Today's Edition
MAYS IBRAHIM (ABU DHABI)
Islamic banks in the UAE held Dh989 billion ($269.3 billion) in total assets at the end of April, accounting for about 18% of the UAE's banking system assets – a share that has remained broadly stable over the past five years, according to S&P Global Ratings.
In new research assessing shariah-compliant lenders in the region, the agency credited the industry’s performance in the UAE with the presence of several large, established Islamic banks with a strong customer franchise.
The UAE’s 2031 strategy for Islamic banks, which aims to more than double assets to Dh2.56 trillion, is expected to support long-term growth.
Its key pillars include harmonising regulation between the Central Bank and the Higher Sharia Authority, alongside expanding digital-first financial services.
The recent retail sukuk initiative is an example of how Islamic finance in the UAE is leveraging technology to open new avenues of growth for the industry, the report said.
The industry comprises nine standalone Islamic banks, 15 Islamic banking windows within conventional lenders and nine Islamic finance companies.
While Islamic banks’ overall share of banking assets has remained steady, the report shows they have outpaced their conventional counterparts on the lending side.
Their share of total financing increased to 23.4% in April from 21.4% at the end of 2021, while their share of deposits edged up to 21.5% from 21.2% over the same period.
Dubai Islamic Bank remains the country's largest Islamic lender, with assets of about Dh420 billion as of March 31, followed by Abu Dhabi Islamic Bank with Dh287 billion. Emirates Islamic and Sharjah Islamic Bank hold assets of Dh149 billion and Dh91 billion, respectively.
S&P said the performance of Islamic and conventional banks remains broadly aligned because both operate under the same economic conditions, liquidity environment and regulatory framework.
Stage 3 loans at the UAE's four largest Islamic banks accounted for 2.7% of total financing at the end of March, only slightly above the 2.5% recorded by the country's six largest conventional banks.
However, Islamic banks continue to have more concentrated balance sheets.
Financing represents about 64% of their total assets, compared with 45% for conventional banks, reflecting the limited availability of Sharia-compliant liquidity management tools and the relatively small and less liquid sukuk market.
That greater concentration has helped profitability. S&P said Islamic banks generate stronger returns than conventional peers by allocating a larger share of their balance sheets to direct financing.
When it comes to funding profiles, customer deposits account for about 83% of Islamic banks' total liabilities, compared with 67% for conventional banks.
S&P said this reliance on customer deposits provides a more stable funding base and lowers refinancing risks during periods of market volatility, including the ongoing conflict in the region.
Although Islamic banks' capital adequacy ratios remain comfortably above regulatory minimums, they are lower than those of conventional banks.
S&P described the Central Bank of the UAE's decision not to adopt the Accounting and Auditing Organization for Islamic Financial Institutions’ “alpha factor” framework as prudent, since it does not expect banks to pass losses on to depositors in the event of a financial shock.
Despite expectations of slower economic activity in 2026 amid regional tensions, S&P said it remains optimistic about the sector's medium-term prospects.
“Our base case assumes that supply disruptions in the Strait of Hormuz will ease in the second half of 2026,” Puneet Tuli, associate director of financial institutions ratings at S&P Global Ratings, told Aletihad.
The agency expects the UAE economy to grow by 1.5% this year before accelerating to an average of 6.2% between 2027 and 2029, supported by higher oil production and strong investment.
Oil shipments are forecast to average about 75% of the pre-war volumes, while Brent crude will average $110 per barrel for the remainder of 2026 and $80 per barrel for 2027.
Combined with the government's ambition to more than double Islamic banking assets by 2031, the outlook is set to create significant growth opportunities for the sector, Tuli said.
Tuli pointed out that the UAE's Islamic banking sector also has greater room for expansion than some neighbouring markets because it accounts for a smaller share of total banking assets than in Saudi Arabia or Kuwait, where Islamic finance is more dominant.
He also cited the Higher Sharia Authority as a structural advantage, due to its role in harmonising Sharia interpretation.
Looking ahead, Tuli said S&P will be closely watching the growth of the UAE's non-oil economy, which remains a key driver of financing demand.
He also identified sustainable Islamic finance and digitalisation as important growth areas, pointing to the banking sector's target of mobilising Dh1 trillion in sustainable financing by 2030 and ongoing efforts to strengthen the regulatory framework for digital finance, including stablecoin adoption.
