This article first appeared in The Edge Malaysia Weekly on April 20, 2026 - April 26, 2026

THE conflict in the Middle East is unlikely to drive any significant shift of Islamic finance activity to Malaysia, experts say.

According to Siew Suet Ming, chief rating officer at RAM Ratings, Southeast Asia’s largest credit rating agency, Malaysia’s Islamic banking and sukuk industry may see limited, indirect benefits from the conflict, mainly because of the country’s position as a stable and well-established Islamic finance market.

“Malaysia’s advantage lies in its deep and liquid ringgit sukuk market, robust regulatory oversight and sizeable domestic institutional investor base, which may attract incremental investor interest during periods of heightened geopolitical uncertainty,” she says in response to questions from The Edge.

In spite of the Iran war, the Malaysian bond market recorded a month-on-month net foreign fund inflow of RM6.1 billion in March compared with a net outflow of RM2.5 billion in February. This marked the highest monthly inflow since May 2025, signalling the market’s confidence in Malaysia’s economic resilience and fiscal credibility, Siew notes.

“However, we do not expect any significant shift of Islamic finance activity to Malaysia, given that most of the growth in that sector continues to be domestically driven,” she points out.

Nikita Anand, an analyst at S&P Global Ratings, is also of the view that the war will only have a limited impact on Malaysia’s sukuk market.

“We expect limited impact on Malaysia’s debt capital markets from the war, given the majority of the issuers and investors are domestic. In our view, [US] dollar sukuk issuance is likely to be slow over the next few months amid heightened geopolitical risks and uncertainties.

“Malaysia’s relatively stable macroeconomic conditions could redirect capital flows. For dollar sukuk issuance, Gulf Cooperation Council investors are significant; hence, any potential benefits could be outweighed by GCC investors’ lower risk appetite and prioritisation of capital and liquidity preservation,” she tells The Edge.

The Middle East is home to some of the world’s largest Islamic banks, including Al Rajhi Bank (Saudi Arabia), Kuwait Finance House (Kuwait) and Dubai Islamic Bank (United Arab Emirates).

In an April 7 report, Fitch Rating notes that Islamic banks in the GCC are resilient and well buffered, should the conflict remain contained. However, it believes heightened geopolitical uncertainty could dampen sukuk issuance in the GCC this year, with no sukuk issuance recorded in the month of March.

Fitch had previously expected strong US-dollar debt issuance in the GCC and Turkiye this year following a record issuance in 2025, supported by tighter credit spreads and strong investor demand.

According to Fitch, global sukuk issuance fell 35.5% quarter on quarter (q-o-q) to US$71 billion in 1Q2026. US dollar sukuk issuance in core markets exceeded US$20 billion, up 9% year on year, but down 9% q-o-q. Global outstanding sukuk surpassed US$1.1 trillion, with a significant share in the GCC, Asean and Türkiye.

RAM Ratings’ Siew is of the view that Malaysia’s sukuk market remains “resilient and attractive”, making up almost three-­quarters of total private debt issuance in the last three years.

Total corporate bond issuance reached a record high at RM174.4 billion last year, with sukuk issuance totalling RM139.8 billion, highlighting continued market depth despite global uncertainty.

“Although issuance is expected to ease in 2026, we expect corporate bond financing to remain strong in 2026, with gross corporate bond issuance expected to reach RM130 billion to RM140 billion,” she says.

“Based on that trajectory, we expect local currency sukuk issuance to remain steady in line with RAM’s forecast, reinforcing the bond market’s central role in corporate funding, and refinancing flexibility for rated issuers, particularly those with established programmes and higher rated credit profiles.”

Siew does not view the Middle East conflict as a standalone factor that may derail Malaysia’s Islamic banking prospects in the near term. She notes, however, that it does raise downside risks through confidence, commodity prices, inflation and competition for funding.

“Our base case expectation is that growth in Islamic financing will remain steady, supported by domestic demand and continued Islamic-first strategy adopted by the large banks, regulatory support and sound capitalisation,” she says.

The recently launched fourth Capital Market Masterplan 2026-2030 (CMP4), which puts Islamic finance in strong focus, should help provide continued growth momentum, she adds.

RAM Ratings expects Islamic financing growth in Malaysia this year to hold at around 8%, broadly in line with that in recent years, and aligned with the rating agency’s economic growth forecast of between 4% and 5%. The sector’s profitability is likely to grow “moderately”, though margins may face pressure from funding competition, says Siew.

S&P Global Ratings’ Anand notes that a prolonged war in the Middle East could lead to a sharp deterioration in macroeconomic conditions and hurt household consumption and finances, which could hurt Islamic banks.

“This is because elevated inflation, due to higher energy prices and supply-chain disruptions, will affect consumers and small businesses. Given that the financing portfolio of Islamic banks is heavily tilted towards consumer and small and medium enterprise (SME) financing, players in this space could see higher default risks from lower income and leveraged consumers.

“We believe large Islamic banks in Malaysia are well capitalised, however, and have adequate provisioning buffers against these downside risks,” she says.

The country’s top Islamic banks by share of gross financing are Maybank Islamic Bhd, CIMB Islamic Bank Bhd and RHB Islamic Bank Bhd.

Islamic financing in Malaysia grew by 7.7% last year — slightly lower than the previous year’s 8.1% — and once again outpaced conventional loans growth, which stood at 2.7% (2024: 3.7%). The growth was mainly driven by household demand, particularly for residential property and auto financing.

As at end-2025, Islamic financing accounted for 44% of total sector loans as compared with 43% in 2024, indicating further market deepening, RAM Ratings notes in a recent report.

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