Islamic banks are witnessing an increasing availability of liquidity-management instruments, as the latter, since the past decade, have expanded across many core markets, supporting funding needs and the investment of surplus liquidity, Fitch Ratings says.
However, as per the ratings agency, gaps remain relative to conventional banks, more so in countries where Islamic banks remain niche and developing. The ongoing Iran war has also reinforced the importance of effective Islamic liquidity management.
“Many GCC Islamic banks have expanded their funding toolkits through certificates of deposits, Islamic syndications, and private placements. Islamic repurchase agreement (repo) is gaining momentum in several markets, supported by Islamic banks’ holdings of sovereign sukuk which have expanded across the GCC and ASEAN in recent years and serve as eligible repo collateral,” said Bashar Al Natoor, Managing Director, Global Head of Islamic Finance at Fitch.
“However, lack of standardization remains a challenge. The International Islamic Financial Market and the International Capital Market Association announced plans to develop standardized Islamic repo documentation, which could reduce operational costs and sharia-related complexities. Fitch also notes the first Islamic repo transaction executed on blockchain by Saudi Awwal Bank (A-/Stable), he said further.
Central bank Islamic liquidity facilities are being offered in most core markets, including Gulf countries, Malaysia, Turkey, Indonesia, Pakistan, Bangladesh, and Tunisia. Since the beginning of the Iran war, some GCC central banks have also introduced stimulus packages and loan-deferral programs, including those for Islamic banks. However, these sharia-compliant facilities, which could help avert a liquidity crunch, are lacking in markets such as Morocco, Egypt, and Kazakhstan.
“Islamic interbank markets are shallower than conventional markets, particularly in countries with few Islamic banks. Differences in sharia contract acceptance can also create obstacles. For example, in Indonesia, where regulators do not permit tawarruq-based contracts, Islamic banks face limitations in conducting interbank transactions with GCC Islamic banks that rely on tawarruq. In some markets, such as Oman, regulations prevent Islamic banks from placing funds with conventional banks, limiting counterparty choice. Bangladesh’s central bank plans to launch a dedicated Islamic interbank money market amid market gaps,” said Saif Shawqi, CFA, FRM, Fitch’s Director of Islamic Finance.
Wider sovereign sukuk availability, as per Shawqi, has granted Islamic banks avenues to invest excess liquidity in high-quality liquid assets.
“Sukuk accounted for significant shares of the debt capital market outstanding in the GCC (42%), Malaysia (59%), Indonesia (18%), and Türkiye (8%) as of end-1H26. Markets such as Egypt, Bangladesh, and Algeria are also progressing and recently began issuing sukuk. The government of Pakistan’s hybrid-sukuk structure adoption in 2026 could enable more sukuk supply,” he remarked further.
While medium-term sukuk are more widely available, short-term sukuk, according to Fitch, have remained absent in most Gulf countries, along with Jordan, Nigeria, and other markets, constraining Islamic banks’ liquidity-management options.
“Only 3% of Fitch-rated sukuk have tenors of up to one year, mainly International Islamic Liquidity Management 2 SA’s asset-backed commercial paper program (F1sf),” Al Natoor said.
“In some markets like Jordan, Islamic banks do not earn any return on balances held with the central bank. The Bank of England expanded its Alternative Liquidity Facility size in 2025 to support UK Islamic banks’ liquidity management,” he added further.
As per Fitch’s Islamic Finance Survey 2026, managing liquidity and funding constraints was ranked the most significant challenge that Islamic financial institutions were dealing with.
According to Redmond Ramsdale, Senior Director and Head of Fitch’s Middle East Banks Ratings and Islamic Banking, weak access to liquidity due to shallow markets or regulatory policies is likely to have a negative effect on the agency’s assessment of an Islamic bank’s funding and liquidity and “Viability Rating.”
“Alternatively, strong access to liquidity, for example, on deep and liquid repo markets (including from official sources), could be supportive for the credit profile,” Ramsdale said.
Talking about the bigger picture, about 62% of Fitch-rated Islamic banks have remained investment-grade as of H1 2026, with around 85% of them carrying Stable Outlooks (excluding national ratings).
“GCC Islamic banks are well buffered if the Iran war remains contained, with sound financial metrics going into the war, ample capital and liquidity buffers, and sound asset quality,” the Fitch analysts concluded.