Increased volatility in commodity prices, profit rates, and exchange rates following the outbreak of the Iran war has highlighted the critical role of Islamic derivatives in risk management, according to Fitch Ratings. However, adoption remains fragmented, showing significant variation across different countries and sectors. While most rated Islamic banks now use these instruments, adoption is rare among rated Islamic insurance firms.
Furthermore, while Islamic securitization and sukuk issuances are beginning to integrate Islamic derivatives, the market still trails far behind its conventional counterpart in most core Islamic finance regions. Fitch notes that sharia-compliant alternatives remain scarce for equity, credit, commodity, futures, and digital asset derivatives. The main obstacles to growth include strict sharia limitations, a lack of standardization, structural and infrastructure gaps, insufficient awareness, and the developing nature of financial systems within many OIC countries.
In fact, the conventional derivatives market itself remains underdeveloped across most OIC states. According to BIS data, the combined over-the-counter (OTC) interest-rate derivatives turnover in Saudi Arabia, the UAE, Bahrain, Malaysia, Indonesia, and Turkiye represented less than 1% of global volumes in April 2025.
Despite these broader market limitations, roughly 75% of Fitch-rated Islamic banks utilized or offered Islamic derivatives between 2025 and the first quarter of 2026, including 100% of rated banks in the GCC. These institutions primarily rely on profit-rate swaps, forward foreign-exchange contracts, cross-currency swaps, and occasionally commodity hedging tools. These products replicate the economic functions of conventional derivatives, helping to mitigate risk and strengthen credit profiles. Conversely, the rated Islamic banks that abstained from using derivatives were located mostly in Indonesia, Jordan, Iraq, Nigeria, and Tunisia.
Malaysia continues to be a premier jurisdiction for Islamic finance, providing both OTC and exchange-traded Islamic derivatives. Even so, conventional options still dominate, with Fitch estimating that Islamic products made up only 1% of the total derivatives market in 2025. In the GCC region (excluding Oman), OTC Islamic derivatives are fairly accessible, but exchange-traded variants remain largely nonexistent or in their infancy. For instance, no derivatives were traded on the Saudi Exchange—the region’s largest equity market—during 2025 and the first quarter of 2026, despite being introduced back in 2020.
Meanwhile, the UAE has emerged as a leader among global emerging markets for OTC interest-rate derivative turnover. Driven in part by activity within the Dubai Financial Services Authority, daily average volumes soared to $68 billion in 2025 from just $4 billion in 2022, ranking the UAE 11th globally according to BIS data. Expanding on this momentum, Dubai’s Virtual Assets Regulatory Authority introduced a framework for exchange-traded virtual asset derivatives in April 2026.
By the end of the first quarter of 2026, just under two-thirds of Fitch-rated Islamic banks held investment-grade ratings, with approximately 80% maintaining a Stable Outlook. Most GCC Islamic banks have remained resilient against the disruptions of the Iran war, backed by solid financial metrics, deep liquidity, and strong capital buffers. When evaluating a bank’s risk profile, Fitch views high, unmitigated exposures to structural or traded market risks negatively, whereas moderate, well-managed exposures are seen as a positive. For both conventional and Islamic insurers, Fitch looks at whether capital and earnings are sufficiently shielded from major losses through risk-mitigation techniques—most commonly reinsurance, though derivatives like options, forwards, or futures can also play a role.
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