March 27, 2021 islamic finance

MDBs will benefit from the growth of Islamic finance

Shariah compliant multilateral development banks (MDBs) will benefit from the growth of Islamic finance and the associated increase in demand for highly rated sukuk, Moody's Investors Service said in a report.

'The Islamic Corporation for the Development of the Private Sector's mandate, and its increased strategic focus towards on-lending to financial institutions, position it well to benefit from sector growth,' says Thaddeus Best, an analyst at Moody's Investors Service.

'However, all Islamic multilateral development banks will benefit from broader growth in Islamic banking through the additional opportunities for treasury asset investment that it will create.'

Further growth in global Islamic banking will continue to support demand for Islamic MDBs' sukuk, which are among the highest-rated Shariah-compliant instruments, the report said.

A lack of high-quality liquid assets has been a constraint for Shariah-compliant financial institutions, which have suffered from low or negative carry as a result. This shortfall creates a large pool of latent demand for high-quality Shariah-compliant securities, supporting market access for Islamic MDBs.

Moreover, Islamic MDBs can also benefit from growth in Islamic banking through on-lending, syndications and commodity placements, particularly in high growth potential markets in North and Sub-Saharan African, and in more established markets in Turkey and Indonesia.

Shariah-compliant MDBs are also well positioned to benefit from the growing focus on environmental, social and governance (ESG) themes and sustainable investing, given that Islamic finance principles prohibit investment in certain industries.

In line with its expectations for growth of conventional sustainable bond issuance, Moody’s expects a similar expansion in both green and sustainable sukuk issuance, given strong investor demand and the IsDB's mandate to support the Sustainable Development Goals.


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