The global Islamic finance industry has increased its assets size by 11% to US$4.5 trillion in 2022, according to the recent ICD -LSEG Islamic Finance Development Report 2023. In the past decade, the Islamic finance industry transformed from a niche market to mainstream in many countries, demonstrating how a small sector can grow to become a large standalone industry. This growth reflects a healthy industry driven by strong balance sheets, high profits, regulator support and sustained demand by both customers and investors across different regions. Islamic finance is expected to continue to grow, with assets forecasted to reach US$6.7 trillion by 2027. To learn more, please access the full IFDI Report here.

Several key factors contribute to this outlook, including the large Islamic finance markets such as the GCC, Malaysia and Indonesia continuing to strengthen their domestic Islamic finance industries, and Pakistan addressing the requirements to convert its financial system to become interest-free following its Federal Shariah Court judgement on Riba in 2022. In other parts of the world, different jurisdictions are working towards embracing the Islamic finance industry further through regulations, such as West African nations.

The industry has also deepened in presence and impact. In the last decade, regulators and governments have continued to strengthen Islamic finance regulations, growth strategies and comprehensive roadmaps to develop the industry and its ecosystem. We saw many jurisdictions build long-term strategies, invest in human capital and education, organise industry events and publish dedicated reports. Some, such as Indonesia, Malaysia, Saudi Arabia and Türkiye, even added Islamic finance metrics as part of their national economic strategies and blueprints. These initiatives bore much fruit in the form of double-digit growth rates in assets in the past few years.

The assets of the world’s Islamic banks expanded rapidly to reach USD 3.24 trillion by end of 2022 up from USD 1.3 trillion by 2012. The number of full-fledged Islamic banks rose by 36% to 336 in 2022 while conventional banks with Islamic windows or services increased by 84% to 274 in 2022. The highest growth in Islamic banking in the past decade was in Saudi Arabia, the United Arab Emirates and Iran that capitalised on improvement of its local currency in the early years.

Holding around 70% share of global Islamic financial assets, Islamic banking was the main driver of the overall growth of the industry in the last ten years. Islamic banks stayed resilient through market volatilities from 2012 to 2022, pertinently recovering from the intense stress inflicted on them during the Covid-19 pandemic and economic uncertainties post-2020 that prompted investors to push more capital and investments towards Islamic banking institutions. During the decade, more countries welcomed Islamic banks– significantly Oman was the last GCC country to adopt Islamic finance–while others, such as Qatar, closed Islamic windows. Outside the GCC, countries in other regions also started focusing more on Islamic banking, with the prime examples being Türkiye, the CIS countries Kazakhstan and Uzbekistan, Nigeria and Uganda in Sub-Saharan Africa, and the Philippines in Southeast Asia.

We also observed the push from governments in recent years for consolidation to create mega banks with international reach. We saw many mergers and acquisitions within the banking sector in key Islamic finance markets, starting with the UAE, followed by Indonesia, Malaysia, Bahrain, Kuwait, and Saudi Arabia, among others. In addition, we also saw the increasingly mainstream Islamic finance attract conventional financial institutions, for example in Morocco and Oman conventional banks established Islamic subsidiaries and in Pakistan more insurance operators opened Takaful windows.

FinTech, digital banking and artificial intelligence (AI) were some of the key developments that had material impacts on the development of Islamic banking in the decade leading up to 2022. We saw many new digital banks open such as in Malaysia and Indonesia in Asia, Bahrain and Saudi Arabia in the Middle East, and Türkiye and the United Kingdom in Europe. We also closely followed the increasing importance and practice of sustainable finance at Islamic banks that led to new departments and frameworks covering ESG, and sustainable finance and investments.

The global sukuk instruments total value stands at USD 788.39 billion by 2022 compared to USD 260.03 billion by 2012 while total number of sukuk outstanding count to 4,806 up from 1,899 in 2012. Issuance from both international and domestic markets has reached a record number in recent years where we have 1,458 number of sukuk issued in 2022 with a value of 198.82 billion compared to 878 in 2012 with value of USD 142 billion.  The sukuk growth became less rapid in the past five years compared to earlier years where it witnessed booming issuance with record sizes.

The development of the Sukuk market was primarily driven by the ever-growing need for funding. Additionally, the wider investor base also caught on to the attractiveness of the instrument, partly due to its scarcity, and partly because of its unique mixed features straddling equity and fixed income. Many governments and corporates tapped the niche market despite the instrument’s complex structures and procedures relative to conventional bonds. Since 2002 when the first Sukuk was issued during this modern Islamic finance period, growth has primarily been centred in traditional Islamic finance markets. However, in the past decade issuers from different countries in Europe, Asia and Sub-Saharan Africa entered the Sukuk market to contribute to its diversification and depth. Despite growth, the development of the Sukuk market was limited by fewer issuances compared to conventional bonds. Compared to the bonds market, the Sukuk market is fragmented, and has lower levels of liquidity in the secondary market due to many investors holding the Shariah-compliant papers to maturity due to instrument scarcity, attractive rates and low credit risk especially with regards government and multilateral issuances.

Over the decade, we saw the pick-up of different types and structures of Sukuk, such as project Sukuk and cross-border Sukuk. Treasury Sukuk and retail Sukuk also gained traction while more recently, there was a movement towards green and other types of ESG Sukuk. Overall, many sovereigns tapped the Sukuk market, including the UAE, Bahrain, Malaysia, Indonesia, Egypt, and those representing smaller Islamic finance markets such as South Africa and Nigeria. Most of their Sukuk were oversubscribed and sold at tight rates, reflecting high demand for Sukuk globally.

 LSEG