The Gulf’s Islamic debt market is heading into a more cautious phase, with prolonged instability in the Middle East expected to cool sukuk activity across the region in 2026.
Analysts at S&P Global believe growth across the broader Islamic finance industry will slow to between 5% and 10% this year, easing from the 10.2% expansion recorded in 2025. The softer outlook is tied largely to geopolitical tensions that are weighing on investor appetite and disrupting international funding conditions.
Foreign-currency sukuk issuance from GCC nations is expected to lose pace as investors become more risk-sensitive amid the conflict. At the same time, expectations for aggressive interest-rate cuts have faded, prompting some borrowers to lean more heavily toward conventional debt markets instead of Islamic instruments.
According to the ratings agency, the ongoing war environment has weakened economic visibility across much of the Gulf, limiting expansion opportunities for banking systems, including Islamic lenders that had benefited from strong regional liquidity over the past two years.
Despite those concerns, issuance activity during the opening months of 2026 has remained relatively resilient. Sukuk offerings tied specifically to GCC issuers climbed 13.1% year-on-year during the first four months of the year. However, much of that increase came from local-currency borrowing in Saudi Arabia rather than international hard-currency deals.
The Gulf remained a dominant force in global sukuk markets last year, contributing roughly 45% of worldwide issuance volumes.
S&P also warned that economies such as Qatar, the UAE, Kuwait and Bahrain could face sharper slowdowns following the closure of the Strait of Hormuz, a development that threatens trade flows, logistics networks, tourism activity and private-sector investment across the region.
Even so, banking systems may prove more resilient than feared. Strong credit growth recorded during the first quarter — particularly in the UAE and Kuwait — could cushion lenders from the broader economic slowdown if market conditions stabilise later in the year.
Saudi Arabia is still expected to post healthy lending growth, though at a more moderate speed than previously forecast. Qatar, meanwhile, may see softer banking expansion as economic activity cools.
While the region’s Islamic finance sector is unlikely to lose its strategic importance, the era of rapid sukuk expansion appears set to give way to a period defined more by caution, selective issuance and shifting investor priorities.
