The global Islamic finance industry is expected to lose momentum in 2026 as geopolitical tensions, oil market disruption and slower economic activity across the Gulf weigh on banking growth and sukuk issuance, according to a new report by S&P Global Ratings.
The ratings agency said the industry’s growth is projected to slow to between 5 per cent and 10 per cent this year, compared with 10.2 per cent growth in 2025, as the prolonged Middle East conflict and instability around the Strait of Hormuz continue to disrupt trade, transportation and investor sentiment.
In its report, Islamic Finance 2026-2027: Navigating Rough Waters, S&P said the economic fallout from the regional war has significantly weakened growth prospects in several core Islamic finance markets, particularly in the Gulf.
Despite the challenging environment, global sukuk issuance remained relatively resilient during the first four months of 2026.
According to S&P, global sukuk issuance rose 20 per cent year on year during the period, supported by strong activity in Saudi Arabia, Malaysia, Türkiye and Indonesia. GCC sukuk issuance increased 13.1 per cent, largely driven by local currency issuance in Saudi Arabia.
However, analysts warned that the sustainability of this momentum would largely depend on how quickly geopolitical tensions ease and oil supply routes stabilise.
“The resolution of the Middle East war will determine whether this trend continues, as the GCC accounted for 45 per cent of global sukuk issuance in 2025,” said Mohamed Damak, Head of Islamic Finance at S&P Global Ratings.
S&P’s base-case scenario assumes that the US and Iran will eventually reach an agreement that allows meaningful oil and product flows through the Strait of Hormuz to resume by the end of May, although intermittent disruptions could continue.
The Islamic finance industry, estimated to be worth more than $5 trillion globally, remains heavily concentrated in oil-exporting economies, making it particularly vulnerable to fluctuations in energy markets and regional geopolitical shocks.
Higher oil prices have boosted liquidity in some Gulf markets, but prolonged volatility and supply disruptions are also increasing inflationary pressures, fiscal uncertainty and funding costs.
Analysts say Islamic banks in the GCC are likely to face slower credit growth as governments and corporations delay investments amid heightened uncertainty.
At the same time, weaker economic activity may reduce demand for large infrastructure and real estate financing — two sectors that have historically driven Islamic banking expansion across the Gulf.
Despite near-term pressures, industry experts believe the long-term fundamentals of Islamic finance remain intact due to strong demand for Shariah-compliant products, growing Muslim populations and continued sovereign support in key markets.
The Islamic finance sector has expanded steadily over the past decade, supported by regulatory reforms, digital banking growth and increasing investor appetite for ethical and asset-backed financial instruments.
According to the Islamic Financial Services Board, Islamic banking assets account for more than 70 per cent of the global Islamic finance industry, with Saudi Arabia, Iran, the UAE, Malaysia and Kuwait remaining the largest markets.
Industry experts say sukuk markets are also becoming increasingly diversified, attracting a wider pool of global investors seeking stable and ESG-linked financing instruments.
The GCC continues to dominate global Islamic finance activity, with the UAE and Saudi Arabia playing central roles in cross-border sukuk issuance and Islamic banking innovation.
The UAE, in particular, has strengthened its position as a global hub for Islamic capital markets through Dubai’s push to become the capital of the Islamic economy and Abu Dhabi’s growing role in sovereign and corporate sukuk listings.
Analysts said Gulf financial institutions remain well-capitalised overall despite the current geopolitical turbulence.
A recent report by the International Monetary Fund noted that GCC banking systems continue to benefit from strong liquidity buffers, government backing and relatively healthy capital adequacy ratios, although risks linked to oil volatility and regional instability have increased.
S&P expects Islamic finance growth to recover gradually in 2027 if geopolitical tensions ease and global trade and energy flows normalise.
Much will depend on the stability of oil prices, investor confidence and the pace of economic recovery across the Gulf and broader emerging markets.
For now, however, the industry faces a more challenging operating environment as geopolitical uncertainty, weaker economic growth and elevated energy risks test the resilience of one of the fastest-growing segments of the global financial system.
