The global Islamic finance industry is worth an estimated $4trn, according to the ICD-Refinitiv Islamic Finance Development Indicator (IFDI) Report 2022. Indeed, according to the report, this figure will rise to $6trn by 2026.

It is unsurprising, then, that so many cities are putting a great deal of time, effort and money into become leading Islamic finance hubs, principally by offering diverse Islamic financial products, robust regulatory frameworks and specialised expertise.

Islamic banking activities accounted for around 70% of global Islamic finance assets in 2021, according to the IFDI Report. The second-biggest segment is sukuk (shariah-compliant debt capital market instruments), accounting for 18%, and Islamic funds in third, accounting for around 4%.

Other Islamic financial institutions, including financial technology (fintech), investment, financing, and leasing and microfinance companies as well as brokers and traders accounted for 4% of global Islamic finance assets in 2021, while takaful (Islamic insurance) had the smallest representation with about 2%.

Given the impressive figures and high growth that the Islamic finance industry enjoys, many different locations are jostling for position to establish themselves as global Islamic finance hubs, with (in no particular order) Dubai, Kuala Lumpur, London, Manama and Riyadh emerging as the most successful centres – but what are the factors behind this quintet’s success?

Dubai, United Arab Emirates

Dubai is considered by some to be the most important hub in the global Islamic finance industry. The emirate’s strategic location connecting Africa, Europe and Asia, its strong Islamic finance framework and its reputation for innovation have enabled it to attract investors and institutions from both Muslim and non-Muslim countries.

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Dubai International Financial Centre (DIFC), a financial free zone established in 2004, has been a key factor behind the emirate’s leading role within the global Islamic finance industry. Dubai Financial Services Authority, the independent regulator of the DIFC, has created specific regulations and guidelines for Islamic finance activities. This framework provides clarity and transparency to investors, which has made the centre particularly appealing when it comes to foreign direct investment (FDI).

The DIFC benefits from a strong talent pool of skilled expatriate workers, houses 36,000 professionals and 4,300 actively registered companies, and has its own distinct legal and regulatory framework, which operates under common law as opposed to Dubai or United Arab Emirates (UAE) federal law.

Onshore, there are six fully fledged Islamic banks in the UAE, two foreign Islamic banks and 15 conventional banks with Islamic windows, according to the Central Bank of the UAE. The country has an active Islamic banking and capital markets scene with a diverse range of borrowers including banks, financial institutions and corporates.

In a drive to standardise the UAE’s (and therefore Dubai’s) Islamic finance industry, the central bank established the Higher Shariah Authority (HSA), a centralised shariah board, in 2018. The HSA is responsible for issuing fatwas (religious rulings) related to Islamic finance products and services, as well as reviewing and approving new sharia-compliant financial products.

The emirate’s two stock exchanges, the Dubai Financial Market and Nasdaq Dubai, provide platforms for the listing and trading of shariah-compliant securities (sukuk, funds, equities), regulatory oversight, innovation and development, and education and awareness programmes. In addition, Dubai Gold & Commodities Exchange and Dubai Multi Commodities Centre also offer shariah-compliant products and solutions to support the emirate’s Islamic finance ecosystem.

Kuala Lumpur, Malaysia

Kuala Lumpur has a sophisticated Islamic finance ecosystem in terms of market infrastructure, regulation, human capital and product innovation.

Islamic finance is a key area mentioned in Malaysia’s 12th economic plan (2021–25), the country’s economic blueprint. In particular it focuses on the areas of regulation and supervision of Islamic finance institutions. The central bank’s Financial Sector Blueprint 2022–26, a five-year plan for the country’s financial sector, mentions advancing value-based finance through Islamic finance leadership.

Malaysia has $650bn (RM2.95trn) in Islamic banking assets, making it the third-largest country globally after Iran in first and Saudi Arabia in second, according to the IFDI 2022 report. The country hosts 38 banks that are either fully Islamic or have windows offering Islamic financial products.

Islamic financing accounted for 41% of Malaysia’s total banking loans in 2022, compared with 38% in 2021, according to Fitch Ratings. Malaysia also has a well-established sukuk market, which made up around 64% of local currency outstanding issuance as of the end of November 2022.

Malaysia’s central bank, Bank Negara, has robust Islamic finance regulations for Islamic institutions through its Islamic Financial Services Act (2013). The act covers issues including licensing and supervision of Islamic finance institutions, consumer protection and market conduct. Bank Negara also has a Shariah Advisory Council (SAC), which provides guidance and rulings on shariah matters related to Islamic finance. The SAC consists of scholars and specialists in Islamic jurisprudence and finance.

Bursa Malaysia and the Securities Commission Malaysia (SRC) support the country’s Islamic ecosystem, particularly when it comes to cultivating an environment conducive to innovation. For example, the SRC launched environmental, social and governance-related bonds and sukuk standards to guide issuers as part of the country’s target to reach net-zero carbon emissions by 2050.

Other supranational Islamic organisations based in Kuala Lumpur include the Islamic Financial Services Board, which promotes harmonisation and standardisation within the Islamic finance industry, and the International Islamic Liquidity Management, an organisation that issues shariah-compliant financial instruments to aid cross-border Islamic liquidity management.

The International Centre for Education in Islamic Finance, global university dedicated to providing education and research in Islamic finance, is based in Kuala Lumpur. The centre aims to develop human capital and expertise in Islamic finance through its academic programmes, research initiatives and industry collaborations.

London, the UK

London is the leading hub for Islamic finance in Europe (and the Western world) because of its historical ties with key Islamic finance markets such as the UAE, a strong regulatory environment, a large and liquid stock exchange as well as specialised law, investment and advisory services in shariah-compliant transactions. For example, Clifford Chance, one of the largest law firms in the world, is headquartered in London, and advised the UK Government on its most recent sovereign sukuk in 2021. Similarly, Schroders, a UK-headquartered asset manager, which manages around £738bn ($918bn) in assets, has a dedicated Islamic equity fund.

There are four British Islamic banks: Bank of London and Middle East, Gatehouse Bank, Al Rayan Bank and Qatar Islamic Bank UK. UK-based Islamic banks’ assets accounted for some $7.5bn in 2021, representing about 0.3% of global Islamic banking assets, according a 2022 report by CityUK. However, the UK makes up around 85% of European Islamic banking assets (excluding Turkey).

To support the domestic Islamic banks’ liquidity management, the Bank of England launched the alternative liquidity management facility (ALF) in December 2021. The ALF enables British Islamic banks to have an account at a central bank to use as a high-quality liquid asset. Historically, this was difficult for Islamic banks in the UK because the existing facility was interest-based and there were no shariah-compliant liquidity facilities.

In the capital markets space, the UK Government sold its debut sovereign sukuk in 2014, which consisted of a £200m five-year issuance. It followed up with a sophomore issuance in March 2021 when it issued a five-year £500m sukuk. HM Treasury noted that domestic and foreign investors in major hubs for Islamic finance in the Middle East and Asia were subscribers to the sukuk.

The London Stock Exchange is a popular destination for international sukuk listings, having attracted $50bn through 68 sukuk issuances as of May 2023, with the likes of the Islamic Development Bank among the companies to have used the exchange for such services.

The UK is also an important player in the Islamic asset management universe, with 37 active shariah-compliant funds managing around $19.6bn in assets in 2021, according to the IFDI 2022 report.

UK Export Finance, the country’s export credit agency, has been involved in sukuk and other Islamic finance transactions. For example, it guaranteed Emirates Airlines’ sukuk in 2015 to support the delivery of four Airbus A380 aircraft.

Manama, Bahrain

Prior to the establishment of the DIFC in 2004, Bahrain was the Middle East’s regional financial hub. Today the country’s positions itself as an alternative to Dubai as a financial centre based in the Gulf, offering companies and investors a supportive regulatory environment as well as a developed Islamic finance ecosystem.

The country has six Islamic retail banks, 13 wholesale banks and nine Islamic windows at conventional banks. It also hosts six takaful and two re-takaful companies, according to data from the Central Bank of Bahrain (CBB). The CBB has developed a strong regulatory environment for its Islamic finance industry, which includes a supervisory shariah board that ensures that the all players in the industry remain shariah-compliant.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a supranational organisation that seeks to harmonise the Islamic finance industry by developing consistent standards, is based in Bahrain. It has issued 100 standards in the areas of shariah, accounting, auditing, ethics and governance for Islamic financial institutions. AAOIFI standards are followed in 45 countries and are a legal requirement in Bahrain and the UAE.

While the CBB is a leading light among central banks when it comes to Islamic financial services, it is also at the forefront of banking innovation. It has its own regulatory sandbox, FinHub973, which provides a space for start-ups and fintech companies to work on innovative banking and financial solutions, while offering regulatory guidance before the companies are launched into the general market. In 2018, Bahrain launched Fintech Bay, an incubator offering fintechs physical office space as well as support services such as mentoring and networking opportunities.

The International Islamic Financial Market, which focuses on the standardisation of shariah contracts and products, is based in Bahrain. The country also hosts training institutes such as the Bahrain Institute of Banking and Finance, which trains bankers and practitioners in varying aspects of Islamic banking and finance.

Riyadh, Saudi Arabia

Riyadh is rising in importance as a centre for Islamic finance. Under Saudi Arabia’s Financial Sector Development Program (FSDP), part of its Saudi Vision 2030 economic blueprint, authorities are seeking to position Riyadh as the global capital of Islamic finance by 2030.

Saudi Arabia held about $896bn (SR3.36trn) in Islamic assets in 2021, the second-largest country total in the world after Iran, according to the IFDI 2022 report. The FSDP is looking to increase the percentage of total Islamic finance assets within Saudi Arabia’s GDP from a contribution of 21.08% in 2018 to approximately 79.3% by 2025. Saudi Arabia is also a regular issuer of local Saudi riyal and US dollar-denominated sukuk, providing Islamic investors and funds with investment grade debt.

There are four fully fledged Islamic banks in Saudi Arabia, led by Al Rajhi Bank, the largest Islamic bank in the world by assets, although all of the country’s banks offer shariah-compliant products. Saudi Arabian Islamic banks benefit from larger retail franchises, which can support higher margins, a lower cost of funding and better asset quality, according to an April 2023 Fitch Report.

In a bid to attract Islamic equity investors and funds, the Saudi Arabian stock exchange (Tadawul) launched its first shariah-compliant index, the TASI Islamic Index, in 2022 to track the performance of the listed shariah-compliant companies. The index acts as a tool to guide and inform investors when analysing shariah-compliant investments. It also helps asset managers benchmark the performance of their shariah-compliant portfolios.

Saudi Arabia is seeking to attract $100bn in FDI by 2030 as part of its economic diversification plans. The country offers a range of investment opportunities for Islamic finance institutions, including real estate, infrastructure and energy projects.

Other important Islamic finance hubs

Other notable emerging Islamic finance hubs include Doha in Qatar, Jakarta in Indonesia, Istanbul in Turkey and Islamabad in Pakistan. While these countries have large Islamic banks or funds (as is the case with Qatar) or large populations (such as in Indonesia), their Islamic finance activity is either concentrated in the domestic market or their financial infrastructure is still not as developed when compared with Dubai, Kuala Lumpur, London, Manama or Riyadh.

Islamic finance came to the fore during the financial crisis of 2008, as investors sought ‘safe havens’ as the conventional banking world was collapsing around their ears. The reputation that Islamic finance acquired for steadiness and stability continues to resonate, as does its continued growth. The competition among the hubs both established and emerging will continue to intensify given the benefits that come from being an Islamic finance hub, not least of which is the increased level of FDI it can bring in. Whether the quintet identified in this report remain in the top spots given the expertise and resources on offer in the likes of Doha and Jakarta remains to be seen, but none of them will want to relinquish their positions as the industry continues to grow and grow.