Muhammad Hammad

Introduction

The Islamic Finance Development Indicator (IFDI) offers a holistic assessment of the Islamic finance industry, moving beyond traditional metrics like asset size and performance to include crucial aspects like governance, awareness, and education.

As a composite weighted index, the IFDI measures industry development across sectors, highlighting disparities and trends that broader data might miss. Released annually, it provides a comprehensive global view, aligning with Islamic principles and promoting accountability among stakeholders.

Catalysing Sustainable Finance

Islamic finance principles align with sustainable finance goals, promoting environmental stewardship and responsible resource management. Shari’ah-compliant instruments like green Sukuk are driving investment in renewable energy and climate resilience.

IFDI 2025 Results

The 2025 Islamic Finance Development Indicator (IFDI) assessed 140 countries, with the global average score declining to 11 due to new entrants scoring low in most indicators. The top 10 countries remained unchanged, led by Malaysia and the UAE, which excelled across all five indicators. Notable shifts include Bangladesh dropping out of the top 10 due to Islamic banking sector challenges, while Tanzania showed promise with Sukuk issuance and sector growth.

Global Overview of the Islamic Finance Industry

The Islamic finance industry is poised for a new phase of growth as it approaches its 50-year milestone in 2025, with assets reaching $5.98 trillion in 2024, a 21% year-on-year growth.

Originating in the 1960s and formalized with Dubai Islamic Bank in 1975, the industry is led by Iran, Saudi Arabia, and Malaysia, accounting for 72% of global assets, with Islamic banking dominating 72% of the market. Key drivers include a large underbanked Muslim population, rising OIC wealth, government support, and innovation in FinTech and sustainable finance.

Looking ahead, the industry is projected to reach $9.7 trillion by 2029, driven by cross-border connectivity, regulatory advancements, and national strategies. Countries like the UAE, Philippines, and Türkiye have launched dedicated roadmaps to boost Islamic finance.

With increasing consolidation, competition, and innovation, Islamic finance is becoming mainstream, appealing to ethical investors globally. Non-OIC countries are emerging as players, with 84 nations now involved, focusing on Islamic funds and FinTech, aligning with ESG principles.

Islamic Banking

Islamic banking is expanding rapidly in sub-Saharan Africa, with 104 Islamic banks and windows operating in 28 countries, driven by proactive central banks in Uganda, and elsewhere. Conventional banks like FNB and Coris Bank are launching Islamic windows, tapping into niche markets. Globally, Islamic banking windows account for 48% of Islamic banks, but only 14% of assets ($619.9 billion), with mixed recognition across countries like Qatar, Bangladesh, and Kazakhstan.

To address liquidity challenges, central banks are introducing Shari’ah-compliant tools, like the UK’s Alternative Liquidity Facility and the UAE’s Sukuk. The International Islamic Liquidity Management Institute (IILM) issues tradable, asset-backed Sukuk, targeting $20-22 billion in 2025, with a 17% CAGR.

To deepen Islamic finance, IILM plans to expand issuers, enhance secondary market liquidity, harmonize regulations, and innovate tools, reinforcing its role as a global standard for Islamic liquidity management.

Takaful

New markets, including Uganda, Kyrgyzstan, Australia, and the Philippines, are introducing Takaful, with regulatory approvals and partnerships in place. Meanwhile, GCC’s Takaful sector sees consolidation driven by regulatory pressures and weak profitability, with mergers announced in Saudi Arabia and acquisitions in Bahrain. Though, some deals have failed to materialize due to valuation and control issues. It has prompted warnings of potential regulatory intervention from agencies like Standard & Poor’s.

Sukuk

The global Sukuk market crossed a milestone, surpassing $1 trillion in outstanding value in 2024, driven by an 11% rise in issuance to $254.3 billion, led by Saudi Arabia’s $75.3 billion in issuances. Governments accounted for 58% of issuance, addressing fiscal deficits and refinancing needs, with $105 billion of Sukuk maturing in 2025. The GCC, particularly Saudi Arabia, fuelled growth amid economic uncertainty, leveraging Sukuk as a mainstream funding tool.

Controversy surrounds AAOIFI’s draft Shari’ah Standard No. 62, proposing stricter ownership transfer rules for Sukuk assets, sparking industry debate, especially in the UAE. Concerns over operational complexities led to revisions, delaying implementation to 2026. This pause offers scope for adjustments, balancing Shari’ah compliance with market practicality, and ensuring that Sukuk remains a viable investment option.

Islamic Funds

Despite a 37% growth in 2024, Sukuk funds remain a small part of the global Islamic fund market, valued at $15.3 billion (9% of total assets). Most Sukuk funds are in Malaysia, and investors’ buy-and-hold approach leads to low liquidity, high trading costs, and elevated fees for passive funds. Sukuk’s price stability, driven by GCC issuers, has not translated into market vibrancy.

New Islamic ETF launches in South Africa, Kazakhstan, Hong Kong, and Saudi Arabia signal growing cross-border interest. Hong Kong’s Saudi Sukuk ETF reflects initiatives with a promise to internationalize Islamic finance, boost accessibility, and diversify Shari’ah-compliant investment options beyond core markets.

Islamic Finance Sustainability Landscape in 2024

The ESG Sukuk market has achieved a significant milestone, surpassing $50 billion in outstanding value in 2024, driven by a 14.7% increase in global issuances to $15.4 billion. GCC-based institutions, particularly banks, led the growth, accounting for 52% of total issuance. This expansion is bolstered by governments in the region, including Oman, Qatar, and Saudi Arabia, establishing sovereign sustainability frameworks to support green projects and meet rising investor demand for ESG-compliant instruments.

Malaysia’s Islamic banks have made notable strides in sustainable finance, with Bank Islam exceeding its 2025 green financing target of MYR 4 billion, achieving MYR 4.8 billion. The bank aims to grow its sustainable finance portfolio to MYR 28 billion by 2025, supporting sectors like renewable energy and SMEs. This demonstrates Islamic finance’s versatility in addressing climate goals, aligning with Malaysia’s National Energy Transition Roadmap (NETR) for net-zero emissions by 2050.

The integration of Islamic finance into global climate solutions is further evidenced by its expansion into voluntary carbon markets. Shari’ah-compliant platforms like XTCC and RVCMC have emerged, facilitating carbon credit trades and supporting projects in Malaysia, Pakistan, and Ethiopia.

To sustain growth, countries like the Maldives and Hong Kong are prioritizing talent development through scholarships, awareness campaigns, and immigration incentives, reflecting a growing institutional commitment to embed Islamic finance in regional and global economic strategies.