UAE: Market share of Islamic banks grows to 17.6%; which Shariah-friendly products are in demand?
Islamic banking is gaining currency in the UAE as Shariah-compliant financial institutions expand their product offerings to cater to a variety of clients.
Industry executives say that the ethical, transparent, and risk-sharing nature of Islamic finance makes it appealing to a broad audience, including non-Muslim customers looking for sustainable and responsible financial products.
In 2024, UAE Islamic banks grew 11.1 per cent compared to 9.2 per cent in the previous year for the overall banking system resulting in a slight increase in the market share of Islamic banks in the country to 17.6 per cent versus 17.3 per cent at the end of 2023, said Dr Mohamed Damak, managing director and global head of Islamic finance, S&P Global Ratings.
'From a performance perspective and based on the numbers disclosed by the top 7 conventional banks and top 4 Islamic banks, the profitability of both types of banks has been strong and comparable with return on assets (RoA) for conventional banks reaching 2.2 per cent versus 2.4 per cent for Islamic banks underpinned by a lower cost of risk for Islamic banks, as efficiency and margins were comparable,' said Damak.
In early 2024, the Central Bank of the UAE ranked the country as the fourth-largest Islamic finance market worldwide. By the end of the first half of 2024, Fitch Ratings reported that Islamic financing accounted for 29 per cent of the UAE's total sector financing.
Ibrahim Al Mheiri, head of Islamic banking, Mashreq, said the demand for Islamic finance products in the UAE continues to grow, driven by increasing customer preference for Sharia-compliant solutions and the country's commitment to positioning itself as a global Islamic hub.
This momentum is expected to continue, with Islamic banks projected to outpace conventional banks in growth over the medium term. Factors such as supportive regulations, enhanced digital offerings, and the growing appeal of ethical banking are reinforcing this trend,' he said.
Badis Shubailat, assistant vice president,and analyst at Moody's Ratings, said that UAE Islamic banks exhibited a higher return on asset performance last year relative to their conventional peers. Amongst Moody's rated entities, net income to tangible assets stood at 2.2 per cent for Islamic banks against 1.8 per cent for their conventional peers in 2024.
'UAE banks benefited from high rates during most of last year and strong operating conditions underpinned by sound business sentiment while ongoing structural reforms continued to safeguard the country's competitive edge,' said Shubailat.
What products are growing?
While demand for all types of Islamic financial products is increasing, Ibrahim Al Mheiri said there is strong demand for those that align with environmental, social and governance (ESG) principles. 'By integrating such principles, Islamic finance is attracting a new wave of socially conscious investors seeking ethical and impact-driven financial solutions. Key growth areas include the Green Sukuk, used to raise capital for environmentally friendly projects such as renewable energy and sustainable infrastructure, and sustainable investment options,' he said.
Competitive returns
Ray Vermam luxury broker at Eden Realty UAE, said Islamic banks in the UAE often provide comparable or slightly higher returns than conventional banks, particularly for fixed-term deposits.
However, he said Islamic returns are not guaranteed, as they depend on profit-sharing (Sharia-compliant investments like trade/real estate), while conventional banks guarantee fixed interest.
'Risk-averse customers may prefer conventional stability, while ethical investors favour Islamic banks' alignment with religious principles.'
Based on mortgage rates in 2024 for the UAE market, Vermam added that the difference between Islamic and conventional mortgages is minimal, Islamic banks in the UAE often provide slightly cheaper credit for fixed-term.
'While the rates are comparable, Islamic mortgages often have more transparent fee structures and typically don't charge prepayment penalties. Conventional mortgages may include additional costs like prepayment penalties and variable interest rates that could increase over time,' he added.
Ibrahim Al Mheiri of Mashreq said in many cases, Islamic banks offer competitive and structured pricing that aligns with customers' financial needs while ensuring compliance with Shariah principles.
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