The Rise of Islamic Banking in the UAE: Growth, Demand, and Competitive Edge

Islamic banking in the UAE has been expanding at a remarkable pace, with its market share reaching 17.6% in early 2024. The country now stands as the fourth-largest Islamic finance market globally, according to the Central Bank of the UAE. This growth is driven by a combination of factors, including a rising preference for Shariah-compliant financial solutions, supportive government policies, and the increasing appeal of ethical banking among both Muslim and non-Muslim customers.

As the industry gains traction, the demand for various Islamic financial products is growing. Among the most sought-after offerings are those that align with environmental, social, and governance (ESG) principles. Products such as Green Sukuk and sustainable investments are attracting a new wave of socially responsible investors looking for ethical and impact-driven financial solutions.

Strong Performance of Islamic Banks Compared to Conventional Banks

The performance of Islamic banks in the UAE has been strong, with growth outpacing that of conventional banks. In 2024, the sector grew by 11.1%, compared to the 9.2% growth seen in the overall banking system. As a result, the market share of Islamic banks slightly increased from 17.3% at the end of 2023 to 17.6% in early 2024.

Industry experts highlight that one of the key reasons for this expansion is the relatively lower cost of risk for Islamic banks. While the efficiency and profit margins of Islamic and conventional banks remain comparable, Islamic banks have been able to achieve slightly higher profitability. According to S&P Global Ratings, the return on assets (RoA) for Islamic banks reached 2.4% in early 2024, compared to 2.2% for conventional banks. Moody’s Ratings also reported that among its rated institutions, Islamic banks recorded a net income to tangible assets ratio of 2.2%, while conventional banks stood at 1.8%.

The Increasing Popularity of Islamic Finance Products

The growing demand for Islamic finance products can be attributed to multiple factors. One major driving force is the UAE government’s commitment to positioning the country as a global hub for Islamic finance. Regulatory support, enhanced digital banking services, and increasing awareness of ethical banking principles have all contributed to the sector’s expansion.

One of the most notable trends is the increasing demand for ESG-focused Islamic financial products. More investors are seeking sustainable investment opportunities that align with their ethical values. As a result, Green Sukuk, which helps finance environmentally friendly projects such as renewable energy and sustainable infrastructure, has gained significant traction

Islamic home financing solutions, including Shariah-compliant mortgages, are also witnessing higher demand. The overall mortgage rates remain comparable between Islamic and conventional banks, the structured pricing and ethical appeal of Islamic mortgages make them an attractive option for many homebuyers.

Competitive Returns and Risk Considerations

One of the key aspects that sets Islamic banking apart from conventional banking is its unique profit-sharing model. Unlike conventional banks, which guarantee fixed interest rates, Islamic banks generate returns through profit-sharing investments in sectors such as trade and real estate.

For instance, luxury real estate broker Ray Vermam of Eden Realty UAE noted that Islamic banks in the UAE often provide comparable or slightly higher returns than conventional banks, particularly for fixed-term deposits. However, the variable nature of Islamic banking returns means that risk-averse customers may still prefer conventional banking for stability.

The Future of Islamic Banking in the UAE

With Islamic banking continuing to gain momentum, industry experts anticipate that it will outpace conventional banking growth over the medium term. Islamic banks are also focusing on innovation to cater to a wider audience. The integration of digital banking services, such as mobile banking apps and AI-driven financial solutions, is helping Islamic banks enhance customer experiences and improve accessibility. These digital initiatives are expected to further drive the adoption of Islamic financial products in the coming years.

As Islamic finance continues to evolve, the sector is likely to see more innovation in product offerings, particularly in areas such as sustainable finance, digital banking, and structured investment solutions. With a strong regulatory framework and growing customer awareness, the UAE’s Islamic banking industry is well-positioned to maintain its upward trajectory and solidify its status as a global leader in Shariah-compliant finance.

The Role of Government and Regulations in Islamic Banking Growth

The UAE government has played a crucial role in the growth of Islamic banking through strong regulatory frameworks and strategic initiatives. The Central Bank of the UAE ensures that Shariah-compliant financial institutions operate within a stable and transparent environment, maintaining fair competition with conventional banks. Regulatory alignment with global Islamic finance standards, such as those set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), has enhanced credibility and investor confidence.

The government’s push for environmental, social, and governance (ESG) principles has led to the rise of sustainable finance solutions, including Green Sukuk and ethical investment funds. Fintech-friendly regulations have encouraged Islamic banks to enhance their digital services, offering seamless online banking, AI-driven financial solutions, and blockchain-based Shariah-compliant transactions. With continued government support, evolving regulations, and increasing demand for ethical banking, the UAE’s Islamic finance sector is poised for long-term growth, solidifying the country’s position as a global leader in Islamic banking.