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In its latest report on the African sukuk market, the credit rating agency said outstanding African sukuk crossed USD 7 billion in August, up 16% year-on-year.

Fitch said that sukuk is becoming a new way for some African governments to get funding, helping them to move away from traditional loans and attract interest from banks and investment funds in the GCC and Africa.

Egypt accounts for 48% of Africa’s outstanding sukuk, making it by far the continent’s largest market, supported by regulatory reforms and closer economic ties with the GCC. Around USD 1 billion of African sukuk has been issued so far in 2026, mainly by Benin and Egypt, a sharp slowdown compared with the USD 3.3 billion issued across the full year in 2025.

The decline in fresh issuance this year underscores how heavily the market still depends on a narrow group of sovereigns that are both willing and able to access the instrument. Fitch noted that enabling regulation for sukuk remains absent in most African countries, leaving a legal and structural vacuum that discourages new entrants.

Domestic Islamic financial institutions, which typically serve as both key investors and potential issuers in more established sukuk markets, are either small or non-existent across much of the continent.

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As per Bashar Al Natoor, managing director and global head of Islamic Finance at Fitch Ratings, the Southeast Asian country has remained a unique “local story” that has successfully buffered itself against external shocks, including geopolitical volatility.

“During the crisis, the Gulf Cooperation Council (GCC) debt markets saw minimal dollar issuances, rising yields, and tighter liquidity, while Malaysia’s market remained resilient with steady foreign investor participation, growing non-sovereign issuance, and innovations like tokenized sukuk, supported by strong ringgit stability and regulatory development. It’s impacted by its own local story,” the senior official told the StarBiz.

Al Natoor expects a resilient debt capital market that will continue to expand as envisioned in Malaysia’s local Capital Market Master Plan (2026 to 2030). Fitch also predicts the nation’s debt capital market (DCM) to expand modestly to reach USD 640 billion outstanding by the 2026-end.

“This growth is anchored by a deep domestic investor base, stable yields, and the ringgit’s performance as one of Asia’s most resilient currencies. Unlike the GCC, where US dollar issuances were scarce during the height of the conflict, activity in the Malaysian market continued almost as normal,” the ratings agency remarked.

“A key trend for the remainder of 2026 is the strategic shift from sovereign to non-sovereign debt. While the Malaysian government is engaging in fiscal consolidation, aiming to reduce federal debt to 60% of GDP by 2030, the private sector is picking up the mantle as well. Non-sovereign issuance rose by 17% year-on-year in the first five months of 2026, accounting for 68% of total DCM activity,” said Bashar, terming the transition a sign of market maturity.

“We expect more non-sovereign to go and issue into the market, and I think that stands out,” he stated, noting that corporate and bank issuers are increasingly defining the market’s trajectory.

“Banks remain the largest non-sovereign contributors, often using sukuk for refinancing and opportunistic funding. The local Islamic banking sector, meanwhile, continues to outpace conventional growth. Islamic banking assets grew by 7% to reach USD 312 billion by the end of 2025, while conventional assets grew by only 4%,” Fitch said further.

Talking about the growth of the Islamic financial ecosystem in Malaysia, the industry now represents 44% of the Southeast Asian country’s total system loans, nearing the Anwar Ibrahim government’s 50% target.

Bashar attributed this success to the most “evolved ecosystem” in the world, which integrates issuers, investors, takaful (Islamic insurance), haj funds, and pension funds like the Employees Provident Fund (EPF) into a cohesive syariah-compliant framework.

“Malaysia has cemented its position as the world’s largest environmental, social, and governance (ESG) sukuk market, holding a 31.6% share of global outstanding ESG sukuk as of mid-2026. ESG-linked debt in the country rose by 44% to USD 20 billion, heavily supported by government tax incentives. Sukuk remains the dominant vehicle for these sustainable investments, accounting for 94% of total ESG debt issuance,” Fitch noted.

Malaysia is also taking a lead role in terms of innovating in the industry. The Southeast Asian nation saw its first tokenized sukuk issuance in the first half of FY 2026. New regulations for private debt will likely further enable this niche.

Bashar, however, warned the use of technology could present a challenge for Malaysia’s Islamic financial ecosystem, as technological advancements are vital for maintaining a competitive edge.

“While the Islamic capital market is domestic-centric, foreign interest remains stable. Foreign holdings of government debt stood at 21.6% at the end of the first quarter of financial year 2026, a high figure compared to other Organization of Islamic Cooperation countries,” he told the StarBiz.

To further attract international capital, particularly from the GCC, the Anwar Ibrahim government plans to launch its first wakalah bi al-khadamat sukuk in 2026. This will bridge the gap between Malaysian and GCC syariah interpretations, potentially opening new inflows of Middle Eastern investments into the Southeast Asian nations.

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Fitch, which has maintained its favourable rating for the Kingdom, still flagged the Gulf major’s dependence on oil and governance indicators as the nation’s “relative weaknesses”.

As per the ratings agency, Saudi Arabia’s economy and public finances had proved resilient despite the ongoing geopolitical volatilities in the Middle East region.

While a ceasefire and the reopening of the Strait of Hormuz eased immediate risks, renewed tensions over Iran’s nuclear programme will remain as the steady problem area that may trigger periodic military actions between Washington and Tehran.

Fitch expects Brent crude prices to average USD 60 a barrel in 2028, down from USD 87 in 2026, as oil markets return to oversupply following the reopening of the Strait of Hormuz. However, the flare-up in tensions between the United States and Iran over the weekend has resulted in the oil prices surging by more than 2%.

As of now, Brent crude futures have gone up USD 1.67, or 2.2%, to USD 77.68, while US West Texas Intermediate crude was up USD 1.59, or 2.23%, to USD 73.00 a barrel.

As per the credit rating agency’s forecasts, Saudi Arabia’s economy is to grow 0.6% in 2026, reflecting trade disruptions due to the Hormuz tensions, before rebounding in 2027 as oil exports and petrochemical production recover.

“Growth is expected to moderate to 2.9% in 2028, supported by an economy-based rollout of giga-projects and continued domestic investment by the Public Investment Fund (PIF), partly offset by lower government capital spending and slower credit growth,” Fitch noted further.

Fitch also expects the kingdom’s fiscal deficit to narrow in 2026 as higher oil prices offset lower production volumes before widening to 4.7% of GDP in 2027 as prices decline. Lower capital expenditure and reduced war-related spending should help the Gulf major narrow the deficit again in 2028.

“The government debt is set to rise to 41.3% of GDP by end-2028, from 31.8% at end-2025, although this remains well below the median for similarly rated sovereigns. Borrowing by government-related entities would continue to increase but remain manageable. The agency also expects Saudi Arabia’s external position to remain strong, with foreign exchange reserves equivalent to about 11.6 months of current external payments in 2026. Sovereign net foreign assets are forecast to remain a key credit strength despite higher borrowing,” Fitch said further.

“A small current account surplus will be seen in 2026 on stronger oil export revenues before a return to deficit by 2028 as lower oil prices and robust domestic demand increase imports. Saudi banks remain resilient, with non-performing loans at 1.1% and a Tier 1 capital ratio of 19.2% at the end of the first quarter. The agency will maintain a neutral outlook for the banking sector despite a deteriorating regional outlook,” it noted.

However, Fitch sees its rating for the Kingdom potentially coming under pressure if public finances weaken materially, government debt continues to rise, or regional security deteriorates significantly enough to disrupt oil exports.

“Conversely, stronger fiscal reforms, sustained higher oil prices or continued diversification of the non-oil economy could support a future upgrade,” the agency concluded.

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As per the American-British credit rating agency, Islamic banking assets in the Southeast Asian country amounted to just USD 44 million as of end-2025, underscoring the archipelagic nation’s still nascent position in a regional market dominated by Malaysia, Indonesia and Brunei.

“Regulators in the Philippines are developing its nascent Islamic finance ecosystem, recently through sukuk guidelines,” Fitch said.

Talking about the Philippines’ efforts towards becoming an Islamic finance growth engine, the country issued its maiden USD 1 billion sovereign sukuk in 2023, which carries a BBB rating. It now has five licensed takaful operators (providers of Shariah-compliant insurance).

ASEAN’s Islamic finance industry exceeded USD 1 trillion in Q1 2026, supported by large Muslim populations, government commitments, accommodative regulation, halal economy growth and digitalisation.

As per Fitch, while the sector’s growth across Southeast Asia remains uneven, tailwinds like stronger links with Gulf Cooperation Council (GCC) countries and closer integration within ASEAN could help the industry players to expand market access, draw investments and support financial inclusion.

Fitch also cited recent agreements by the United Arab Emirates (UAE) with Indonesia, Malaysia and the Philippines that are aimed at deepening Islamic finance collaboration between the countries.

“For the Philippines, cross-border cooperation may provide additional momentum. Still, the Philippines remains far behind more established regional markets. Indonesia’s Islamic banking assets reached USD 61 billion at end-January, while Brunei’s stood at USD 11 billion as of end-2025. In Malaysia, Islamic financing already accounted for 44% of total banking system financing by the 2025 end,” Fitch noted.

While Malaysia leads ASEAN’s Islamic fund industry with around USD 70 billion in assets under management (AUM), Indonesia has emerged as one of the world’s largest sukuk issuers. Brunei, on the other hand, has the highest Islamic finance market share in most verticals, with Islamic bank assets equivalent to about 70% of its banking sector.

“Across ASEAN, about 49% of Islamic finance assets consist of sukuk outstanding, followed by Islamic banking assets at 41%, Islamic funds’ assets under management at 8% and takaful assets at 2%. Nearly half of global sukuk outstanding now comes from the ASEAN. Malaysia ranks first globally, while Indonesia ranks third, with most issuance denominated in local currencies,” Fitch observed.

Also, all Fitch-rated dollar ASEAN sukuk were investment grade, or within the BBB category, as of end-April, with no defaults recorded in the past four years. However, Fitch said that the overall credit environment has become more challenging, with 63% of the region’s sukuk issuers on negative outlooks following the revisions of the sovereign outlooks of Indonesia and the Philippines.

And last but not least, geopolitical tensions, particularly the Iran war, could affect sovereigns and sukuk issuers through higher energy prices, heavier subsidy burdens, weaker currencies, wider credit risk premia and tighter external funding conditions.

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According to a report from Kuwait Financial Centre “Markaz,” in the Q1 2026, the total value of bond and sukuk issuances reached USD 55.04 billion spread across 95 deals, registering a 5.64% increase compared to the tally registered in the same period in 2025.

Saudi Arabia led the Middle East’s Islamic banking landscape with USD 32.54 billion in offerings (59.1% market share), followed by the UAE (USD 13.57 billion), Qatar (USD 4.2 billion), Bahrain (USD 2.1 billion), Kuwait (USD 1.98 billion) and Oman (USD 650 million).

However, the ongoing geopolitical instability in the region has resulted in GCC sukuk issuers from Qatar and the UAE being placed on Fitch Ratings’ RWN list. The GCC issuers currently account for 3% and 4% of all rated sukuk volumes and instruments, respectively.

“War-related rating actions continued in April, with Ras Al Khaimah placed on RWN,” the Fitch report added.

“A re-escalation of hostilities to greater intensity than before the ceasefire or a more prolonged economic activity disruption would further test resilience and exert more pressure on ratings than it has to date,” Fitch noted.

On the brighter side for the Gulf’s Islamic banking industry, most sukuk issuers maintained a stable outlook at the end of Q1 2026, with Fitch assigning ratings to more than 35 sukuk, totalling over USD 15 billion.

According to Markaz data, the government was the largest bond and sukuk issuer, with offerings totalling USD 20.46 billion, followed closely by the financial sector (USD 19.45 billion) and energy (USD 5.52 billion).

“Investors demonstrated a strong appetite for conventional bonds, which hit USD 35.89 billion, representing 65.2% of the market, while sukuk issuances reached USD 19.15 billion. Large-scale offerings of more than USD 1 billion drove the volume, reaching USD 33.33 billion,” the Kuwait Financial Centre added.

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Islamic funds are expected to remain the dominant category. However, the AMI remains exposed to oil-price sensitivity, local, regional and global market volatility and geopolitical risks. Equity-linked fee and performance income was weighed down by a circa 13% yoy fall in equity market capitalisation by the end of August 2025.

“Saudi Arabia’s AMI is on a steady growth path, supported by ongoing reforms and deeper local capital markets. Sharia-compliant funds remain the majority, with product breadth widening across areas such as new IPOs, sukuk and bonds, ETFs and private credit. New initiatives, such as voluntary pension and savings schemes, should enhance access and liquidity. Although market volatility and oil-price sensitivity pose near-term risks, foreign participation is rising and Saudi sukuk largely carry investment-grade ratings, supporting resilience,” said Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings.

Fitch Ratings further reported that PIF’s recent MoUs with global asset managers such as BlackRock, Franklin Templeton, Neuberger Berman, and Northern Trust Asset Management would amount to about USD 12 billion and facilitate foreign capital and expertise inflows.

The share of Saudi bank-affiliated asset managers was 63.5%, while international and regional institutions rose to about 15%, it said. At the end of Q1 25, the industry AUM grew 21% yoy to USD 306.1 billion, with about half in private funds, followed by discretionary portfolio management, and public funds.

“The government aims for AUM to reach 31% of GDP in 2025 and 40% by 2030, from about 23% in 1H25. Foreign investors held 7.6% of government local debt issuances in June 2025 (2023: 5.2%),” the report noted further.

Talking about the steady emergence of Saudi Arabia’s AMI industry, a recent report from S&P Global Ratings predicted the Kingdom’s total AUM to surpass USD 500 billion by 2030, while citing factors like continuous regulatory reforms, development of debt and equity markets, increasing availability of exchange-traded funds (ETFs), real estate investment trusts (REITs), and various other retail and institutional products behind the phenomenon.

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There will be strain on capital, finance, and liquidity due to strong credit expansion. It is anticipated that banks will keep broadening their sources of funding using wholesale funding, which includes issuing sukuk, which is increasingly contributing to the mix of funding sources. However, deposits will probably continue to be the primary funding source.

Saudi Islamic banks have a strong position in the banking industry thanks to their larger retail franchises, which enable them to offer superior asset quality, reduced funding costs, and higher margins.

In recent years, lending has expanded more slowly than finance due to the requirement that all residential mortgages adhere to Sharia law.

According to Fitch Ratings, Saudi Arabia leads the world in Islamic banking, having the highest percentage of Islamic financing (85%) of any nation that permits conventional banks to coexist with Islamic banks.

By the end of 2023, 84% of conventional banks’ funding came from customer deposits, vs. 80% for Islamic banks. By the end of 2023, the average financing-to-deposits ratio for Islamic banks had increased from 99% at the end of 2022 to 102%, indicating a quicker growth in financing than in deposits.

Except for Al Rajhi Banking and Investment Corporation, which gains from a finely tuned retail deposit base, deposit concentration is still quite high.

The research stated that even in the face of tighter conditions, the central bank’s liquidity-management instruments and the expanding supply of government sukuk help Islamic banks’ efforts to manage their liquidity.

Talking about the Saudi banking sector, it demonstrated strong performances in 2023, with operating income growing by 9.5%, driven by non-interest revenue, according to professional services firm Alvarez & Marsal.

“The performance of the top 10 banks in the Kingdom is largely robust and positive. Operating income grew by 9.5%, reflecting the effect of higher non-interest income,” the firm noted, after analysing premier financial institutions like Saudi National Bank, Al-Rajhi Bank, Riyad Bank, Saudi British Bank, Banque Saudi Fransi, Arab National Bank, and Alinma Bank.

The report highlighted a significant improvement in the net interest margin by 3.5%, contributing to a boost in the sectors’ profitability. Return on equity increased to 14.5%, showcasing the industry’s robust state of affairs.

The report also indicated a decline in the cost of risk, suggesting a marginal decrease in total impairments, which positively impacted the sector’s overall stability. Additionally, liquidity received a notable enhancement and attributed to record government-related entity deposits, which constituted 68.2% of total inflows, ameliorating liquidity conditions in the banking system.

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Fitch Ratings Managing Director and Global Head of Islamic Finance, Bashar Al-Natoor, expressed hope that COP28 will hasten the issuance of sustainable bonds shortly.

“Given that 51% of sustainable issuances in the Gulf region take the form of bonds, there is a strong expectation that they will benefit significantly from the heightened awareness being cultivated by COP28,” the official stated further.

Al-Natoor emphasised in remarks to the Emirates News Agency (WAM) the notable rise of ESG (environmental, social, and governance) bonds in the United Arab Emirates, which is expected to reach USD 6.4 billion by the third quarter of 2023, up 41% from USD 4.5 billion in the previous quarter.

He emphasised that ESG bonds issued in the United Arab Emirates account for over 30% of all ESG bonds rated by Fitch Ratings and represent over 19% of the worldwide ESG bond market.

Al-Natoor went on to say, “The UAE emerged as the leading issuer of sustainable bonds globally during the third quarter of 2023, contributing USD 1.8 billion or approximately 80% of the global total, which stood at USD 2.3 billion.”

He emphasised how crucial the UAE is to the advancement of governmental programmes and sustainability measures, especially in 2023. He pointed out that the timeliness of these projects varies, with some producing rewards right now and others having long-term advantages.

Al-Natoor emphasised that the UAE’s Islamic finance is expected to benefit from COP28, pointing out that by the 2022 end, Islamic financing would have contributed about 29% of all funding for the banking industry. Institutions in the United Arab Emirates are acknowledged as prominent investors and issuers of Sukuk, or Islamic bonds, and they are instrumental in setting up Sukuk issuances.

All sustainable issuances evaluated by Fitch in the United Arab Emirates, he said, fall within the “investment grade” category. Of these, about 35% are related to financial institutions, 25% are companies and infrastructure projects, and 38% are other companies and sectors.

Al-Natoor made the following statement about green issuances: “Globally, green issuances constitute about 45% of the total ESG issuances during the third quarter of 2023.”

According to him, green Sukuk is a subset of ESG issuances that includes social, sustainable, blue (water-related), and green issuances.

He discussed the notable rise of the well-known ESG sukuk around the world, which increased by 66% a year to USD 33.3 billion in the last quarter of 2023. According to Fitch, Saudi Arabia has the largest percentage of established ESG sukuk issuances (48.1%), followed by the United Arab Emirates (30.5%), Indonesia (19.6%), and Turkey (1.8%).

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On the other hand, Islamic banks will almost certainly be able to keep a large portion of the market thanks to the robust public demand for Islamic products and the favourable regulatory environment for Islamic financing.

According to the rating agency, the financial metrics of Islamic banks were “resilient” in the first half of 2023, benefitting from the stable operating environment. This was the case since the banks were able to continue their normal business operations.

The sector’s assets increased by 25% year on year (YoY), spurred by the merger of Kuwait Finance House and Ahli United Bank, which resulted in the creation of one of the largest Islamic banks in the world when it was completed in 2017.

Due to the merger, the proportion of total banking assets held by Islamic banks climbed to 50% by the end of the first half of 2023.

Despite Fitch’s projections for real GDP growth of -0.3% in 2023 and 3.6% in 2024, as well as lower real non-oil GDP growth, the stable operating environment in Kuwait will maintain Islamic banks’ standalone credit profiles in 2023, according to Fitch.

Meanwhile, During the first eight months of 2023, local banks in Kuwait provided significantly less financing to the public services sector, with a sharp decrease of 68.8%, totalling 48 million dinars, as per a report from the Arab Times.

The latest ratio also marked a substantial drop from 69.7 million dinars during the same period in 2022.

Notably, in August 2023, financing for the public services sector was only about 100 thousand dinars, while there was no such financing provided by local banks in July.

The decline in funding to the services sector also coincided with a broader drop in new credit facilities provided to all sectors, falling by approximately 93.1 million dinars, or 0.6%, from 15.76 billion dinars in the first eight months of 2022 to 15.669 billion dinars during the same period in 2023.

There was an increase in total credit facilities for all sectors during August 2023, surging by 3.2% or roughly 63.6 million dinars compared to July, reaching 2.012 billion dinars.

“In comparison to August 2022, this is a considerable increase from 1.354 billion dinars. The cumulative balance of financing provided by local banks to the public services sector experienced notable growth, rising by 11.8% or 33.8 million dinars since the start of 2023, amounting to 319.3 million dinars in August. On a monthly basis, this represents an 11.7% increase of 33.6 million dinars compared to July,” the Arab Times report stated further.

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