Islamic derivatives usage is set to expand across key markets, supported by new product offerings, legal reforms, and the increasing market share of Islamic banking, according to Fitch Ratings.
The agency reports that around 75% of its rated Islamic banks used derivatives in 2024–H1 2025. These instruments help manage risks stemming from volatility in interest rates, currencies, and commodity prices.
Despite this growth, derivatives markets in many Organisation of Islamic Cooperation (OIC) countries remain underdeveloped, especially for Islamic-compliant products, due to Sharia constraints and infrastructure gaps.
Where Use Is Rising
In markets such as Saudi Arabia, the UAE, Turkiye, Kuwait, and Qatar, the most common Islamic derivatives are:
- Profit-rate swaps
- Forward foreign exchange (FX) contracts
- Cross-currency swaps
The UAE has introduced a broader suite of products, including profit rate caps, collars, and zero-cost FX/commodity collars. Oman launched its first Islamic FX hedging product, while South Africa introduced a Sharia-compliant FX contract.
However, Islamic banks in Indonesia, Iraq, Jordan, Nigeria, and Tunisia still largely do not use derivatives.
In Malaysia, a leader in Islamic finance with a 40%+ market share, Islamic derivatives accounted for only 1% of the total derivatives market in 2024.
Most Islamic banks also lack offerings for Sharia-compliant versions of credit, equity, commodity, futures, and digital asset derivatives.
Legal Reforms Strengthen Confidence
New laws are helping enhance legal certainty and reduce risk:
- Saudi Arabia and the UAE enacted netting regulations in 2025, covering Islamic derivatives, sukuk-linked products, and digital assets.
- The UAE law also prohibits retrospective claims of non-compliance with Sharia once the contract has been validated.
- Similar legal drafts have been approved in Bahrain and Oman.
However, Kuwait, Qatar, Egypt, and Pakistan still lack netting laws, creating legal uncertainty for derivatives markets.
Standardisation and Risk
Efforts to standardise contracts are underway. In 2024, the International Islamic Financial Market (IIFM) and International Swaps and Derivatives Association (ISDA) released updated templates for Islamic profit rate and cross-currency swaps.
The Central Bank of the UAE is also finalising schedules to the Tahawwut Master Agreement, set for release in 2025.
While derivatives help Islamic banks manage risk, Fitch warns that improper use can expose institutions to counterparty credit, liquidity, and operational risks, potentially weakening their Viability Ratings.
Sukuk Market Adoption Still Limited
Sharia-compliant hedging is still rare in sukuk documentation. However, some recent non-bank sukuk rated by Fitch have incorporated hedging terms—especially when underlying assets are equities—to ensure timely investor payments.
