The Islamic finance sector will continue to show strong growth in 2018, according to a new Moody’s report, with trade finance bankers pointing to their sector as an area with huge growth potential.

In its recent in-depth sector report, the credit rating agency predicts that Islamic financing assets will grow at 7% this year, thus continuing to outpace conventional counterparts. This will leave the market share of Islamic financing in core markets at 40% of total financial assets.

The expectations, the report notes, reflect the fact that Islamic finance “remains under-represented in the global financial system”, while “demand for sharia-compliant financial instruments is rising”.

While much of this growth, according to Moody’s, has been driven by retail demand for sharia-compliant financial services in Muslim-majority countries, trade finance bankers speaking at the GTR Mena Trade & Export Finance Week 2018 in Dubai in February were optimistic about the potential for trade finance to grow as an Islamic offering.

“The demand is huge,” said Haytham Elmaayergi, global head of transaction banking at the Abu Dhabi Islamic Bank, adding that he is seeing a rising number of new Islamic finance structures in the market.

Speaking on a panel discussion about regional trade flows and patterns, he said: “You will find areas that are typically not very widespread in Islamic banking, like export finance, have started to emerge. A lot of interesting structures in receivables finance are now being done under the Islamic structure.”

Krishnakumar Duraiswamy, head of trade finance at Abu Dhabi Commercial Bank, agreed. “The product itself has come a long way. Where there was a limited number of products in the past, now Islamic products can actually cover the entire working capital cycle. That’s why we’ve seen a growth, which is obviously based on the demand that we have in the market,” he said, speaking on the same panel.

While Abu Dhabi Commercial Bank is mainly focused on conventional trade, its Islamic trade flows have increased in the last two to three years, and, as a result, its Islamic trade products.

The growing demand for Islamic trade finance is also apparent in the secondary market, Duraiswamy said. “On the secondary market side, we actually see Islamic products today, which was non-existent a couple of years back. So that shows how the market is growing, and the demand which is there.”


“Difficult to consume”

Despite the optimism for Islamic trade finance, the sector faces a number of challenges that financiers will have to overcome to meet the growing demand.

The first, Elmaayergi said, is the perception that Islamic trade products are “difficult to consume”.

“A challenge for Islamic banks is how to make it easy to consume, because the minute it’s easy to consume, a lot of customers would rather go Islamic. On the retail side, a lot of people would prefer to go to an efficient conventional bank if there is no efficient Islamic bank. The more we introduce efficiency in Islamic banking, the more we see the demand emerging.”

This, he noted, is something that Islamic banks are already “progressively working on”, adding that the use of technology is playing a crucial role in making it easier and more straightforward for users to access the financing “so it does not give them the feeling that you will need to go through extra steps or be delayed compared to a traditional transaction”.

Elmaayergi also pointed out that when it comes to bank-to-bank transactions, the sector’s key hindrance is the lack of standards.

“On the conventional side, you have the MRPA (master risk participation agreement), which is pretty standard, not much discussion there, but when it comes to Islamic finance, every Islamic bank has their own version,” he said.

The concern is currently being addressed by various organisations in the trade finance space. Just earlier this month, the Bankers Association for Finance and Trade (Baft) and International Islamic Financial Market (IIFM) announced they would work together to create an MRPA to support Islamic trade finance.

The Islamic risk participation agreement will incorporate the practical considerations for funded and unfunded risk participations in trade assets within a sharia-compliant framework. The aim is to “contribute to the sustainable growth of the industry” as Khalid Hamad, chairman of IIFM, put it at the time.

Elmaayergi hopes for the same. “I think a lot of effort now is being put into standardising the interbank documents and I think the more investment into this area, the more trade flows we’ll see coming into this region in the future,” he said. He expects a growth in trade with Turkey and Southeast Asia in particular.

According to the Moody’s report, Islamic finance penetration across the globe has risen from 30% in 2007 to 45% in 2017. One of its expectations is that Islamic finance will not only be limited to Muslim-majority countries. Structured finance issuances, it notes, “may expand as Europe and the UK establish their own Islamic banks”, with Moody’s specifically expecting a stronger offer for Islamic products in the UK.