Muhammad Hammad

The Islamic Financial Services Industry (IFSI) entered 2025 with renewed growth momentum and broad-based expansion into new markets and across all three core sectors banking, capital markets, and insurance. Total IFSI assets rose significantly, with double-digit growth recorded in all three sectors, driven by the continuing dynamism of the Islamic banking sector, and a growing momentum in the non-bank segments of the industry.

The IFSI’s growth trajectory reflects not only sustained demand but also the positive impact of regulatory reforms and increased market participation across jurisdictions.

Total IFSI assets reached USD 3.88 trillion, marking a significant 14.9% year-on-year (YoY) growth compared to 2023. This acceleration in asset growth outpaced the average rates of recent years. The growth momentum reflected accommodative global financial conditions in 2024 driven by lower interest rate expectations and easing inflation, which revived market sentiment and capital flows, alongside sustained demand for Islamic financial services, and increased market participation across key Islamic finance jurisdictions.

Islamic Banking

Total Islamic banking assets recorded a YoY growth of 17.05%, exceeded the sector’s long-term trend. Growth was further reinforced by regulatory reforms, market development and digitalization initiatives. The alignment between asset and financing growth suggests effective deployment of funds and balanced intermediation, while steady deposit growth points to continued customer confidence and a stable funding base. These growth trends also underscore the sector’s capacity to maintain its growth momentum in an evolving economic environment.

17 domestic systemically significant markets where Islamic banking assets represent 15% or more of total domestic banking assets collectively accounted for over 92.9% of global Islamic banking assets. However, compounded annual growth rates (CAGR) over the past five years show that several smaller jurisdictions, particularly in SSA, ECA and some parts of MENA (excluding GCC) have recorded growth rates exceeding those of mature markets. At the same time, some established markets continue to post strong growth, further entrenching their systemic importance. These trends suggest that Islamic banking is both deepening its penetration in traditional strongholds and gaining traction in new regions.

The global average leverage ratio of Islamic banks remained stable at around 10.7% during the reporting period well above the 3% regulatory minimum requirement. This reflects the sector’s prudential balance sheet structure, shaped by limitations on debt trading, speculative instruments, and excessive leverage.

The global Islamic banking sector recorded higher profitability during the reporting period, with both Return on Assets (ROA) and Return on Equity (ROE) surpassing pre-pandemic levels and remaining above global banking averages.

During the reporting period, the global average non-performing financing (NPF) ratio declined slightly, remaining below pre-pandemic levels. This improvement reflected sustained financing growth, particularly in the household, real estate, and trade sectors, which continue to account for the largest share of Islamic banks’ financing portfolios across most regions.

Islamic Insurance

Islamic insurance assets reached USD 54.4 billion by Q3 while Gross Written Contributions (GWC) reached USD 28.6 billion, marking 16.9% and 15.1% YoY growth respectively. These figures substantially outperform the broader insurance market’s 3.20% premium growth. However, structural challenges persist, particularly the limited availability of Islamic financial instruments and concentration risks in investment portfolios.

The GCC region dominated the global Islamic insurance market, accounting for 59.9% of the total GWC, supported by consolidation activity and comprehensive regulatory frameworks in major jurisdictions. MENA (excluding GCC) and EAP regions accounted for 19.3% and 17.0% of global GWC. SA and SSA regions are at earlier stages of market development, prioritizing regulatory framework enhancement and infrastructure building. ECA experienced the highest growth rate (47.5%), through the strengthening of the broader Islamic financial system, driven by increased demand and regulatory reforms.

Islamic Capital Markets

New Sukuk issuances rose by 25.6% to USD 230.4 billion, with total outstanding Sukuk surpassing USD 900 billion. Lower interest rate expectations, coupled with ample global liquidity and tighter credit spreads, created conducive financing conditions, encouraging issuers to tap the Sukuk market to meet refinancing needs and fund new projects. Governments and corporates in key Islamic finance jurisdictions increased Sukuk issuance to finance large-scale infrastructure and economic diversification initiatives.

Sovereign and quasi-sovereign issuers accounted for around 52.9% of total issuances. However, corporate Sukuk issuance grew by 21.2% to USD 87.7 billion, reflecting increased private sector participation and recognition of Sukuk as a viable alternative to conventional debt. Issuances by multilateral institutions, notably the Islamic Development Bank and the International Islamic Liquidity Management Corporation, also increased to over USD 20 billion in 2024, driven by efforts to mobilize development funding and facilitate cross-border liquidity management. While these developments signal broader issuer participation, the market structure remains concentrated in key markets and sectors.

Foreign currency Sukuk accounted for 34% of total issuances, up from 26% in 2023. The growth was driven by issuers seeking to diversify their investor base, access international markets, and benefit from favorable global financing conditions. The increased use of foreign currencies signals greater integration of the Sukuk market with international capital markets.

However, it also introduces heightened exposure to foreign exchange risks and potential currency mismatches, particularly for issuers with revenues primarily in local currency. A sharp depreciation of the domestic currency could significantly increase debt servicing costs and strain fiscal or corporate balance sheets. It therefore warrants close monitoring and strengthened risk management to safeguard financial stability, particularly during periods of market stress.

Overall, Sukuk issuances were dominated by the EAP region and the GCC, accounting for 51.2% and 42.1% of total issuances, respectively, while other regions contributed marginally. Sovereign Sukuk issuance was led by the EAP region, representing 51.4% of global sovereign Sukuk, reflecting use of Sukuk for public financing and monetary operations, particularly in Malaysia and Indonesia. The GCC followed with 42.2%, driven by increased fiscal needs and infrastructure funding.

Corporate Sukuk issuances increased in the GCC, which accounted for 57.5% of global corporate Sukuk, reflecting the region’s growing private sector reliance on Sukuk as a financing tool amid economic diversification efforts. The EAP region contributed 34.3% to corporate Sukuk, while ECA accounted for 7.5%.

Participation from other regions remained limited across both issuer categories. These patterns underscore the concentration of Sukuk activity in a few core markets and the limited development of Sukuk markets in other jurisdictions, highlighting the need for broader geographical diversification to support the market’s long-term depth and resilience.