Demand for Islamic finance is expected to rise further, as strong economic activity in the Gulf Co-operation Council (GCC) region and Southeast Asia is supported by diversification agendas, investment inflows and population growth.
Stable investor demand for Shariah-compliant products will continue to support inflows into Islamic funds, according to Moody’s Ratings, which expects takaful premiums to grow moderately in the next two to three years, underpinned by economic expansion and rising demand for medical insurance and other compulsory products.
Competition, increasing climate risk, digitalisation and regulatory improvements are likely to drive mergers and acquisitions in the takaful sector.
Green and sustainable issuance fell 10.6% in 2024 to $9.5bn, following strong momentum in 2023. Moody’s expects issuance levels to remain steady in 2025, underpinned by issuers’ ongoing commitment to ESG agendas and increasing interest from both domestic (GCC based issuers) and international investors willing to diversify their funding base.
The GCC Islamic banking sector will continue to benefit from sustained economic growth, governments’ commitment to the promotion of the broader Islamic finance industry and higher demand for Shariah-compliant products.
These factors will enable Islamic banks’ profits to outpace conventional peers because of margin advantage.
GCC Islamic banks will also maintain strong capital and liquidity, allowing them to capitalise on the growing demand for Shariah-compliant financial services in the region.
Stable investor demand for Shariah-compliant products will continue to support flows into Islamic funds. Similarly, the ratings agency expects that premiums for takaful, or Islamic insurance, will grow moderately in the next two to three years as demand for medical insurance and other compulsory products rises in GCC, African and Southeast Asian countries.
Competition, increasing climate risk, digitalisation and regulatory improvements will continue to drive mergers and acquisitions in the takaful sector.
Its latest survey of chief investment officers (CIOs) of GCC asset managers shows they expect inflows and assets under management (AUM) to remain broadly stable, with still high oil prices supporting asset valuations across the region.
Around 80% of respondents expect demand for Islamic financial products and investments with environmental, social and governance (ESG) objectives to increase moderately, with the rest expecting no change.
CIOs also indicated that funds focused on ESG objectives will continue to attract inflows, but are not a strategic focus.
It continues to believe Shariah capital markets have substantial opportunities for long term growth, because of the size of the global Muslim population, a wider product offering and socially conscious investing being embedded in Shariah principles.
Investors outside the core Islamic finance economies are also showing interest, such as in the UK. Over the last five years, the comparatively strong performance of Islamic finance indexes has generated investor interest, underpinning net flows into Islamic funds.
Moody’s, however, expects that decline in sukuk issuance over the next 12-18 months will limit the supply of Shariah-compliant assets, denting growth.
After higher than expected issuance in 2024, it expects issuance to fall in 2025 to around $210bn to $220bn as a result of lower sovereign issuance, given lower sukuk refinancing needs, mainly in the region.