Islamic banks in the Europe, Middle East, and Africa (EMEA) region are poised for continued consolidation through 2025, driven by the need for increased scale, profitability, and operational efficiency amid evolving economic and regulatory environments, according to Fitch Ratings. This trend is particularly prominent in the Middle East, where high-profile mergers have already been observed in the UAE, Saudi Arabia, and Qatar.
The push for consolidation stems from several key factors, including stricter regulatory requirements, rising customer demands for digital banking solutions, and the necessity for stronger capital reserves. Smaller Islamic banks, in particular, are under mounting pressure to merge with or align themselves to larger institutions in order to absorb the costs associated with technological advancements and regulatory compliance. Regional governments are actively encouraging these mergers as part of broader economic diversification strategies and the implementation of Basel III standards.
The consolidation wave is expected to result in a landscape characterized by fewer, but stronger, institutions. These larger players will be better positioned to compete globally and offer enhanced digital services. Conversely, smaller banks may struggle to maintain independence unless they pursue strategic partnerships or mergers.
The trajectory of consolidation is further accelerated by the growing focus on Environmental, Social, and Governance (ESG) principles and sustainable finance initiatives. Islamic banks are increasingly aligning themselves with the global sustainability agenda, leveraging their inherent compatibility with ESG objectives. A testament to this is the surge in green and sustainable Sukuk issuances, which recorded a notable 17% increase in Q1 2024 compared to the previous year. This convergence of Islamic finance principles with ESG goals has created a distinct value proposition, particularly in emerging markets where traditional banking penetration remains limited.
Meanwhile, the Islamic banking sector is undergoing a significant demographic shift. Research indicates that 85% of Gen Z Muslims express strong interest in Islamic banking services, driving unprecedented demand for innovative digital solutions. This demographic trend is pushing traditional Islamic financial institutions to adapt swiftly or pursue strategic partnerships to remain competitive.
The transformation is taking place amid projections that the Islamic finance industry will grow to US$6.67 trillion by 2027. However, challenges loom on the horizon. The proposed implementation of the AAOIFI Standard 62, set to reshape Sukuk market dynamics from 2025, could create additional complexities for market participants.
Key Milestones on Islamic Banking in East Africa
- Kenya Lists First Islamic Bonds: Kenya issues its first Islamic bonds (Sukuk) worth $23 million to support the affordable housing agenda.
- Absa Bank Expansion: Absa Bank opens branches in northern Kenya to attract customers seeking Shariah-compliant (Islamic-friendly) banking services.
- Shariah-Compliant Investment Bank: Banker Abdullahi Adan leads Kenya’s first Shariah-compliant investment bank under the SIB brand.
- DIB Bank Kenya Achieves Profit: DIB Bank Kenya reports its first profit in 7 years, marking a significant turnaround.
- DIB Bank Launches Internet Banking: DIB Bank Kenya introduces an internet banking platform to enhance digital accessibility and customer experience.
- Uganda Enters Islamic Banking Market: Uganda taps into the Islamic banking sector with the entry of Salaam Bank, marking a milestone for Shariah-compliant finance in the country.
The evolving Islamic banking landscape presents both opportunities and challenges. Institutions that successfully balance technological innovation, regulatory compliance, and authentic Shariah-compliant service delivery are expected to thrive. Larger, consolidated entities will likely maintain a competitive edge as they capitalize on operational efficiencies, robust capital structures, and digital transformation. In contrast, smaller players face a critical juncture—merging or forming alliances may be essential for survival in an increasingly consolidated and competitive market.
The EMEA region, which includes Europe, the Middle East, and Africa, is a commonly used geographic division for global operations. While not strictly defined, it provides practical advantages for international businesses by encompassing countries within four major time zones, facilitating efficient communication and operational coordination.