The UAE cabinet’s recent approval of the strategy for Islamic finance and halal industry could boost the industry, Fitch Ratings said in its latest report. The UAE Islamic finance industry is long-established, and it is expected to continue to expand in the short-to-medium term on the back of significant bottom-up and top-down demand and regulatory initiatives to further deepen the Islamic finance ecosystem and infrastructure.

Details of the new strategy are yet to be revealed, and a lot remains unknown about the steps the government will take to achieve its targets and what challenges it might face.

UAE Islamic bank assets to grow

The UAE cabinet aims to more than double the UAE Islamic banking assets to AED2.56 trillion from AED986 billion, local sukuk issuances to AED660 billion, and international sukuk listed in the UAE to AED395 billion by 2031, among other objectives. The cabinet also approved the formation of a committee chaired by the UAE central bank’s governor to implement the strategy.

Islamic banks’ yearly assets growth outpaced conventional banks, according to the CBUAE, with continuation expected over the medium term, said Fitch.

“However, these ambitious goals could face increasing competition from large conventional banks who benefit from strong government links. The evolving and additional sharia-compliance requirements could pose risks for the Islamic finance industry and sukuk issuance trends,” said the report.

UAE Islamic finance industry hits over $285 billion

The UAE Islamic finance industry is estimated to have reached over $285 billion at the end of Q1 2025. Fitch rated $28 billion of UAE sukuk at the end of Q1 2025, 92.1 percent of which were investment grade.  About 39.2 percent of sukuk issuers are in the ‘A’ category, followed by 34.5 percent in the ‘BBB’ category, 18.5 percent in the ‘AA’ category, with the rest in the ‘BB’ and ‘B’ categories; all issuers have Stable Outlooks.

About 50 percent of sukuk issuers are financial Institutions, but diversity is rising with the remaining 50 percent split between corporates, infrastructure and project finance, international public finance and sovereign.

Fitch rates five investment-grade Islamic banks in the UAE, along with one takaful company and one sharia-compliant corporate. No rated Islamic finance issuer or sukuk defaulted in 2024 and Q1 of 2025.

Fourth-largest U.S. dollar debt issuer

The UAE is a pivotal player in the global sukuk market, with a 6.5 percent share of the global sukuk outstanding as of Q1 2025, placing it fourth globally. In addition, the UAE is the fourth-largest U.S. dollar debt issuer in emerging markets excluding China, and the third-largest issuer of ESG bonds and sukuk in Q1 2025.

“We expect Nasdaq Dubai to remain among the top listing centers for dollar sukuk globally, with the venue listing more sukuk than conventional bonds and equities combined in 2024,” added Fitch.

Sukuk make up 18 percent of the UAE’s DCM outstanding

The sukuk share of the UAE’s debt capital market (DCM) outstanding reached about 18 percent in Q1 2025, while sukuk were close to half of all dollar issuance. Fitch also revealed that sukuk issuance in all currencies during the first four months of 2025 grew 28 percent yoy to $6.5 billion, while conventional bonds were up 6.7 percent.

In April 2025, following the market volatilities exacerbated by the U.S. administration’s tariff rise, most UAE issuers accessed the dollar debt capital market mainly through sukuk rather than conventional bonds. There are not yet any Islamic alternatives to the dirham M-Bills, but the CBUAE has started to develop a sustainable Islamic M-Bills program, added the agency.

The UAE’s Islamic banks also have a significant role in the country’s financial landscape, with over 17 percent of total banking system assets at the end of January 2025. The Higher Shari’ah Authority of the CBUAE aims to harmonize and standardize the practices of Islamic financial institutions and regularly issues regulations and guidelines.