RIYADH: Saudi Arabia is poised to play a key role in propelling the growth of the global Islamic finance industry in 2025, underpinned by non-oil economic expansion and robust sukuk issuance, according to a new analysis.
The Kingdom’s banking system growth, supported by Vision 2030 initiatives, is expected to contribute significantly to the expansion of Islamic banking assets next year, S&P Global Ratings said in its latest outlook report.
Saudi Arabia’s debt market has seen significant growth in recent years, attracting investors’ interest in debt instruments amid rising interest rates.
“We expect economic growth in Saudi Arabia and the UAE will continue supporting Islamic banking asset expansion in 2025, barring any significant disruptions from global trade tensions or a further decline in oil prices,” said S&P Global.
The report also noted that Vision 2030 “will continue to translate into significant banking system growth, provided it attracts sufficient refinancing sources, including sukuk issuances from the international capital market.”
Earlier this month, Kuwait Financial Center, also known as Markaz, reported that the Kingdom led the Gulf Cooperation Council in primary bond and sukuk issuances during the first quarter, raising $31.01 billion from 41 offerings. That accounted for 60.2 percent of total GCC issuances during the period.
S&P Global said the strong performance of the UAE’s non-oil economy, along with capital expenditure needs across various sectors, will continue to support financing requirements and sukuk issuances in 2025.
The US-based agency added that the growth of the global Islamic finance market will also be supported by countries in the GCC, including Qatar, Bahrain and Oman, as well as by nations in the Asia-Pacific region such as Pakistan, Bangladesh and Indonesia.
“The financing growth of Islamic banks will continue to outshine conventional banks’ credit growth, facilitating market share gains. However, this growth might be somewhat tempered by local currency volatility,” the report said.
Resilient growth
The global Islamic finance industry is expected to maintain its steady growth momentum in 2025, supported by financing needs linked to economic diversification efforts, according to S&P Global.
The agency said strong performance in both banking and sukuk segments helped the industry grow 10.6 percent year-on-year in 2024, with total sukuk outstanding surpassing $1 trillion for the first time in November.
Banking assets accounted for about 60 percent of the Islamic finance industry’s growth in 2024, up from 54 percent in the previous year. The GCC region was the primary driver, contributing 81 percent of that growth — two-thirds of which came from Saudi Arabia, the report showed.
Islamic banking, also known as Islamic finance, refers to financial activities that comply with Shariah law. Sukuk, or Islamic bonds, are Shariah-compliant debt instruments through which investors gain partial ownership of an issuer’s assets until maturity.
Commenting on the outlook, Mohamed Damak, head of Islamic Finance at S&P Global Ratings, said: “Financing needs driven by economic transformation programs will remain high, and the inherent preference for Islamic finance will persist. As a result, despite growing uncertainty, we expect the Islamic finance industry to grow in 2025.”
According to S&P Global, oil prices are expected to average $65 per barrel for the remainder of 2025 and $70 per barrel in 2026, which could support growth in most core Islamic economies.
The agency projected that global sukuk issuance is likely to reach between $190 billion and $200 billion in 2025, assuming current market volatility does not have a significant impact. Foreign currency-denominated issuance is expected to contribute $70 billion to $80 billion.
The report also noted that global sukuk issuances declined slightly in 2024, totaling $193.4 billion compared to $197.8 billion in 2023.
In a separate forecast made in January, Fitch Ratings said global sukuk issuances could reach $190 billion to $200 billion this year, driven by increased offerings in countries such as Saudi Arabia and Indonesia.
S&P Global’s findings align with a separate analysis released by Moody’s in September, which projected that the profitability of Islamic banks in the GCC will remain strong over the next 12 to 18 months. Moody’s attributed this to stable oil prices, government-led economic diversification initiatives, and high levels of business confidence.
In December, a report by Kamco Invest projected that Saudi Arabia will see the largest share of bond maturities in the GCC region between 2025 and 2029, totaling $168 billion.
The latest report from S&P Global said sustainable sukuk issuance is expected to range between $10 billion and $12 billion in 2025, compared to $11.9 billion in 2024 and $11.4 billion in 2023.
The issuance of sustainable sukuk will be supported by the Islamic finance guidelines introduced by the International Capital Market Association in April 2024, along with other regulatory initiatives.
The guidelines allow a broader range of assets to be used as underlying assets for sukuk, provided the proceeds are invested in green or social assets and projects. This added flexibility is aimed at addressing the shortage of sustainable assets in the Islamic finance space.
In 2024, Saudi Arabia accounted for 38 percent of total sukuk issuances.
However, the volume of sustainable sukuk issuance in the UAE declined by 60 percent in 2024 compared to the previous year.
“We anticipate an increase in sustainable sukuk issuance when GCC issuers implement climate transition plans more quickly and make progress toward renewable energy targets, particularly if regulators offer incentives for sustainable issuances,” said the report.
Potential challenges
In the report, S&P Global also highlighted several challenges that could affect the global Islamic finance industry, including a potential decline in crude oil prices and the adoption of the draft Shariah Standard 62.
In late 2023, the Accounting and Auditing Organization for Islamic Financial Institutions released an exposure draft of Shariah Standard 62 on sukuk.
The proposed guidelines address a range of market elements, including Shariah requirements for issuances, asset backing and ownership transfer, investment and financing structures, as well as trading and settlement procedures.
“Adopting Sharia Standard 62 could disrupt the sukuk market from 2026 by potentially reclassifying the instruments from debt-like to equity-like. But the extent of this will depend on whether the standard is approved, its content, and when it will be implemented,” said S&P Global.
It added: “If Standard 62 is adopted as proposed, we anticipate the industry could become more fragmented and less attractive to investors and issuers due to higher sukuk pricing for issuers and fewer fixed-income investors.”
In January, Fitch Ratings echoed similar views, noting that the adoption of AAOIFI guidelines could alter the structure of the sukuk market and potentially lead to increased fragmentation.
