The Islamic finance sector’s growth is expected to cool this year to between 5% and 10%, down from 10.2% in 2025, as the Middle East conflict drags on and impacts sukuk issuance.

Foreign-currency sukuk issuance from Gulf states is likely to decline due to the regional conflict increasing risk aversion, coupled with fewer- than-expected interest rate cuts and a shift to conventional debt, according to S&P Global.

“The war has dampened the economic growth prospects of most Gulf Cooperation Council (GCC) countries, which will inevitably result in lower growth opportunities for their banking systems, including Islamic banks,” the ratings agency said.

The first four months of the year have been positive for issuance so far, with GCC-specific offerings rising by 13.1% year-on-year. The growth, however, was primarily supported by local-currency issuance in Saudi Arabia, rather than foreign-currency deals.

Last year, the Gulf region accounted for a huge chunk – 45% - of global sukuk issuance.

The ratings agency also expects Qatar, the UAE, Kuwait and Bahrain to experience significant economic slowdown this year following the closure of the Strait of Hormuz, with sectors such as tourism, private investment, supply chains and trade among those affected as well.

Despite the slowdown, the region’s credit expansion in the first three months of the year, particularly in Kuwait and the UAE, could ease any impact on the banking sector for the rest of the year.

“While slower economic growth will reduce growth opportunities for banking systems, strong performance in the first quarter and an expected return to some normalcy in the second half of the year could help absorb the shock,” S&P said.

Lending is also on track to grow in Saudi Arabia, albeit at a slightly slower pace, while Qatar could experience lower growth amid the economic slowdown.

(Writing by Cleofe Maceda; editing by Seban Scaria) seban.scaria@lseg.com