In a world increasingly driven by ethical and sustainable investment, Islamic finance—rooted in Sharia-compliant principles that prohibit interest (riba), excessive uncertainty (gharar), and investments in harmful industries—is breaking free from its traditional strongholds in the Gulf Cooperation Council (GCC) and Southeast Asia. With global assets projected to reach $6.7 trillion by 2027, according to LSEG data, the industry is expanding into non-Muslim-majority countries, fueled by technological innovation, regulatory support, and a growing appetite for ethical finance.

A booming market

Islamic finance has grown by over 10.6% year-on-year in 2024, with global assets reaching over $3.6 trillion, per S&P Global Ratings. Banking assets, constituting 60% of global Islamic finance assets in 2024, and sukuk (Islamic bonds) drive this growth. Regionally, the Gulf Cooperation Council (GCC) contributed 81% of this growth, with Saudi Arabia alone accounting for two-thirds of it.

"With the global Muslim population rapidly growing—young, tech-savvy, and deeply values-driven—the demand for authentic, purpose-built products is surging. Stakeholders have a real opportunity to lead by creating genuinely Sharia-compliant offerings that are inclusive, ethical, and accessible to all segments of society," Umer Suleman, chief risk officer at the UK-based Islamic finance firm Wahed, told Forbes Middle East.

The sukuk market is expected to reach issuances between $190 billion and $200 billion in 2025, per S&P Global Ratings, compared to $193.4 billion in 2024. Sustainable sukuk, aligned with environmental, social, and governance (ESG) criteria, is likely to reach $10 billion to $12 billion in 2025, compared to $11.9 billion in 2024 and $11.4 billion in 2023, supported by regulatory incentives like the Dubai Financial Services Authority’s fee exemptions for sustainable securities and Malaysia’s grant schemes covering 90% of issuance costs until 2025.

Non-Muslim markets embrace Islamic finance

The UK, home to four million Muslims, has emerged as Europe’s Islamic finance hub. With total assets valued at $10 billion at the end of 2023, per Fitch Ratings, London’s robust regulatory framework and ties with GCC markets have made it a magnet for Sharia-compliant investments. The UK government’s issuance of sovereign sukuk in 2021, advised by firms like Clifford Chance, set a precedent for other non-Muslim-majority countries.

South Africa and Australia are also joining the fold. In November 2023, South Africa re-entered the Sukuk market after a nine-year hiatus, issuing a four-tranche sovereign domestic Sukuk valued at $1.1 billion (ZAR 20.4 billion). Australia’s National Australia Bank introduced a Sharia-compliant loan in 2021, targeting its Muslim population. These developments reflect the industry’s ability to tap into diverse capital pools, driven by rapid economic growth in countries like the UAE and Saudi Arabia, which have attracted significant foreign direct investment (FDI).

Fintech and blockchain

Technology is propelling Islamic finance into new markets. Fintech firms like Wahed and IMAN are revolutionizing access to Sharia-compliant products. Wahed, a global Islamic fintech, has 400,000 users globally and operates in the US, the UK, and the UAE. IMAN, with operations in over 60 countries, offers a customized mobile platform featuring IMAN Invest, an investment service, and IMAN Pay, a halal buy-now-pay-later (BNPL) offering.

Blockchain technology is another catalyst, enhancing transparency and reducing gharar in transactions. In 2018, the UAE’s Al Hilal Bank used distributed ledger technology, commonly recognized as the foundation of the cryptocurrency Bitcoin, to facilitate the sale and settlement of a small portion of its $500 million five-year sukuk in the secondary market. Also, in 2023, Islamic Coin, a UAE-based Shariah-compliant crypto, raised up to $200 million from Alpha Blue Ocean’s ABO Digital, in a testament to the promising prospects of the industry.

Challenges to overcome

Despite its growth, Islamic finance faces hurdles. Standardization remains a sticking point, with variations in Sharia interpretations creating inconsistencies across jurisdictions. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has made strides, with standards adopted in Bahrain, Qatar, and Oman, but global harmonization is elusive.

A shortage of skilled professionals also hampers progress. The industry requires experts versed in both Sharia law and modern finance, a niche skill set. Malaysia has addressed this through specialized programs at institutions like the International Centre for Education in Islamic Finance, but other regions lag.

Liquidity management is another challenge, as Sharia prohibits conventional tools like interbank lending. Islamic financial institutions rely on less efficient alternatives, impacting scalability. The IMF’s Interdepartmental Working Group, formed to address such issues, is developing frameworks for Islamic banking regulation and liquidity tools, but progress is gradual.

"Fostering cross-border collaboration between regulators and institutions is key. We must empower global standard-setters like AAOIFI and IFSB with real authority to drive alignment," said Suleman.

"The talent gap can be closed by offering practical bridging programs for professionals transitioning from conventional to Islamic finance—alongside new, tech-focused courses tailored to the next generation of Islamic fintechs."

Road ahead

Islamic finance’s global expansion is not without risks, particularly in geopolitically volatile regions like the Middle East. Yet, its asset-based nature offers stability, as sukuk, with $1 trillion outstanding in 2024, and commodity murabahah are insulated from interest rate fluctuations.

The industry’s growth hinges on regulatory support, technological adoption, and public awareness. Governments in non-Muslim-majority countries are increasingly accommodating, with the UK, France, Ireland, and Luxembourg offering tax-neutral frameworks for sukuk. Educational campaigns, like those led by Malaysia and the UAE, are demystifying Islamic finance for global audiences.