The Islamic finance industry will continue to expand this year, but lose some momentum in 2018, according to S&P Global Ratings.
The agency said in a research note that the industry's assets reached $2 trillion at year-end 2016, with sukuk issuance accelerating in the first half of this year and forecast to stay strong in the second half.
However it noted that it doesn't believe this growth rate is sustainable, adding that greater standardisation is needed to create a "truly global industry".
S&P said the current economic situation in core Islamic finance markets and depreciation of local currencies have weighed on the industry's performance in 2016 and 2017.
It added that the lack of product and market integration constrains growth,as does the absence of standardised Sharia interpretation and legal documentation.
Integration, standardisation, and higher interest in responsible finance could be a game changer, but only in the medium term, it noted.
Islamic finance remains concentrated primarily in oil-exporting countries, with the Gulf Cooperation Council (GCC), Malaysia, and Iran accounting for more than 80 percent of the industry's assets.
"The drop in oil prices and governments' cuts to investment and current spending have reduced the industry's growth prospects, in our view," S&P said.
"Overall, we think the industry's growth rate will stabilise at about 5 percent in 2017 and 2018, which is lower than the average over the past decade," the agency added.
More recent industry entrants, such as Morocco and Oman, will likely show stronger growth, but their contribution to the overall Islamic finance industry will likely remain small, the research said.
S&P also said it expects the slowdown at Islamic banks in the GCC to persist in 2017 after asset growth declined to 5.3 percent in 2016.
"We see banks becoming more cautious and selective in their lending activities, triggering stiffer competition. Yet we don't expect this will happen uniformly in all GCC countries," it said.
"As the economic cycle turns, we think GCC Islamic banks' asset quality indicators will deteriorate in the second half of this year and in 2018," it added.
S&P's research noted that the sukuk market gave a strong showing in the first half of 2017 compared with the same period in 2016, thanks primarily to the jumbo issuances of GCC governments.
"Although we expect issuance numbers will stay solid for the rest of 2017, we consider it unlikely that some of the large transactions seen in the first half of the year will be repeated in 2018," it added.
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