The Banking Executive Magazine - May 2026 Issue - New

Islamic Finance ISSUE 209 MAY 2026 the BANKING EXECUTIVE 43 What makes this situation particu- larly striking is that it occurs with un- precedented financial liquidity. According to the Islamic Finance De- velopment Indicator 2025, global Is- lamic finance assets reached USD 5.9 trillion in 2024, growing by more than 20 percent year-on-year, and are projected to approach USD 9.7 trillion by 2029. Islamic finance today spans over 140 jurisdictions, positioning it as one of the fastest- growing segments of the global fi- nancial system. However, despite this scale, the ma- jority of Islamic financial assets re- main concentrated in deposits and low-risk instruments rather than channeled into productive invest- ment. The challenge, therefore, is not a shortage of capital, but a structural disconnect; liquidity is abundant, and development needs are signifi- cant, yet financing fails to reach the segment where it is most needed. ISLAMIC FINANCE: STRUCTURAL POTENTIAL, PRACTICAL CON- STRAINTS. In theory, Islamic finance is uniquely suited to address this challenge. Its emphasis on asset-backed transac- tions, profit-and-loss sharing, and real-economy linkage aligns closely with the financing needs of SMEs. The objectives of Shariah (maqasid al-shariah) explicitly prioritize pro- ductive economic activity, risk shar- ing, and social value creation, principles that resonate strongly with inclusive growth agendas. In practice, however, this potential remains partially realized. Islamic banking accounts for roughly 70–75 percent of total Islamic finance as- sets, while global sukuk markets now exceed USD 1 trillion in outstanding value. Yet SME financing represents only a modest share of these portfo- lios. The reason is not a lack of avail- ability, but the persistence of execution risk. Risk-sharing instruments require ro- bust project appraisal, reliable cash- flow projections, and strong enterprise governance. Where SMEs lack investment readiness, risk shar- ing can increase exposure rather than mitigate it. At the same time, regulatory capital requirements, in- ternal risk models, and supervisory expectations tend to favor standard- ized, lower-risk assets. As a result, Is- lamic financial institutions, like their conventional peers, often rationally concentrate liquidity in safer instru- ments, even when development mandates encourage greater real- economy engagement. BRIDGING THE GAP THROUGH IFETAA Recognizing that liquidity alone does not generate lending, the Islamic Fi- nance-led Economic Transformation in Africa, the Arab Region and Be- yond (IFETAA) programme was es- tablished to address the structural bottlenecks that inhibit SME finance at scale. IFETAA is not conceived as a financing facility, nor as a substitute for banks’ credit decisions. Rather, it is designed as an enabling architec- ture that reduces risk at its source and improves the conditions under which financial institutions deploy capital. The programme brings together com- plementary institutional strengths.