The UAE’s Islamic finance and halal strategy could boost the industry

The UAE cabinet’s recent approval of the strategy for Islamic finance and halal industry is likely boost the industry, a top agency said.

According to a report by Fitch Ratings, the UAE Islamic finance industry is long-established and it is expected to continue to expand in the short-to-medium term on the back of significant bottom-up and top-down demand and regulatory initiatives to further deepen Islamic finance ecosystem and infrastructure. 

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“Details of the new strategy are yet to be revealed, and it is to be seen what steps the government will take to achieve its targets and what challenges it might face. Fitch will continue to monitor these developments,” the agency said in a report.

According to the Cabinet decision, the UAE will aim to more than double the country’s Islamic banking assets to Dh2.56 trillion ($697.5 billion) from Dh986 billion ($268.4 billion), local sukuk issuances to Dh660 billion ($179.8 billion) and international sukuk listed in the UAE to Dh395 billion ($107.5 billion) by 2031, among other objectives. The cabinet approved the formation of a committee chaired by the central bank’s (CBUAE) governor to implement the strategy.

Islamic banks’ yearly assets growth outpaced conventional banks, according to the CBUAE, with continuation expected over the medium term. “However, these ambitious goals could face increasing competition from large conventional banks who benefit from strong government links. The evolving and additional sharia-compliance requirements could pose risks for the Islamic finance industry and sukuk issuance trends,” Fitch said.

The UAE Islamic finance industry is estimated at over $285 billion at end of the first quarter of 2025. Fitch rated $28 billion of UAE sukuk at the end of the first quarter, 92.1 per cent of which were investment grade. About 39.2 per cent of sukuk issuers are in the ‘A’ category, followed by 34.5 per cent in the ‘BBB’ category, 18.5 per cent in the ‘AA’ category, with the rest in the ‘BB’ and ‘B’ categories; all issuers have stable outlooks. “About 50 per cent of sukuk issuers are financial Institutions, but diversity is rising with the remaining 50 per cent split between corporates, infrastructure and project finance, international public finance and sovereign,” Fitch said.

Fitch rates five investment-grade Islamic banks in the UAE (60 per cent in the ‘A’ category; 40 per cent in the ‘BBB’ category), along with one takaful company (Abu Dhabi National Takaful Company; A-/Stable) and one Shariah-compliant corporate (Emirates REIT BB-/Stable). No rated Islamic finance issuer or sukuk defaulted in 2024 and in end of the first quarter of 2025, data showed.

The UAE is a pivotal player in the global sukuk market, with a 6.5 per cent share of the global sukuk outstanding as of the end of the first quarter, placing it fourth globally (all currencies). Also, the UAE is the fourth-largest US dollar debt issuers in emerging markets (excluding China), and the third-largest issuer of ESG bonds and sukuk in the end of the first quarter. “We expect Nasdaq Dubai to remain among the top listing centres for dollar sukuk globally, with the venue listing more sukuk than conventional bonds and equities combined in 2024,” Fitch said in its report.

The sukuk share of UAE debt capital market (DCM) outstanding reached about 18 per cent in the 25 (2024: 19.9 per cent), while sukuk were close to half of all dollar issuance (1Q24: 40 per cent). Sukuk issuance in all currencies in the 4M25 grew 28 per cent yoy to $6.5 billion, while conventional bonds were up 6.7 per cent. In April 2025, following the market volatilities exacerbated by the US administration’s tariff rise, most UAE issuers accessed the dollar DCM mainly through sukuk rather than conventional bonds. There are not yet any Islamic alternatives to the dirham M-Bills, but the CBUAE has started to develop a sustainable Islamic M-Bills programme.

The UAE’s Islamic banks also have a significant role in the country’s financial landscape, with over 17 per cent of total banking system assets at the end of January 2025. “The Higher Shariah Authority of the CBUAE aims to harmonise and standardise the practices of Islamic financial institutions, and regularly issues regulations and guidelines,” Fitch said.

Somshankar Bandyopadhyay

Somshankar Bandyopadhyay is a News Editor with close to three decades of experience. Currently, he m...Read More

somshankar@khaleejtimes.com