S&P Global Ratings anticipates that the UAE’s Islamic finance sector will continue to experience robust growth in the near future, buoyed by the strong performance of the non-oil economy.
Surge in sukuk issuance
The agency reports a notable increase in sukuk issuance in foreign currencies since the start of the year, particularly within the real estate and financial institutions sectors, as efforts are made to attract more foreign investment.
Outlook for interest rates and insurance sector expansion
Moreover, S&P Global Ratings expects interest rate reductions to persist until the conclusion of 2025, which will support global issuance growth. The insurance sector in the UAE, encompassing both conventional and Islamic insurance, is projected to expand by 15 to 20 percent, driven by positive economic indicators and ongoing infrastructure projects.
Sustainable finance opportunities
In a conversation with Emirates News Agency (WAM) during the 14th Annual Islamic Finance Conference organized by S&P Global Ratings and the Dubai International Financial Centre (DIFC), analysts from the agency noted that sustainable finance is creating new funding opportunities, particularly for oil-exporting nations aiming for carbon neutrality. They emphasized that the UAE is a pivotal market for sustainable issuances within the region.
Growth in total assets
Dr. Mohamed Damak, global head of Islamic Finance at S&P Global Ratings, stated that the global Islamic finance sector is experiencing impressive growth, with total assets reaching $3.3 trillion by the end of 2023, reflecting an 8 percent increase from the previous year. He highlighted that all segments within the industry are witnessing significant growth, especially the Islamic banking sector in the Gulf Cooperation Council (GCC).
Read more: CBUAE: UAE ranks as fourth largest Islamic finance market globally
Stability amidst challenges
Moreover, Damac pointed out that sukuk issuance volumes stabilized during the first half of the year, despite challenges in certain markets, with local currency issuances slightly declining due to rising interest rates in Turkiye, which have adversely affected growth in that sector.
Future growth projections
Damak mentioned that S&P expects the Islamic finance sector to grow at a high single-digit rate through 2024 and 2025, driven by financing demands in key countries. He also highlighted that the anticipated 225 basis points of interest rate cuts by the US Federal Reserve by the end of 2025—including a 50 basis point reduction already implemented in September—will improve market liquidity and encourage greater sukuk issuance.
Economic strength supporting Islamic banking
Furthermore, Damak emphasized that the UAE’s strong non-oil economy will further enhance the growth of the Islamic banking sector, particularly with the increase in Islamic sukuk issuance. He noted that at the start of the year, there was substantial growth in hard currency sukuk issuance, primarily driven by real estate developers and financial institutions seeking to attract foreign capital through the sukuk market.
Challenges and opportunities in sustainable bonds
Rawan Oueidat, director at S&P Global Ratings, addressed the sustainable bonds and sukuk market, outlining both its challenges and opportunities. She predicted that sustainable bond issuance, which includes green, social, and sustainability bonds, will stabilize at around $1 trillion this year. She added that while Europe and the Asia-Pacific regions are expected to remain the dominant markets for sustainable bonds, the Middle East’s contribution is likely to be limited to under 3 percent.
She further mentioned that total issuances reached $16.7 billion, affected by rising interest rates that have reduced demand for these types of investment instruments.
Key markets for sustainable issuances
Oueidat highlighted that the UAE and Saudi Arabia are critical markets for sustainable issuances, with demand for sustainability sukuk in the Middle East increasing to approximately $6.1 billion in the first nine months of this year, thereby raising their market share to 25-30 percent from last year’s 20-25 percent.
Insurance market outlook
Emir Mujkic, director at S&P Global Ratings, spoke about the outlook for the UAE insurance market, discussing the challenges and opportunities facing Islamic insurers. He noted that Islamic insurance constitutes about 15 percent of the total insurance sector in the UAE.
Projected growth in insurance sectors
Mujkic forecasted that both the conventional and Islamic insurance sectors will grow at a similar pace of 15 to 20 percent this year, driven by favorable economic conditions, infrastructure development, and price adjustments, particularly in the medical and motor insurance segments.
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