2024-2025 Islamic Finance Outlook: Insights from S&P Global & DIFC’s 14th Annual Conference

The Islamic finance industry, one of the fastest-growing segments in global finance, is set to continue its upward trajectory through the 2024-2025 Islamic Finance Outlook. Analysts and industry leaders, gathering at the 14th Annual Islamic Finance Conference, hosted by S&P Global Ratings and the Dubai International Financial Centre (DIFC), will address the sector’s key drivers, challenges, and innovations. The event, scheduled for October 30 at DIFC Atrium, offers in-depth sessions on Islamic finance’s future amid shifting economic conditions, digitalization, and the rise of sustainability-focused finance. Experts project continued high-single-digit growth for the industry, supported by expanding markets, sukuk innovations, and a growing interest in Sharia-compliant finance.

The Global Islamic Finance Landscape

In 2023, Islamic finance assets were valued at approximately $3.38 trillion, underscoring the sector’s resilience and appeal. Operating on ethical principles that exclude interest-based transactions (riba) and encourage equity-sharing, Islamic finance is increasingly seen as a viable alternative to conventional banking. Islamic finance’s foundational practices, which emphasize real economic activity and social justice, are particularly attractive in today’s inflationary and uncertain economic climate. Consequently, this alternative finance model has gained a solid foothold in traditional markets like the GCC while making inroads into regions across Asia-Pacific, Africa, and Central Asia.

2024-2025 Islamic Finance Outlook Growth

Several key factors are expected to shape the industry’s growth over the next two years:

1. GCC and Asia-Pacific: Saudi Arabia’s Vision 2030 has positioned the Kingdom as a significant player in Islamic finance, especially in sukuk issuance, which finances large-scale infrastructure and housing projects. Meanwhile, Asia-Pacific countries such as Indonesia, Malaysia, and Pakistan are witnessing growth in Islamic banking assets, as robust demand for Sharia-compliant products persists. These regions not only offer a large Muslim demographic but also benefit from favorable government policies supporting Islamic finance.

2. Sukuk for Infrastructure: The sukuk (Islamic bonds) market is expected to see robust growth, with estimates suggesting issuance could reach $160-$170 billion in 2024. Countries are leveraging sukuk to fund infrastructure projects, green finance, and renewable energy, catering to a global shift toward sustainable investments. Foreign currency sukuk issuances have also surged, appealing to international investors seeking diversified and ethical investments. Sukuk structure is also evolving under the AAOIFI’s (Accounting and Auditing Organization for Islamic Financial Institutions) Standard 62, which emphasizes true asset ownership for Sukuk holders.

3. Fintech Advancements: Islamic finance is increasingly embracing digitalization, from blockchain-based sukuk to digital wallets. Digital sukuk, for example, enables faster issuance and greater transparency, benefiting from blockchain’s traceable, secure nature. Fintech is also helping Islamic banks streamline processes and enhance customer engagement through mobile banking apps and online platforms. However, regulatory frameworks are still adapting to these innovations, with industry leaders calling for more standardization.

4. Economic Resilience: The global economic landscape remains unpredictable, with currency volatility in emerging markets like Turkey and Egypt affecting asset valuations. However, Islamic banks in these regions are showing resilience due to local demand for Islamic financial products. In the UAE, economic diversification away from oil strengthens Islamic finance’s role in sectors such as green sukuk, which aligns with the country’s commitment to sustainability and low-carbon growth.

Islamic Investment Funds

Takaful (Islamic insurance) and Islamic investment funds represent integral components of the Islamic finance ecosystem. Takaful is anticipated to grow by around 10% annually, spurred by rising health and life insurance demands. Islamic funds, especially those invested in sukuk and equities, are expanding as investors increasingly seek Sharia-compliant options. The growth of takaful and Islamic funds demonstrates the importance of regulatory frameworks that promote diversification and accommodate evolving investment demands.

DIFC Islamic Finance Conference 2024

The conference will feature panels on various critical themes that will influence Islamic finance’s 2024-2025 trajectory:

• Global Islamic Finance: This panel will cover macroeconomic factors affecting Islamic finance, including inflation and geopolitical issues in core regions like the GCC, Asia-Pacific, and Africa. As these areas adapt to shifting economic policies and trade relationships, Islamic finance is increasingly recognized as a stable alternative to conventional banking systems.

• AAOIFI’s Standard 62: With AAOIFI’s new Standard 62 emphasizing true asset transfer for sukuk holders, this session will explore how sukuk structuring and investor interest might evolve. Standard 62 aims to reduce reliance on debt-like features and instead promote asset-backed characteristics, which may challenge current issuance structures but attract investors interested in more equity-like financial instruments.

• GCC Cross-Sector: This discussion, led by S&P analysts, will assess the cross-sector effects of geopolitical risks on GCC Islamic finance, including credit ratings and financial stability across sovereign and corporate entities. As GCC countries diversify economically, Islamic finance has the potential to mitigate risks associated with oil price fluctuations and enhance financial stability.

Embracing Sustainability

Sustainable finance is gaining traction in Islamic finance, with green sukuk emerging as a popular instrument. Malaysia, Saudi Arabia, and Indonesia are exploring sustainable finance options, with green sukuk issuance supporting projects like renewable energy and low-carbon infrastructure. Beyond the Middle East, regions such as Africa and Central Asia are developing Islamic finance models to attract environmentally and socially conscious investors.

Ethical finance, one of the principles underlying Islamic finance, is particularly compatible with sustainability objectives. Islamic finance’s emphasis on ethical investing creates a natural alignment with the green economy, making instruments like green sukuk an attractive choice for investors prioritizing environmental, social, and governance (ESG) considerations.

Country-Specific Insights

1. Saudi Arabia: Saudi Arabia’s Vision 2030, which emphasizes infrastructure and economic diversification, is a significant driver of Islamic finance growth. The country’s sukuk market is robust, with both government and private sector entities tapping into Sharia-compliant financing options to meet their extensive funding requirements.

2. Indonesia and Malaysia: Southeast Asia remains a leading region for Islamic finance, with Malaysia dominating the sukuk market. Indonesia is also scaling up its sukuk offerings, utilizing Sharia-compliant funds to finance infrastructure and serve underbanked populations. Digital banking initiatives are further expanding the reach of Islamic finance, with supportive central bank policies encouraging fintech adoption in these countries.

3. Turkey and Egypt: Both Turkey and Egypt face economic headwinds, primarily due to currency depreciation. However, local demand for Islamic financial products remains strong, and government policies continue to support Islamic finance. Turkey’s banks are increasingly issuing sukuk as they seek funding from foreign and local investors interested in Sharia-compliant investments.

Related: Sukuk Issuance Reaches $91.9 Billion in H1 2024, Reports S&P

The Challenge of Standardization

As the industry expands, standardization remains a critical challenge, particularly for cross-border sukuk issuance. Varying interpretations of Sharia compliance create structural complexities, which can hinder the international flow of Islamic finance. Organizations such as AAOIFI and the Islamic Financial Services Board (IFSB) work to streamline standards and improve transparency, yet challenges remain in aligning practices globally. Regulatory efforts also target risk management and digital finance, as seen in AAOIFI’s Standard 62, which introduces guidelines for sustainable and digital Islamic finance.

Future Trajectory

The 2024-2025 Islamic Finance Outlook emphasizes resilience through innovation, inclusivity, and sustainability. Key industry trends include:

• Digital Sukuk: Digital finance innovations like blockchain offer enhanced traceability and transparency, which align with Islamic finance principles. By issuing digital sukuk, Islamic financial institutions can attract a new generation of tech-savvy investors, enhancing inclusivity and reducing operational costs.

• Ethical Investments: Green Sukuk and sustainable finance solutions are crucial in addressing climate challenges. Islamic finance’s ethical foundation makes it well-suited to the rising demand for ESG-compliant products, presenting a substantial opportunity for growth in green finance initiatives.

• Financial Inclusion: Expanding Islamic finance into emerging regions like Africa, Central Asia, and non-Muslim-majority countries enables underserved populations to access ethical and inclusive financial services. This expansion could bridge financial gaps and strengthen economic resilience in these markets.

• Standardization: As Islamic finance integrates into global markets, transparency, and standardized regulations become even more critical. Stakeholders must work towards creating a cohesive regulatory framework that enhances market competitiveness and addresses investor concerns regarding compliance and risk management.

The 2024-2025 Islamic Finance Outlook

The Islamic finance sector stands at a pivotal moment. As industry leaders gather at DIFC’s 14th Annual Islamic Finance Conference, the discussions and insights shared will help shape the sector’s path forward. With strong projected growth, an emphasis on digital transformation, and alignment with global sustainability goals, Islamic finance is set to offer a resilient, ethical, and inclusive financial alternative.

For professionals, investors, and policymakers interested in navigating this dynamic sector, the DIFC conference will be an invaluable platform for networking, learning, and gaining actionable insights into the future of Islamic finance.