The UAE’s non-oil economy has become a cornerstone for the rapid expansion of its Islamic finance sector, setting a robust foundation for continued growth. As S&P Global Ratings highlights, the UAE’s economy benefits from a flourishing real estate market and a drive to attract foreign investment. The sustained issuance of Sukuk, a key financial instrument in Islamic finance, demonstrates the strength and potential of the UAE’s financial sector in the global Islamic economy. With expected interest rate cuts, expanding insurance markets, and a rising demand for sustainable finance, the Islamic finance sector in the UAE is poised for transformative growth.
The Impact of a Diversified Economy on Islamic Finance
The UAE’s economic diversification beyond oil has created fertile ground for Islamic finance, allowing sectors like real estate and finance to thrive. S&P notes that the performance of non-oil industries has directly contributed to the increase in foreign currency Sukuk issuance, especially in real estate and financial institutions.
Real Estate and Foreign Capital: Key Drivers of Sukuk Issuance
Early 2024 marked a surge in Sukuk issuance in hard currency, largely from real estate developers and financial institutions seeking foreign capital. This trend not only strengthens the Islamic finance market but also diversifies investment sources in the UAE.
Interest Rate Cuts: Fueling Global Issuance Growth
S&P forecasts a series of global interest rate cuts until the end of 2025, with reductions in the US expected to boost liquidity in financial markets. This scenario is likely to encourage further Sukuk issuance, with UAE institutions taking advantage of the conducive environment.
Conventional and Islamic Insurance Growth Projections
According to S&P, the UAE’s insurance sector, comprising both conventional and Islamic options, is expected to grow by 15 to 20 percent. This growth is largely driven by the UAE’s economic performance and infrastructure investments, providing a solid foundation for insurers to expand.
Opportunities for Sustainable Finance in Islamic Sectors
Sustainable finance is gaining momentum in the UAE, particularly as oil-exporting nations pursue carbon neutrality. S&P emphasizes the potential of sustainable issuances, noting that the UAE is a pivotal market for green bonds and sustainable Sukuk within the region.
The Role of the UAE and Saudi Arabia in Sustainable Issuances
Saudi Arabia and the UAE are leading the region’s push for sustainable financing, with rising demand for sustainability Sukuk in the Middle East. Recent figures show a market share increase from 20-25 percent to 25-30 percent, indicating significant growth in demand for green and socially responsible financial products.
Insights from Industry Leaders
Mohamed Damak on Global Islamic Finance Growth
Dr. Mohamed Damak, S&P’s Global Head of Islamic Finance, reports impressive growth within the Islamic finance industry. With total assets reaching $3.3 trillion by 2023, an 8 percent increase over the previous year, the industry is positioned for continued expansion. Damak highlights that the Islamic banking sector in the GCC is experiencing robust growth, which bodes well for the UAE’s financial market.
Regional Insights on Sukuk Issuances
Despite some market challenges, Sukuk issuances have remained steady, with minor declines in local currency issuances due to high interest rates in Turkiye. However, Dr. Damak forecasts a high single-digit growth rate for the sector in the UAE through 2025, driven by financing needs in key regions and favorable economic conditions.
Factors Influencing UAE’s Islamic Finance Growth
- Interest Rate Cuts and Market Liquidity
The anticipated 225 basis points reduction in US interest rates by the end of 2025, with 50 basis points already cut in September, is expected to enhance liquidity. This increase in liquidity will likely spur additional Sukuk issuances, solidifying the UAE’s position as a leader in Islamic finance.
- Robust Non-Oil Economy: A Supportive Backdrop
The UAE’s diversified economy continues to support the growth of Islamic finance. S&P’s analysis underscores the role of non-oil sectors in facilitating Islamic finance expansion, creating a positive environment for Sukuk issuance and other financial products.
Sustainable Bonds and Green Finance: Challenges and Opportunities
- Middle Eastern Markets and Sustainable Bonds
Sustainable bonds, including green, social, and sustainability-focused issuances, are gaining traction globally. Although Europe and Asia-Pacific remain primary markets, Middle Eastern contributions are growing, with the UAE and Saudi Arabia accounting for the largest market shares within the region.
- Market Share and Growth in Sustainable Sukuk
S&P’s Rawan Oueidat reports that sustainability Sukuk demand in the Middle East has reached approximately $6.1 billion, reflecting increased interest in ethical investment options. Rising interest rates have impacted demand, but the UAE’s focus on sustainability aligns with global trends toward environmentally responsible finance.
Islamic Insurance: Market Share and Future Prospects
Expanding Role of Islamic Insurance in the UAE
Emir Mujkic, a Director at S&P, points out that Islamic insurance comprises around 15 percent of the UAE’s total insurance market. The expanding insurance sector reflects the country’s commitment to offering diverse financial services that cater to varying consumer needs.
The Road Ahead for UAE’s Islamic Finance Sector
Strategic Moves to Attract Foreign Investment
The UAE’s strategy to attract foreign capital through Sukuk and other Islamic financial products demonstrates its commitment to creating an inclusive and diversified financial market. With real estate and financial institutions as the main players, foreign investors have significant opportunities to engage in the UAE’s Islamic finance sector.
Emphasis on Sustainability and Carbon Neutrality
The UAE’s alignment with sustainable finance and carbon neutrality goals underscores its ambition to lead in eco-friendly financial solutions. By prioritizing green and social bonds, the UAE positions itself as a future-forward market that attracts ethically conscious investors.
Conclusion
The UAE’s Islamic finance sector is set for a promising future, bolstered by a resilient non-oil economy, strategic interest rate cuts, and a firm commitment to sustainability. S&P’s insights reveal that the country’s focus on diversification and foreign investment is yielding impressive results, particularly through Sukuk issuance. As the UAE pushes forward, its Islamic finance market will continue to attract global interest and set the stage for sustainable growth in the years ahead.
For those interested in exploring opportunities in the UAE’s booming Islamic finance sector, consider starting today and become part of this dynamic financial landscape.
