UAE Non-Oil Boom Fuels Islamic Finance Growth by S&P

Islamic finance in the UAE is rapidly growing, driven by a robust non-oil economy and supported by the nation’s focus on infrastructure, real estate, and sustainable finance. S&P Global Ratings recently highlighted that the UAE’s Islamic finance sector is expanding at a high single-digit rate, supported by a diverse economy that draws from more than just oil revenues. This growth aligns with a broader trend within the Gulf Cooperation Council (GCC), where Islamic finance is a fast-evolving sector that attracts both local and foreign investors interested in ethical, Shariah-compliant financial products.

With the total value of global Islamic finance assets reaching $3.3 trillion by the end of 2023, an 8% increase from the previous year, it’s clear that this sector is becoming a substantial component of the global financial system. The UAE’s role in this market is particularly noteworthy, with the nation leading in Sukuk issuance and expanding its Islamic insurance options. As more countries explore Shariah-compliant financial solutions, the UAE’s growth strategy sets an example of how Islamic finance can succeed alongside economic diversification and innovative policies. This article will explore the factors behind the UAE’s Islamic finance growth, the impact of global interest rate cuts, and the UAE’s pioneering role in sustainable finance.

The UAE’s Islamic Finance Landscape

Islamic finance has taken a prominent position within the UAE’s financial sector, largely due to the country’s sustained efforts to diversify its economy. Traditionally, the UAE’s economy depended on oil revenues, but with a deliberate shift toward sectors such as tourism, real estate, and technology, the UAE is establishing a robust economic foundation outside of oil. This transformation has provided fertile ground for the growth of Islamic finance, as these sectors demand diverse, ethical investment products. S&P projects high single-digit growth in the Islamic finance sector through 2025, supported by these non-oil economic pillars and the increasing popularity of Shariah-compliant finance in the country.

The UAE’s investment in real estate development is particularly noteworthy. With projects like Dubai Creek Tower and various smart city initiatives, the real estate sector is booming, creating a ripple effect that stimulates the financial sector. Islamic banks, by offering Shariah-compliant mortgage products and investment options, are meeting the needs of property developers and investors who value ethical financial instruments. This alignment between real estate and Islamic finance reflects the UAE’s commitment to promoting economic growth while adhering to ethical and sustainable principles.

Sukuk Issuance in the UAE

Sukuk, often referred to as Islamic bonds, are at the forefront of the UAE’s Islamic finance growth. These financial instruments comply with Shariah law, offering a return on investment without involving interest, which is prohibited in Islam. Sukuk has grown in popularity as an alternative to conventional bonds, particularly among international investors seeking to diversify their portfolios with ethical investments. Since early 2024, Sukuk issuance in the UAE has surged, driven by sectors like real estate and finance. Hard currency Sukuk issuances have attracted foreign capital, reinforcing the UAE’s reputation as a global hub for Islamic finance.

Globally, Sukuk issuance returned to pre-pandemic levels in 2023, with total global issuances reaching $185 billion. As more countries recognize the stability and ethical appeal of Sukuk, the UAE’s role in this market is expanding. In a recent analysis, S&P highlighted that hard currency Sukuk issuance would likely continue to grow as the UAE attracts both local and foreign investors to this Sharia-compliant option. The real estate sector, in particular, has shown a strong preference for Sukuk, using it as a mechanism to secure funding for development projects.

Shaping Islamic Finance Growth

Interest rate policies significantly affect the UAE’s Islamic finance sector, particularly in the Sukuk market. Global interest rates influence the relative appeal of Sukuk compared to conventional bonds, as lower interest rates make Sukuk a more attractive option for investors. The U.S. Federal Reserve’s recent decision to cut interest rates by 50 basis points in September is part of a broader trend, with additional cuts expected through 2025. These reductions are likely to increase global liquidity, making Sukuk more appealing and accessible to investors looking for low-risk, stable returns.

Dr. Mohamed Damak, S&P’s Global Head of Islamic Finance, explained that the anticipated 225 basis-point reduction in interest rates by the end of 2025 will have a positive impact on Sukuk issuance. As liquidity improves, more investors are likely to favor Sukuk, particularly in regions where Islamic finance is well-established, such as the UAE. However, it is essential to note that local currency Sukuk issuances have been impacted by high interest rates in some countries, such as Turkey. Despite these regional challenges, the UAE’s hard currency Sukuk issuance remains resilient, demonstrating the country’s unique position in the Islamic finance landscape.

Takaful as a Growth Engine

The UAE’s insurance market is expanding rapidly, with both conventional and Islamic insurance, or Takaful, projected to grow at rates between 15% and 20% annually. Takaful operates under Shariah law, with risk shared among participants rather than transferred to an insurance company. This structure is appealing to those who prefer ethical, community-based risk management solutions. As the UAE’s economy continues to diversify, demand for Takaful is rising, particularly in sectors like health and motor insurance. This growth aligns with broader economic improvements, as infrastructure projects and increased healthcare spending create new insurance needs.

While Takaful comprises approximately 15% of the UAE’s total insurance market, it is gaining traction as more consumers recognize the benefits of Shariah-compliant insurance. The growth potential for Takaful is particularly promising in medical insurance, where rising healthcare costs and evolving regulatory standards are creating demand for new, flexible insurance solutions. However, Takaful providers face challenges, including the need to remain competitive in pricing and to navigate complex regulatory environments. Yet, the sector’s steady expansion reinforces its position as a key contributor to the UAE’s Islamic finance ecosystem.

Sustainable Finance

As countries around the world prioritize environmental sustainability, the UAE is leveraging Islamic finance to fund green initiatives. The nation’s commitment to sustainable finance is evident in its focus on green and sustainability-linked bonds, including green Sukuk, which finance renewable energy projects and other environmentally friendly initiatives. By aligning Islamic finance with sustainability principles, the UAE is attracting investors who prioritize environmental, social, and governance (ESG) standards.

Green and sustainable Sukuk have seen rising demand in the Middle East, with the UAE and Saudi Arabia leading the region in sustainable issuances. In the first nine months of 2024 alone, the Middle East saw $6.1 billion in sustainability Sukuk issuances, increasing the region’s market share from 20-25% to 25-30%. While Europe and the Asia-Pacific remain the primary markets for sustainable bonds, the UAE is positioning itself as a leader in the Middle East, drawing international attention to its innovative approach to sustainable finance.

S&P’s Rawan Oueidat notes that the global sustainable bond market is expected to stabilize at around $1 trillion this year, with the Middle East contributing close to 3% of that total. Although this may seem modest, it reflects significant growth in a region where sustainable finance is still emerging. As the UAE continues to promote green Sukuk, its reputation as a sustainable finance hub strengthens, showcasing Islamic finance as a pathway to achieving national sustainability goals.

Sustainable Bond Markets

While sustainable finance presents growth opportunities, challenges persist. The global rise in interest rates has dampened demand for bonds, including those in the sustainable finance sector. However, the UAE’s focus on sustainable projects and green bonds offers a counterbalance, attracting investors interested in ethical, eco-friendly investments. To encourage sustainable finance, the UAE has introduced policies that support green initiatives, including incentives for renewable energy projects and carbon-reduction efforts.

The UAE’s emphasis on sustainable finance aligns with its Vision 2030 agenda, which prioritizes environmental sustainability and economic diversification. By incorporating sustainability into its Islamic finance offerings, the UAE is meeting investor demand for responsible investments while supporting long-term national goals. The government’s support for green Sukuk and sustainability-linked bonds reflects a broader commitment to fostering a resilient, green economy.

UAE’s Islamic Finance Sector

The growth of Islamic finance in the UAE has attracted significant foreign investment, especially in sectors like real estate, tourism, and infrastructure. Investors are drawn to the stability and ethical appeal of Islamic finance, which provides a reliable alternative to traditional investment vehicles. In recent years, the UAE has enhanced its regulatory framework for Islamic finance, aligning it with international standards to improve transparency and investor confidence. This alignment is especially appealing to foreign investors who seek assurance that their investments adhere to global best practices.

One of the most compelling aspects of Islamic finance is its resilience in the face of economic fluctuations. Shariah-compliant products, such as Sukuk and Takaful, offer a stable return on investment, which is increasingly attractive to investors in today’s volatile market. The UAE’s success in attracting foreign capital to its Islamic finance sector reflects its commitment to fostering a secure and appealing investment environment.

Islamic Finance in the UAE

Looking ahead, the UAE’s Islamic finance sector appears poised for continued growth. The country’s proactive approach to economic diversification, coupled with its commitment to sustainable finance, has created a favorable environment for Islamic finance to thrive. S&P predicts that the sector will experience high single-digit growth through 2025, driven by rising demand for Sharia-compliant products, strategic infrastructure investments, and favorable interest rate trends.

The UAE’s emphasis on sustainable finance further strengthens its Islamic finance offerings. By aligning Islamic finance with global sustainability goals, the UAE is not only appealing to investors interested in ethical finance but also supporting its national commitment to a low-carbon, diversified economy. As other countries look to develop their Islamic finance sectors, the UAE serves as a model of how to integrate economic, environmental, and ethical priorities.

The UAE’s non-oil economic boom is powering the growth of Islamic finance, positioning the nation as a leader in Sukuk issuance and Shariah-compliant insurance. Supported by a strong real estate sector, interest rate trends, and a commitment to sustainable finance, the UAE is setting new standards in Islamic finance. As global interest rate cuts boost market liquidity, Sukuk and Takaful products are likely to become even more popular among investors.

With high single-digit growth expected through 2025, the future of Islamic finance in the UAE looks bright. By continuing to innovate and align with international standards, the UAE is cementing its role as a global hub for Shariah-compliant finance. Through sustainable finance and strategic investments, the UAE is fostering a resilient economy that attracts both local and international investors.

The UAE’s unique approach to Islamic finance, combining ethical investment opportunities with sustainability, serves as a model for other nations. As the Islamic finance sector evolves, the UAE’s dedication to growth, transparency, and sustainability will undoubtedly pave the way for a new era in global finance.