The Islamic Financial Services Board (IFSB) published its Islamic Financial Stability Report (IFSR) 2026 in May 2026. The report finds that the Islamic financial services industry stayed resilient through 2025, but it puts a new issue at the centre of its analysis: hybrid risks in Islamic banking, which current prudential rules do not fully capture.
How big the industry is now
Total Islamic financial services industry (IFSI) assets reached USD 4.40 trillion in the third quarter of 2025, up 13.4% year on year. The industry has added USD 1.7 trillion since 2020, a five-year compound annual growth rate of 10.3%.
- Islamic banking: USD 3,050.94 billion, 69.3% of the industry, up 9.7%.
- Sukuk outstanding: USD 1,100.83 billion, 25.1%, up 21.8% and now above USD 1 trillion.
- Islamic funds: USD 180.47 billion, 4.1%, up 25.6%.
- Islamic insurance (takaful): USD 71.14 billion, 1.6%, up 13.9%.
By region, the GCC holds 53.8% of assets, East Asia and the Pacific 21.3%, the rest of the Middle East and North Africa 16.4%, Europe and Central Asia 4.9%, South Asia 2.4% and Sub-Saharan Africa 0.7%. In other words, two regions account for about three quarters of the industry.
The main theme: hybrid risks
The IFSB uses “hybrid risks” to describe exposures from Islamic structures that behave much like conventional credit. In some jurisdictions these structures now dominate both financing and funding. They have helped Islamic banks grow, but the report argues they also change how balance sheets behave.
At the level of individual banks, the IFSB points to more elastic balance sheets, a build-up of leverage, greater sensitivity to benchmark rates and heavier reliance on outside operational partners. At the level of the system, it warns of credit expanding in sync across banks, feedback loops between credit and asset prices, and liquidity stress spreading through interbank markets. Because standard risk weights may understate some hybrid exposures, reported capital ratios can give an incomplete picture.
Banking: resilient, with clear weak spots
Capital adequacy was broadly sound, with one stark exception. Bangladesh’s capital ratio fell from above the regulatory minimum in 2023 to negative levels in 2024. Gross non-performing financing ratios were exceptionally high in Bangladesh and Kenya and above 5% in a few other jurisdictions. The report also notes that some improvements in those ratios came from write-offs and restructurings rather than better loan books, and that real estate and household financing make up the largest share of bad financing in most regions.
Liquidity coverage ratios were above minimum requirements in most markets, though several Bangladeshi banks fell below 100%. One structural concern stands out: commodity murabahah makes up nearly three quarters of interbank funding, which concentrates risk in a narrow set of commodities, brokers and trading platforms.
Takaful: thinner buffers
Takaful solvency ratios remain within requirements in most markets, but the cushions are getting thinner. Claims outpaced contributions across most regions, with motor and medical lines under the most pressure, and investment income became the main source of profit in 2025. Some operators rely on qard support from shareholders to cover deficits in participants’ funds. In one case the report illustrates, accumulated fund deficits rose from 84% of shareholder equity in 2021 to 168% in 2025. Limited Islamic reinsurance capacity means operators keep more risk on their own books.
Sukuk: record issuance, thin long end
The IFSB recorded USD 234.5 billion of sukuk issuance in 2025, a record. Corporates issued 43.4% of the total, sovereigns 30.9%, quasi-sovereigns 21.0% and multilaterals 4.8%. Composite structures rose to 42% of issuance, from 25% in 2024. Sustainability-related sukuk grew 33% and green sukuk 94%.
Market depth is still the weak point. Issuance with maturities beyond 30 years fell 67%, leaving the long end of the curve thin, and sukuk remained more expensive to trade than comparable bonds, especially in less developed domestic markets.
What the IFSB recommends
- Capital: keep frameworks risk-sensitive so hybrid instruments are treated according to their real risk.
- Macroprudential oversight: track the scale and concentration of hybrid risks, include them in stress tests and calibrate system-wide buffers.
- Operational dependencies: supervise reliance on a small number of commodities, brokers or platforms more closely.
- Liquidity and resolution: develop Islamic money markets and central bank facilities for Islamic banks, and strengthen crisis management frameworks.
- Takaful: improve pricing discipline and capital frameworks, supervise at fund level and expand Islamic reinsurance capacity.
- Sukuk: build market infrastructure, adopt common taxonomies and disclosures, and widen the domestic institutional investor base.
Why it matters
The headline numbers are strong, but the report’s real message is about the quality of that growth. If Islamic banks keep expanding through structures that carry conventional-style credit risk, supervisors need tools that measure that risk properly. For regulators, bank boards, takaful operators and sukuk investors, the IFSR 2026 is a practical checklist of where the industry’s next stress could come from.
Related reading: S&P Global’s Islamic finance outlook for 2026 and 2027, the Islamic Finance Insight Report 2026 on Nigeria and Mordor Intelligence’s Islamic finance market forecast to 2031.
FAQ
The Islamic Financial Services Board (IFSB), based in Kuala Lumpur. The 2026 edition was published in May 2026.
USD 4.40 trillion in the third quarter of 2025, up 13.4% year on year.
The IFSB uses the term for exposures from Islamic structures that behave much like conventional credit, which standard risk weights may not fully capture.
