The Gulf’s Islamic finance engine is beginning to lose some momentum after a strong run, with prolonged instability across the Middle East now casting a shadow over sukuk activity and broader banking growth in the region.
According to new estimates from S&P Global, expansion across the global Islamic finance industry is expected to slow to between 5% and 10% in 2026, easing from the 10.2% growth recorded a year earlier. The drag is being linked largely to geopolitical uncertainty and changing investor appetite in Gulf debt markets.
Sukuk — widely used as Sharia-compliant investment and fundraising instruments — remain central to financing strategies across the Gulf. But analysts say international issuance, particularly foreign-currency sukuk from GCC nations, is likely to weaken as investors grow more cautious amid escalating regional risks.
S&P noted that the ongoing conflict has started to weigh on economic prospects across several Gulf economies, limiting expansion opportunities for banks, including Islamic lenders. The agency also pointed to a smaller-than-anticipated cycle of interest-rate cuts and a growing preference among issuers for conventional debt instruments over sukuk structures.
Despite those concerns, issuance activity during the opening months of the year has not collapsed. GCC sukuk offerings rose 13.1% year-on-year during the first four months of 2026. Much of that increase, however, came from Saudi Arabia’s domestic-currency issuance rather than international fundraising activity.
The Gulf remained a dominant force in the global sukuk landscape last year, accounting for roughly 45% of worldwide issuance.
Economic strains are expected to be particularly visible in Qatar, the UAE, Kuwait and Bahrain following the closure of the Strait of Hormuz, a disruption that analysts say could hit tourism, trade flows, supply chains and private-sector investment across the region.
Still, banking systems may avoid deeper stress if lending momentum continues. Credit growth in Kuwait and the UAE remained relatively strong during the first quarter, helping cushion banks from the immediate impact of slower economic activity.
S&P believes a gradual return to stability later in the year could soften the blow for Gulf lenders, even as growth moderates.
Saudi Arabia is still expected to post healthy lending expansion, though at a more measured pace, while Qatar’s banking sector could feel sharper pressure from the wider slowdown.
