By 2026, the global Islamic finance industry is expected to reach $6tn, study shows

By Puja Sharma

The UAE has been taking impressive strides to reinforce its position as the global hub of Islamic finance industry with its Shariah-compliant banking sector currently accounting for 23% of total banking assets of the country, equivalent to Dh845 billion.

Khaled Mohamed Balama, governor of the Central Bank of the UAE, said, “the nation’s buoyant Islamic banking sector has become an integral part of the UAE’s financial industry. The sector plays a crucial role in the development and provision of sustainable finance and in meeting the sustainability objectives of the wider financial sector, in accordance with the UAE’s regulatory, supervisory and risk management directives.”

The central bank governor said the Islamic finance sector is key to the UAE’s sustainable growth and its achievement of sustainable development goals, in keeping with the vision of the country’s leadership. “We will continue our efforts to support the development of the Islamic and sustainable finance sectors in the UAE to enhance their stature and participation within the wider industry,” Balama was quoted as saying in the UAE Islamic Finance Report 2023 issued by CBUAE.

Islamic windows, in addition to the takaful market and sukuk issuances, account for 25% of total Islamic banking assets in the UAE, equivalent to Dh214 billion. “This is further strengthened by the issuance of the Guiding Principles Regarding Sustainability in Islamic Financial Institutions by the Higher Shari’ah Authority,” said the CBUAE governor.

The apex bank’s Islamic Finance Report, which highlights the sustainable Islamic finance efforts of Islamic financial institutions (IFIs) across the UAE, comes in line with the UAE’s Year of Sustainability and its recent hosting of COP28.

The report analyses the performance of various Islamic finance sectors, initiatives and activities globally and locally, with a specific focus on sustainability. The report also provides an overview of the legislative, regulatory and Shariah governance landscape, in addition to an assessment of the sustainability strategies adopted by Islamic financial institutions (IFIs) as well as the opportunities and challenges they face.

The UAE’s Islamic finance landscape comprises eight standalone Islamic banks, 16 Islamic banking windows of conventional banks, and nine Islamic finance companies. The report also highlights the presence of 10 takaful insurance companies with total gross written contributions amounting to Dh4 billion in 2022, whereas the value of sukuk outstanding stood at Dh217 billion in H1 2023.

Driven by favourable dynamics in the GCC and a few other core markets, the size of the global Islamic finance industry is poised to cross the $3 trillion mark this year, growing by around 10 per cent after expanding at a similar pace in 2022, according to S&P Global Ratings. In 2022, GCC countries drove most of the growth in banking assets. Malaysia and GCC countries accounted for a large portion of the sukuk market during the same period.

According to the ICD-Refinitiv Islamic Finance Development Indicator report, the global Islamic finance industry is poised to rise to $6.0 trillion by 2026.

Islamic banking activities accounted for around 70% of global Islamic finance assets in 2021, according to the IFDI Report. The second-biggest segment is Shariah-compliant debt capital market instruments, accounting for 18%, and Islamic funds in third, accounting for around 4.0%.

Other Islamic financial institutions, including financial technology (FinTech), investment, financing, and leasing and microfinance companies as well as brokers and traders accounted for 4.0% of global Islamic finance assets in 2021, while takaful (Islamic insurance) had the smallest representation with about 2.0%.