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UAE's strong non-oil economy fuels Islamic finance growth: S&P

UAE has seen significant growth in Sukuk in foreign currency issuance

S&P Global Ratings expects strong growth in the UAE's Islamic finance sector to continue over the coming period, supported by the strong performance of the non-oil economy.

According to the agency, the UAE has seen significant growth in Sukuk in foreign currency issuance since the beginning of the year, with issuance activity in the real estate and financial institutions sectors, amid a drive to attract more foreign capital.

The agency indicated that interest rate cuts are anticipated to continue until the end of 2025, fostering global issuance growth. The UAE's insurance sector, both conventional and Islamic, is projected to expand by 15 to 20 percent, driven by economic performance and infrastructure projects.

The agency's analysts indicated that sustainable finance presents new opportunities for funding, particularly in oil-exporting nations pursuing carbon neutrality, while highlighting that the UAE is a key market for sustainable issuances in the region.

Dr. Mohamed Damak, Global Head of Islamic Finance, S&P Global Ratings, said: "The global Islamic finance industry is witnessing remarkable growth, with total assets reaching $3.3 trillion by the end of 2023, an increase of 8 percent compared to the previous year. All sectors related to the industry have witnessed remarkable growth, especially the Islamic banking sector in the Gulf Cooperation Council (GCC)."

He stated that the volume of Sukuk issuances stabilised during the first half of the year, despite challenges in some markets, with local currency issuances seeing a slight decline as a result of higher interest rates in Turkiye, which impacted the growth of the sector there.

Damak stated that S&P expects the sector to grow at a high single-digit rate through 2024 and 2025, fueled by financing needs in key countries. He also noted that the US Federal Reserve's anticipated 225 basis points of interest rate cuts by the end of 2025, including the 50 basis points already cut in September, will enhance market liquidity and promote increased Sukuk issuance.

He noted that the UAE's robust non-oil economy will bolster the growth of the Islamic banking sector, highlighting the rise in Islamic Sukuk issuance. "At the start of the year, there was significant growth in hard currency Sukuk issuance, driven by real estate developers and financial institutions turning to the Sukuk market to attract foreign capital."

Rawan Oueidat, Director at S&P Global Ratings, discussed the sustainable bonds and Sukuk market, highlighting its challenges and opportunities. He forecasts that sustainable bond issuance, including green, social, and sustainability bonds, will stabilize at approximately $1 trillion this year. "While Europe and the Asia-Pacific are expected to remain the primary markets for sustainable bonds, the Middle East's contribution will be limited to under 3 per cent."

She added that total issuances reached $16.7 billion, influenced by rising interest rates that have diminished demand for these investment instruments.

She stated that the UAE and Saudi Arabia are key markets for sustainable issuances, with sustainability Sukuk demand in the Middle East rising to approximately $6.1 billion in the first nine months of this year, increasing their market share to 25-30 per cent from 20-25 per cent last year.

Emir Mujkic, Director at S&P Global Ratings, discussed the UAE insurance market's outlook and the challenges and opportunities for Islamic insurers, noting that Islamic insurance comprises approximately 15 percent of the total insurance sector in the UAE.

He projects that both the conventional and Islamic insurance sectors will grow at a similar rate of 15 to 20 percent this year, driven by favourable economic conditions, infrastructure investments, and price adjustments, particularly in medical and motor insurance.