PETALING JAYA: The Islamic finance industry is poised for further growth, supported by a mature domestic ecosystem and measures under Budget 2027, according to Fitch Ratings.
Fitch Ratings estimated that Malaysia’s Islamic finance industry exceeded US$800bil at the end of the third quarter of 2026 (3Q26), representing more than 150% of gross domestic product (GDP).
The industry was led by sukuk (47%), followed by Islamic banking assets (42%), Islamic funds (8%) and takaful (3%).
“The industry’s strength is rooted in domestic market depth, supported by one of the most developed local Islamic finance systems,” said Fitch Ratings in a note.
On policy support, Fitch Ratings said Budget 2027 measures included a planned tokenised retail savings sukuk by the government and a 40% income tax exemption for syariah-compliant fund management service providers for the 2028 to 2030 assessment years.
Other incentives included tax deductions on issuance costs for Securities Commission-approved Sukuk Prisma for the 2027 to 2030 assessment years.
However, Fitch Ratings added that the benefits of these measures are likely to depend on implementation and market uptake.
Meanwhile, Malaysia remained the world’s largest sukuk marketing at end-3Q26, accounting for 33% of global sukuk outstanding. Sukuk represented about 64% of the domestic debt capital market.
The government also re-entered the US dollar sukuk market after a five-year hiatus, raising US$1.5bil.
Fitch Ratings expects government debt, including sukuk, to ease gradually, supported by nominal GDP growth and planned fiscal consolidation.
Debt is projected to decline around 7.4% of GDP in 2027 from 77% in 2025, although this would remain above the current median of 57.4% for BBB-rated sovereigns.
On Islamic banking, Islamic financing accounted for 44.3% of total banking system financing in August 2026, up from 44% in 2025.
Fitch Ratings expects this share to grow further over the medium term as banks prioritise Islamic finance strategies.
Separately, Islamic funds represented 22.4% of industry assets under management at the end of the first half of 2026, while takaful accounted for about 20% of insurance industry assets at the of the first quarter.
Digitalisation and sustainable finance could provide additional support.
Environmental, social and governance or ESG debt outstanding rose 27% year-on-year to US$21bil, with sukuk accounting for 92%.
According to Fitch Ratings, Malaysia’s Capital Market Masterplan 2026 to 2030 targets cumulative financing of RM90bil to RM100bil for environmental and social priorities.
