RIYADH: The Islamic finance industry in the Association of Southeast Asian Nations is set to exceed $1 trillion in assets by the end of 2026, driven by Malaysia, Indonesia and Brunei and supported by closer Gulf ties, Fitch Ratings said.
The bloc鈥檚 Islamic finance sector reached nearly $950 billion at the end of the first half of 2025, accounting for about a quarter of the global total, the agency said in a report. Demand remains uneven within ASEAN, with limited presence in Singapore, the Philippines and Thailand, and underdeveloped markets in Vietnam, Laos, Cambodia and Myanmar.
ASEAN鈥檚 Islamic finance industry is expanding in line with global trends, with worldwide assets projected to reach $7.5 trillion by 2028, up from $5.5 trillion in 2024, according to Standard Chartered.
In its latest report, Fitch stated: 鈥淕rowth will continue to be led by Malaysia, Indonesia and Brunei due to their large Muslim populations, enabling regulations, access to sukuk, and potentially improving ties with Gulf Cooperation Council countries.鈥
GCC investors already hold stakes in some Malaysian banks, while Gulf Islamic banks are key arrangers and investors in dollar sukuk issued in Malaysia, Indonesia and the Philippines 鈥 a pattern seen in markets such as the UK, Turkiye and Kazakhstan.
Sukuk dominate
ASEAN鈥檚 sukuk outstanding reached $475 billion by mid-2025, making up 16 percent of the region鈥檚 debt capital market.
Malaysia and Indonesia lead the way, contributing nearly half, 47 percent, of the global sukuk market. 鈥淪ukuk outstanding represents 59 percent of Malaysia鈥檚 debt capital market and 18 percent in Indonesia,鈥 Fitch highlighted.
Environmental, social, and governance-linked sukuk are also concentrated in these two nations, while Singapore serves as a key listing hub for dollar-denominated sukuk.
Banking and funds
Malaysia remained ASEAN鈥檚 largest Islamic banking market, with assets totaling about $300 billion, representing 42 percent of total system financing.
Indonesia followed with $56 billion in Islamic banking assets, though its market share remains modest at 7 percent. Brunei鈥檚 Islamic banks hold a dominant 63 percent of the country鈥檚 total banking assets.
In the takaful sector, Malaysia鈥檚 family takaful accounts for 39 percent of the insurance market, while Brunei鈥檚 takaful penetration stands at 47.8 percent.
The Philippines has taken steps to develop its Islamic finance ecosystem, issuing its first takaful operator licenses in 2024 and introducing guidelines for micro-takaful products.
Regulatory gaps
Recent high-level meetings have reinforced Islamic finance鈥檚 role in ASEAN鈥檚 economic strategy. The 12th ASEAN Finance Ministers and Central Bank Governors鈥 Meeting in April emphasized its importance in sustainable and infrastructure financing.
Meanwhile, the second ASEAN-GCC summit in May strengthened cross-border ties, with Fitch noting that 鈥淕CC Islamic banks are key investors and arrangers of dollar sukuk issued in Malaysia, Indonesia, and the Philippines.鈥
Despite progress, regulatory frameworks remain absent in Vietnam, Myanmar, Laos, and Cambodia, limiting growth. However, with deepening GCC connections and strong fundamentals, Fitch expected ASEAN鈥檚 Islamic finance industry to maintain its upward trajectory.
Fitch鈥檚 report aligns with S&P Global Ratings鈥 April assessment, which highlighted the Islamic finance industry鈥檚 rapid expansion in 2024, driven by robust growth in banking assets and sukuk issuances 鈥 particularly in foreign currencies.
S&P projected that this momentum will continue in 2025, barring major macroeconomic disruptions, supported by stable oil prices and sustained financing needs from economic transformation programs.
However, risks loom, including potential oil price declines and the possible adoption of Shariah Standard 62, which could reshape sukuk structures from debt-like to equity-like, potentially fragmenting the market and deterring fixed-income investors.
The industry鈥檚 10.6 percent asset growth in 2024 was heavily concentrated, with GCC countries 鈥 led by 黑料社区 鈥 contributing 81 percent of Islamic banking expansion, fueled by Vision 2030 projects and deep market penetration.
Meanwhile, Malaysia and Indonesia remained key sukuk hubs, though currency volatility in emerging markets like Turkiye and Egypt poses challenges. Global sukuk issuance is expected to reach $190鈥200 billion in 2025, with foreign currency issuances playing a pivotal role.
Looking ahead, S&P emphasized that simplifying Islamic finance structures and leveraging fintech could enhance competitiveness, while sustainable sukuk, led by the Kingdom and Indonesia, presents a growing niche.
Yet, the industry鈥檚 trajectory hinges on regulatory clarity, particularly around Standard 62, which could trigger a pre-emptive issuance surge before implementation.