After a resilient performance in 2020, the international Islamic finance sector fared positively in 2021 as an improved economic environment, a rise in the number of large projects, and an increased focus on environmental, social and governance (ESG) factors combined to drive demand for services.

Despite the twin challenges of the Covid-19 pandemic and the fall in international oil prices that affected many of the world’s heavyweights in Islamic finance, the global sector’s assets grew by 10.6% in 2020, according to ratings agency Standard & Poor’s (S&P). Although this was down from the 17.3% growth recorded in 2019, it was a strong performance in light of the global recession, with many suggesting that the sector’s positive growth was a sign of its strong future potential.

Building on this, in May 2021 S&P forecast that the global Islamic finance industry would grow by 10-12% annually in 2021 and 2022. This projection was largely based on the expected economic recovery in key Islamic markets in the Gulf and South-east Asia – driven by the rollout of large infrastructure projects in countries like Saudi Arabia and Qatar – and an increase in sukuk (Islamic bond) issuance, which the agency expected to reach $140bn-155bn in 2021, up from $139.8bn in 2020.

Market Share

Perhaps unsurprisingly, the continued growth of Islamic finance is translating into increased prominence in international markets, particularly in Muslim-majority countries. For example, in the GCC sharia-compliant banking assets as a proportion of total banking assets have grown significantly in recent years. GCC countries represent the world’s largest Islamic finance market, with a combined 45% share of global assets.

Sharia-compliant assets in Qatar grew from 19.7% of the total in 2018 to 26.6% in 2020, while in Malaysia – the world’s third-largest Islamic finance market – the share of sharia-compliant finance rose from 22.8% to 30.1% over the same period. However, this trend is not universal: Islamic banking assets in the UAE experienced a slight fall in terms of their share of overall assets, and the corresponding figures in Bahrain and Oman expanded by a small margin.


The increases in asset value and market share have naturally led many conventional banking institutions to turn their attention to Islamic finance. Coinciding with a broader trend of mergers and acquisitions (M&A) in the Gulf, a number of conventional players have sought to acquire or merge with Islamic banks in recent years.

For example, in 2019 Abu Dhabi-headquartered Islamic finance institution Al Hilal Bank combined with Abu Dhabi Commercial Bank and Union National Bank in the region’s largest tie-up to date. The merged entity became the UAE’s third-largest bank, with an estimated $114.4bn in assets. M&A activity continued into 2020, with the National Bank of Bahrain (NBB) acquiring a 78.8% stake in Bahrain Islamic Bank in January of that year, while in July Oman Arab Bank completed a takeover of fellow Omani institution Alizz Islamic Bank.

In November 2021 Qatar’s Masraf Al Rayan finalised a merger with Al Khalij Commercial Bank, creating the country’s second-largest lender and one of the region’s largest sharia-compliant groups. “On a strategic level, the integration of conventional and Islamic banks provides stronger balance sheets through a robust risk-management framework,” Yaser Alsharifi, group chief strategy officer of NBB, told OBG. “It can also lead to an acceleration in funding and capital synergies, as well as opportunities for joint bids on larger corporate deals.”

Nevertheless, alongside the considerable benefits associated with M&A, some challenges exist when bringing institutions with different operating principles together. “Key integration challenges include unlocking synergy value early on in the integration plan,” Alsharifi told OBG. “This can be achieved through a clearly communicated governance framework and a well-structured integration plan with effective monitoring and control of performance. In addition, it is important to have an effective change-management plan that focuses on talent retention and culture harmonisation during the initial integration years.”

ESG in Islamic Finance

Looking ahead, the turn towards ESG in global finance is expected to provide Islamic banking with substantial growth opportunities, particularly in the Gulf. There are many parallels between ESG values and those of Islamic finance, which similarly address social and environmental factors. For example, in its discouragement of interest, strong focus on profit- and loss-sharing, and belief in not financing activities that cause societal harm, Islamic finance has social factors entrenched in its core operating principles. Some socially minded products include qard hassan, an interest-free loan; zakat, a tax levied on individuals who earn above a certain threshold that is used to support social welfare initiatives; and waqf, a philanthropic deed or donation. “Islamic finance in and of itself is not more inherently risky than conventional finance,” Sabeen Saleem, CEO of the Islamic International Rating Agency, told OBG. “In addition, its inherent empathy for society and avoidance of interest allows its customers room to recover when required.”

With the “protection of life” principle, sharia-compliant finance also aligns with the environmental aspect of ESG, as both look to avoid financing projects or developments that could be harmful to the environment or the general well-being of people. “ESG will be a major driver of growth in the local and regional banking industry. ESG adoption in Qatar is strongly backed by the central bank, and banks are rapidly adapting their strategies to ensure sustainable development,” Fahad Al Khalifa, group CEO of Masraf Al Rayan, told OBG.

Rise of Green Sukuk

Indeed, the increasing awareness of ESG in global finance has coincided with a rise in demand for green or socially responsible sukuk. Following the first issuance of a green sukuk by Malaysian company Tadau Energy in 2017, which was used to fund a 50-MW solar project, interest in the product has grown steadily.

Although it still comprises a relatively small part of the overall Islamic finance market, green and socially responsible sukuk have significant growth potential, particularly in the Gulf. “While the Islamic capital market in the GCC is still not as deep as in Malaysia or Indonesia, financial institutions in the region are increasingly experimenting with sukuk, including green or ESG-minded facilities,” Saleem told OBG. “However, much work is still needed to define and set the standards for what comprises a sharia-compliant sukuk generally, and set regulatory standards for green or ESG-focused instruments.”

The year 2021 was a robust one for green sukuk, with Fitch reporting that key jurisdictions – namely, the GCC, Malaysia, Indonesia, Turkey and Pakistan – issued a combined $230.2bn.

2022 Prospects

The start of 2022 saw momentum in the green sukuk market continue. In February Saudi Arabia’s Riyad Bank closed a $750m sustainability sukuk, the latest in a wave of high-profile issuance across different regions. It was an additional tier-1 sukuk, and 4.3 times oversubscribed at $3.2bn. This followed Saudi National Bank’s $750m debut sustainability sukuk in January, the proceeds from which will fund projects that meet the criteria of the bank’s Sustainable Finance Framework, such as renewable energy facilities.

Nevertheless, in January 2022 S&P Global Ratings forecast that global sukuk issuance overall was likely to moderate during the year. S&P attributed this to three main factors: lower and more expensive global and regional liquidity; the complexity of issuing sukuk; and reduced financing needs in core markets such as the GCC. This last factor is principally due to the recent rebound in oil prices. Despite this, many analysts anticipate that the market for ESG-focused sukuk will continue to grow.

Green sukuk bear the same relationship to green bonds as traditional sukuk do to conventional bonds. In this sense, the overall health of the green bond market, rather than the broader sukuk market, is indicative of how green sukuk may fare going forwards. In the case of Qatar, in August 2021 the Qatar Financial Centre indicated that it had the architecture in place to begin issuing green sukuk locally.

The outlook is therefore promising. The green bond market was valued at $517.4bn in 2021, according to Climate Bonds Market Intelligence. Nearly double the 2020 total of $270bn, it was the highest figure since market inception and marked the 10th record year in a row. As 2022 progresses, investors’ demand for ESG-compliant finance is set to drive continued appetite for green and sustainable sukuk.