The global Islamic finance sector is bracing for a period of deceleration in 2026, as ongoing geopolitical volatility in the Middle East and energy market disruptions threaten to dampen momentum. According to a recent S&P Global Ratings report, growth for the industry is expected to dip to between 5% and 10%, a noticeable cooling from the 10.2% expansion seen in 2025. This downturn is primarily fueled by tensions surrounding the Strait of Hormuz and broader regional conflicts, which have complicated trade routes and unnerved investors. Since the sector is heavily concentrated in oil-dependent economies, the current climate of fiscal uncertainty and fluctuating energy prices is expected to slow credit growth, particularly in Gulf markets where large-scale infrastructure and real estate investments are increasingly being sidelined.

Despite these headwinds, the sector has shown surprising resilience, with global sukuk issuance climbing 20% in the first four months of 2026, bolstered by robust activity in Saudi Arabia, Malaysia, Türkiye, and Indonesia. Analysts suggest that while Gulf-based financial institutions maintain strong liquidity buffers and solid capitalization, their future performance remains tethered to the stabilization of oil supply chains and a potential cooling of regional hostilities. Although the short-term outlook is clouded by these macroeconomic risks, the long-term prospects for Islamic finance remain optimistic. Sustained demand for Shariah-compliant products, coupled with institutional support and a diversifying investor base, positions the industry to potentially recover by 2027, provided that global trade and energy markets regain their footing.