UAE's Non-Oil Economy Drives Continued Growth In Islamic Finance Sector, Reports S&P Global Ratings

S&P Global Ratings anticipates continued robust growth in the UAE's Islamic finance sector, driven by a strong non-oil economy. The UAE has experienced a notable increase in foreign currency Sukuk issuance since the start of the year, particularly in real estate and financial sectors, aiming to attract more foreign investment. Interest rate reductions are expected to persist until late 2025, promoting global issuance expansion.

Dr. Mohamed Damak, Global Head of Islamic Finance at S&P Global Ratings, highlighted the impressive growth of the global Islamic finance industry. He stated, "The global Islamic finance industry is witnessing remarkable growth, with total assets reaching US$3.3 trillion by the end of 2023, an increase of 8 percent compared to the previous year." This growth is evident across all related sectors, especially in the Gulf Cooperation Council's Islamic banking sector.

The UAE stands out as a significant market for sustainable issuances within the region. Analysts from S&P Global Ratings noted that sustainable finance offers new funding opportunities, especially for oil-exporting countries aiming for carbon neutrality. The UAE's commitment to sustainability is reflected in its increasing role in this market.

Rawan Oueidat from S&P Global Ratings discussed challenges and prospects within the sustainable bonds and Sukuk market. She predicts that sustainable bond issuance will stabilize around $1 trillion this year. "While Europe and the Asia-Pacific are expected to remain the primary markets for sustainable bonds, the Middle East's contribution will be limited to under 3 percent," she explained.

The UAE's insurance sector is projected to grow by 15 to 20 percent, encompassing both conventional and Islamic segments. This expansion is attributed to economic performance and infrastructure projects. Emir Mujkic from S&P Global Ratings noted that Islamic insurance makes up about 15 percent of the UAE's total insurance sector.

Mujkic forecasts similar growth rates for both conventional and Islamic insurance sectors this year. This growth is driven by favourable economic conditions, infrastructure investments, and price adjustments in areas like medical and motor insurance.

Sukuk Market Dynamics

The volume of Sukuk issuances remained stable during the first half of the year despite challenges in some markets. Local currency issuances saw a slight decline due to higher interest rates in Turkiye affecting sector growth there. However, hard currency Sukuk issuance grew significantly at year's start due to real estate developers and financial institutions seeking foreign capital through this market.

Damak expects high single-digit growth for the sector through 2024 and 2025 due to financing needs in key countries. The anticipated US Federal Reserve interest rate cuts totaling 225 basis points by late 2025 will enhance liquidity and promote increased Sukuk issuance.

Sustainable Issuance Trends

The demand for sustainability Sukuk in the Middle East rose to approximately $6.1 billion within this year's first nine months. This increased their market share from last year's 20-25 percent range up to 25-30 percent now. Despite rising interest rates reducing demand for these instruments overall globally—total issuances reached $16.7 billion—UAE remains pivotal alongside Saudi Arabia as key markets supporting sustainable issuances regionally.

The UAE's strong non-oil economy continues boosting its Islamic banking sector while fostering greater Sukuk issuance activity overall throughout various industries seeking foreign investment opportunities via these financial instruments.

With inputs from WAM