitable endowment) funds towards making takaful more affordable to lower-income consumers.

Another perhaps unexpected development has seen Islamic finance education increasingly offered online or through distance learning as the COVID-19 pandemic makes it harder for students to attend classes. Events such as conferences and seminars are also increasingly being hosted online. This makes it easier for students or industry stakeholders from other countries to take online courses or attend Islamic finance events, which will help the industry to grow.

Ultimately, as all good businesspeople know, every threat is also an opportunity. According to Ayman Amin Sejiny, the pandemic is “an opportunity for the re-emergence of certain strong Islamic instruments, such as zakat [alms] and waqf, which could once again play a role in reducing the impact on the most vulnerable segments of the population or on poor countries.

This would not only be in line with the ultimate goals of Shariah but also create a new growth channel for the industry. “The pandemic may serve as an impetus for further innovation in the Islamic capital markets, with instruments specifically ring-fenced to mitigate the health and economic impact of the coronavirus and aid recovery.”

A list of the companies awarded in the World Finance Islamic Finance awards 2021 can be seen below.

 

World Finance Islamic Finance Awards 2021

Best Islamic Bank by Country

Algeria
Al Salam Bank

Bahrain
Al Baraka Islamic Bank

Bangladesh
Islami Bank Bangladesh

Egypt
Faisal Bank

Indonesia
Maybank Syariah Indonesia

Iran
Ansar Bank

Jordan
Jordan Islamic Bank

Kazakhstan
Al Hilal Bank

Kenya
National Bank of Kenya – National Amanah

Kuwait
Kuwait International Bank (KIB)

Lebanon
Al Baraka Bank Lebanon

Malaysia
CIMB Islamic

Morocco
Bank Assafa

Nigeria
Taj Bank

Oman
Bank Nizwa

Pakistan
Meezan Bank

Palestine
Arab Islamic Bank

Qatar
Qatar Islamic Bank

Saudi Arabia
Al Rajhi Bank

Sri Lanka
MCB Bank

Tunisia
AlBaraka Tunisia

Turkey
AlBaraka Turk

UAE
Abu Dhabi Islamic Bank

UK
Gatehouse Bank

 

Individual Awards

Lifetime Achievement in Islamic Banking and Dedication to Community
Sheikh Mohammed Al-Jarrah Al-Sabah, Chairman of KIB

Lifetime Achievement in Financial Technology Innovation
Robert Hazboun, ICSFS Group CEO & MD

Business Leadership and Outstanding Contribution to Islamic Finance
Musa Shihadeh, Chairman of the Board of Directors, Jordan Islamic Bank

Islamic Banker of the Year
Ahmad Shahriman Mohd Shariff, CEO of CIMB Islamic

Kuwaiti Visionary CEO – Development & Growth Driver
Raed Jawad Bukhamseen Vice Chairman & CEO of KIB

 

Corporate Awards

Best Islamic Bank for Treasury Management
CIMB Islamic

Best Stock Exchange for Islamic Listings
Boursa Kuwait

Best Islamic Private Bank
Abu Dhabi Islamic Bank

Best Islamic Bank for Customer Experience
Emirates Islamic

Best Islamic Banking & Finance Software Provider
ICS Financial Systems (ICSFS)

Best Core Banking Systems Implementer, Middle East
Masaref Consulting

 

Special Recognitions

Best Employee Development and Empowerment in Kuwait
Kuwait International Bank (KIB)

Best Customer-focused Islamic Banking Products & Services in Kuwait
Kuwait International Bank (KIB)

Best Credit Card in the UAE
Skywards Black Credit Card of Emirates Islamic

Best Participating Bank for Customer Service Quality in Morocco
Bank Assafa

Best Participating Bank for Customer Service Quality in Turkey
Ziraat Katılım Bankası

Most Innovative Participating Bank in Morocco
Bank Al Yousr

Most Reliable Participating Takaful Insurance Company in Turkey
Bereket Katılım Sigorta

CSR Excellence and Dedication to Community in Turkey
Bereket Katılım Sigorta

Best Takaful Insurance Company in Jordan
Islamic Insurance Company

Best Takaful Insurance Company in Kuwait
KFH Takaful Insurance Company

Best Takaful Insurance Company in Qatar
AlKhaleej Takaful Insurance

Best Takaful Insurance Company in Saudi Arabia
Tawuniya