New sukuk issuance continues to remain subdued in 2016, but growth prospects for the Islamic finance sector are still strong, says Moody's Investors Service in a report published today.

"Growth in the Islamic banking sector continues to broadly outpace that of conventional banks in most systems in which Islamic banks have been established," says Khalid Howladar, Global Head of Islamic Finance at Moody's. "This is driven by strong retail demand and proactive government legislation for the industry."

The sector also has potential for further growth, especially in countries in which the penetration of Islamic banking assets remains relatively low, at between 5%-10% of Islamic financing assets.

Over the last three years, Oman's Islamic banking sector, for example, has gone from zero to an aggregate of around 10% of banking system financing assets as of June 2016, compared to Indonesia and Turkey which have both taken over two decades to reach around 5% of banking system financing assets. However, the government of both these countries have recently taken initiatives to boost the growth in the sector over the next ten years.

While new sukuk issuance volumes in 2016 are expected to remain flat, at around $70 billion, the rating agency says that the longer-term outlook remains promising. "Subdued issuance volumes in 2016 were mostly driven by reduced short-term borrowing by the Malaysian government, one of the largest sukuk issuers globally, as well as the drive of the GCC governments to tap conventional sources of liquidity, which has reduced the attractiveness of the sukuk format" explains Nitish Bhojnagarwala, Assistant Vice President -- Analyst at Moody's. "However, we expect increased sukuk issuance into 2017 from sovereigns, banks and corporates in the Gulf, as regional financing needs increase amid lower oil prices" he adds.

Growth in the Islamic insurance (Takaful) sector is also slowing, but the rating agency expects it to remain at double digit levels into 2017 and for gross contributions to reach $20 billion by 2017.

"Complex regulation, as well as compliance and operational challenges have slowed growth in the Takaful industry," explains Mohammed Ali Londe, Assistant Vice President -- Analyst at Moody's Insurance team. "Growth has broadly slowed to below 15% in 2015 in most key markets. Globally, year-on-year growth stayed just below 20% in the past couple of years due to large premium increases in the Saudi market in 2015 of around 19%."

Overall, the persistent efforts by government agencies and central banks, combined with retail customer demand, is driving growth in all these markets and we expect this trend to continue well into the next decade.