Growth in the Islamic finance sector is projected to moderate to between 5% and 10% this year, a decrease from the 10.2% growth recorded in 2025. This cooling trend is largely attributed to the ongoing conflict in the Middle East, which has dampened economic prospects across the Gulf Cooperation Council (GCC) and significantly impacted the sukuk market. S&P Global notes that increased risk aversion and a preference for conventional debt are likely to lead to a decline in foreign-currency sukuk issuance from Gulf nations.
The impact of the regional instability is expected to be felt across several major economies. S&P Global anticipates that Qatar, the UAE, Kuwait, and Bahrain will face notable economic slowdowns, particularly following the closure of the Strait of Hormuz. This disruption is poised to affect vital sectors such as tourism, trade, supply chains, and private investment. While the first four months of the year saw a rise in GCC-specific offerings, this was primarily driven by local-currency issuance in Saudi Arabia rather than international deals.
Despite these challenges, the banking sector may find some stability through strong credit expansion observed in the first quarter, particularly in Kuwait and the UAE. While lending in Saudi Arabia is expected to grow at a slightly slower pace and Qatar may see reduced growth, analysts believe that the robust performance early in the year could help the industry absorb the geopolitical shock. Many are looking toward an expected return to normalcy in the latter half of the year to stabilize the market’s long-term trajectory.
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