The ongoing Middle East conflict is set to slow down the growth trajectory of the Islamic finance, predicted the latest outlook from S&P Global Ratings. As per the agency, the industry, after recording a 10.2% growth in 2025, will witness a 5%-10% decline in 2026, as activities like oil and gas supplies, trade, and transportation may face consistent disruptions.
In a report titled “Islamic Finance 2026-2027: Navigating Turbulent Waters”, S&P Global said that the Iran war has significantly impacted economic growth prospects in some key Islamic finance markets, leading to a decline in sukuk issuances and reduced growth opportunities for banking systems in these countries.
As per the ratings agency, the industry is currently undergoing a high degree of unpredictability regarding the duration and scope of the Iran war and its potential impact on commodity prices, supply chains, economies, and credit conditions.
S&P’s baseline scenario assumes the United States and Iran reaching an agreement by the May 2026 end, that will ease the blockade of the Strait of Hormuz, allowing for the resumption of oil and commodity flows. However, the possibility of continued intermittent disruptions, due to geopolitical flare-ups, can’t be ruled out.
“A weakening of fiscal balances in most GCC countries, as higher oil prices will only partially offset the significant decline in oil production and exports during the war. This will likely be financed through a combination of liquid asset utilisation and debt issuance, particularly through private placements. The complexities of sukuk issuance may push governments to issue conventional bonds, except for those with large, well-established sukuk issuance programmes,” the ratings agency said.
In the first four months of 2026, sukuk issuance in the Gulf countries increased by 13.1% year-on-year, driven by local currency issuances in Saudi Arabia. Global sukuk issuance also rose by 20% in the same period, with Malaysia, Turkey, and Indonesia contributing significantly. As of now, S&P Global sees the continuation of this trend on the direction and outcome of the Middle East conflict, given that GCC countries accounted for 45% of global sukuk issuance in 2025.
The agency also confirmed that the Islamic finance sector’s double-digit growth in 2025 was supported by growth in banking assets and issuances. The expansion of Islamic banking assets contributed approximately 74% to the sector’s growth in 2025, compared to 54% in 2024.
“The Gulf countries accounted for two-thirds of banking asset growth in 2025, with Saudi Arabia and the UAE being the main contributors, driven by projects related to Saudi Vision 2030 and the UAE’s strong economic performance,” S&P remarked.
The agency also predicted that several key GCC countries in Islamic finance, including Qatar, the UAE, Kuwait, and Bahrain, would experience a slowdown in economic growth in 2026 due to the Hormuz disruptions. The Iran war may also end up affecting the performances of other sectors like tourism, private investment and supply chains, along with trade-dependent and real estate segments in the Gulf region.
“The Kingdom’s growth trajectory is somewhat supported by Saudi Aramco’s East-West crude oil pipeline, which bypasses the Strait of Hormuz, although this pipeline could also be a target for military attacks should the current ceasefire collapse. We also assume that the Saudi government’s efforts to increase the non-oil sector’s contribution to GDP will continue, albeit with a significant realignment of priorities. Oman’s geographic location has enabled it to continue exporting oil, gas, and other refined products, directly benefiting from higher prices,” S&P concluded.