WHY THE PERCEPTION OF ISLAMIC FINANCE AS A CONSERVATIVE SECTOR IS OUTDATED

The UAE has built a reputation as a global financial hub, balancing conventional and Islamic finance with remarkable ease. But while Sharia-compliant investing has been around for decades, it is now becoming a major force in shaping market trends, offering solid returns, and aligning with the region’s push for sustainability.

Despite its growing appeal, many investors still see it as complex or limiting. Some assume it is only relevant to Muslim investors, while others believe it lags behind conventional markets in performance. The reality is different. Sectors like real estate, logistics, health care and technology, where asset-backed strategies thrive, have seen strong growth under Sharia principles, making them attractive to a much broader investor base.

Sharia finance is not about restriction, it is about structure. The focus on transparency, ethical investing and risk sharing makes it especially relevant today, as global markets reckon with uncertainty.

Competitive asset class

The perception of Sharia finance as a conservative, slow-moving sector is outdated. Sharia-compliant investments today are dynamic, covering a wide range of asset classes, from equities and exchange-traded funds to sukuk and real estate investment trusts. More importantly, they have proven competitive. Over the past decade, Sharia-compliant equities in the UAE have delivered returns comparable to, and in some cases outperforming, conventional indices.

Take the Dubai Financial Market (DFM) Sharia Index, for instance. It has outpaced broader market trends during financial downturns by avoiding highly leveraged companies, offering investors a level of insulation from crises that often stem from excessive debt.

Sukuk, the Islamic alternative to bonds, have also gained momentum, delivering yields that rival traditional bonds while benefiting from the UAE’s stable economic policies and government-backed infrastructure projects. Unlike conventional bonds, which are exposed to rising interest rates, Sukuk remain insulated from this risk due to their asset-backed nature.

Expats and Sharia investments

One of the biggest misconceptions about Islamic finance is that it is exclusive to Muslim investors. That could not be further from the truth. Sharia-compliant investments are open to anyone looking for ethical, interest-free financial products, and the UAE, home to one of the largest expat populations in the world, offers a thriving ecosystem for such opportunities.

Expats in the UAE have access to a broad range of Sharia-compliant investment options, including real estate funds, equity portfolios, and ETFs listed on major exchanges like DFM and Nasdaq Dubai. Unlike in some countries where access to Islamic financial products is restricted by nationality or residency status, the UAE’s regulatory framework allows seamless participation. Investors can also verify compliance by looking for certification from recognised Sharia boards, investing in Sharia-compliant mutual funds, or using financial apps that screen for compliant stocks.

The overlooked opportunity here is not just in traditional asset classes. Hybrid sukuk, which blends features of equity and debt, and infrastructure sukuk, which finance large-scale projects like Al Maktoum Airport, are further expanding the options available.

Ethical investing meets ESG

There is also a natural alignment between Sharia finance and the global push for ethical, sustainable investing. Long before ESG (Environmental, Social, and Governance) became a mainstream term, Islamic finance had already been enforcing principles that mirror its core values.

Now, as the UAE accelerates its clean energy initiatives under Vision 2050, we are seeing the rise of Sharia-compliant green finance, particularly through green sukuk. Masdar’s $750 million green sukuk issuance, which funds solar and wind energy projects, is a prime example of how Islamic finance is converging with the sustainability movement. Investors who prioritise ethical financial decisions do not have to compromise on returns. Sharia-compliant products are proving they can deliver both profit and purpose.

Risks

Like any investment strategy, Sharia-compliant investing comes with its own set of risks. One of the biggest challenges is sector concentration. Since Islamic finance avoids high-debt companies, portfolios tend to be more focused on sectors like real estate, energy and technology. While these industries offer strong growth, they also expose investors to cyclical market trends, such as fluctuations in oil prices.

Liquidity can also be a factor. Sharia-compliant ETFs and sukuk generally have lower trading volumes compared to their conventional equivalents, meaning investors may need to plan for longer holding periods. Compliance is another consideration. Unlike conventional portfolios, which follow broad regulatory standards, Sharia-compliant investments require continuing oversight from Sharia scholars to ensure they adhere to ethical guidelines.

A good time to start

Markets move fast, and the smartest investors are not the ones who simply follow the crowd, they are the ones who recognise a shift before it becomes the norm. Islamic finance is not a niche corner of the market any more. It is a serious player driving growth in the UAE and beyond.

Asfar Ibrahim is an independent financial adviser and associate vice president at Continental Group

2025-04-28T05:00:38Z