Islamic finance industry sees high growth but remains fragmented - Moody's

MUMBAI (Thomson Financial) - Despite growth rates at least twice as high as those recorded on global conventional financial markets, the Islamic financial industry remains fraught with diversity and heterogeneity, Moody's Investors Service said.

While Islamic finance is becoming increasingly 'internationalised', it essentially remains a collection of disseminated and still weakly co-ordinated local operations, it said.

The core principles underlying Islamic financial products - although subject to vast consensus as to their formal content - remain differently interpreted and differently weighted in practice, the agency explained.

In addition, the lack of technical and contractual standardisation impedes the capacity of Islamic finance, Moody's noted, adding that initiatives aimed at either introducing Islamic finance or strengthening its position remain country-specific and weakly coordinated.

'Building in prospective views is not an easy task in such a young industry,' the agency said, adding that it nevertheless, expects the Sukuk market to become more complex, more structured, larger, more diversified and more liquid as it evolves over time.

The rating agency also noted that the current excess liquidity prevailing in Gulf economies since the September 2001 terrorist attacks has fuelled both sustained demand for the products supplied by Islamic financial institutions and the booming expansion of the market for Sukuk (Islamic bonds), while contributing to the creation of a very close link between Islamic banks and what remains to date a relatively illiquid compartment of the bond market.

Moody's expects liquidity in the Sukuk market to improve gradually as the variety of Sukuk issuances widens. Not only are volumes expected to exceed $150 billion by the end of the current decade, but the nature, geographic location and credit quality of future issuers are also expected to considerably evolve and diversify, it said.