The United Arab Emirates (UAE) is witnessing a significant expansion in its debt capital markets (DCM), with projections indicating a surge to $400 billion in the coming years. This rapid growth is driven by a combination of funding diversification, upcoming debt maturities, infrastructure financing, regulatory reforms, and the evolution of the Dirham Monetary Framework. According to Fitch Ratings, these favorable conditions are helping cement the UAE’s position as a key player in the global debt markets.

Current Market Landscape

As of the third quarter of 2024, the UAE’s DCM had already surpassed the $300 billion mark, reflecting a year-on-year increase of 13.1%. This robust expansion underscores the nation’s strengthening financial landscape and strategic role within the global sukuk and bond markets. The rapid growth reflects the UAE’s ongoing efforts to create a diversified and sustainable financial ecosystem, bolstered by investor confidence and sound regulatory policies.

Bashar Al Natoor, Managing Director and Global Head of Islamic Finance at Fitch Ratings, emphasized the UAE’s pivotal role, noting that sukuk accounted for 20% of the total DCM by the end of the third quarter of 2024. The remaining 80% comprised conventional bonds, demonstrating the continued dominance of both Islamic and non-Islamic financing in the market. He further stated that the UAE is one of the most significant players in the global sukuk market, holding a 6.6% share of total global outstanding sukuk.

Investment-Grade Sukuk and Market Stability

A key highlight of the UAE’s debt market is the quality of its issuances. Fitch Ratings reports that 92% of the UAE’s sukuk are investment-grade, with nearly all issuers maintaining stable outlooks. This indicates a strong financial foundation, with investors viewing the UAE as a reliable and stable market for debt instruments.

The absence of defaults in 2024 further reinforces market stability, attributed to a combination of supportive monetary policies, strong liquidity conditions, and investor confidence. The Dirham Monetary Framework has played a significant role in fostering an environment where both local and international investors see the UAE as a safe and attractive destination for debt investments.

Currency Diversification and ESG Initiatives

One of the most notable trends in the UAE’s debt market has been the diversification of issuance currencies. The dirham’s share of the DCM surged to 23% by the end of 2024, marking a significant rise from just 0.5% in 2020. This rapid shift signals growing confidence in the local currency and the UAE’s strategic efforts to reduce reliance on foreign-denominated debt issuances.

In addition to currency diversification, the UAE is actively advancing Environmental, Social, and Governance (ESG) initiatives in its debt markets. In 2024, sukuk made up 20.8% of total dollar issuances, while ESG-related debt accounted for 17.2%. The UAE government has also extended fee exemptions for ESG bond and sukuk listings, which is expected to further encourage sustainable finance efforts. With sustainability at the forefront of global financial markets, the UAE is positioning itself as a leader in green and ethical investing.

Banking Sector’s Role and Challenges

The UAE’s banking sector continues to play a pivotal role in both issuing and investing in debt instruments. Domestic banks are some of the largest issuers of debt in the country, contributing significantly to market liquidity and stability. However, a notable challenge remains—much of the investor base in the UAE’s DCM is concentrated within banks.

Dirham-denominated corporate debt issuance remains relatively rare, as the funding culture in the region is still heavily bank-focused. While large corporates are gradually beginning to issue their own debt, a broader investor base is needed to enhance market depth and resilience. Encouraging more private and institutional investors to participate in the market will be essential for sustained growth.

Regional and Global Standing

Within the Gulf Cooperation Council (GCC), the UAE holds the second-largest share of the total outstanding sukuk market at 16.2%, following Saudi Arabia’s dominant 71% share. This underscores the UAE’s prominence in regional Islamic finance and its growing influence in the global debt capital landscape.

On a broader scale, the UAE has emerged as one of the most significant US dollar debt issuers in emerging markets (excluding China), ranking third behind Saudi Arabia and Brazil with an 8.9% share in the first half of 2024. The country was also the second-largest issuer of ESG bonds and sukuk in emerging markets (outside China), following Brazil, in the first nine months of the year. These statistics highlight the UAE’s role as a critical player in international financial markets, attracting investors from around the world.

Future Outlook

Looking ahead, the UAE’s debt capital markets are projected to continue their rapid expansion. By the end of 2025, the DCM is expected to exceed $350 billion, with further growth towards the $400 billion mark in subsequent years. This growth trajectory will be driven by a combination of conventional bond and sukuk issuances, high investment-grade ratings, and the UAE’s strategic market positioning in the sukuk sector.

Continued regulatory support, the development of sustainable finance products, and increasing investor participation will be key drivers of this growth. The UAE government’s proactive approach to financial market reforms and infrastructure financing will further strengthen its standing in the global debt market.

Islamic Finance and Sustainability Initiatives

The UAE’s leadership in Islamic finance is further exemplified by its commitment to sustainability and ethical finance. The nation has been a pioneer in integrating ESG principles into Islamic finance, with green sukuk making up 63% of total sustainable sukuk issuance in 2023. This aligns with the UAE’s broader energy transition and climate change goals, showcasing its commitment to responsible financial growth.

The increasing issuance of green and social bonds, along with sukuk linked to sustainability objectives, reflects the UAE’s ambition to become a global hub for ethical and impact-driven finance. The growing investor interest in sustainable finance products will likely drive further innovation and expansion in the sector.

Technological Advancements in Sukuk Issuance

The digitization of sukuk issuance has streamlined administrative processes, making it more efficient and cost-effective for issuers and investors. Digital platforms are facilitating real-time tracking of performance and market developments, enhancing transparency and accessibility.

Blockchain technology and smart contracts are also being integrated into sukuk issuances, improving security and reducing settlement times. These technological advancements are expected to further attract investors, particularly those seeking secure and efficient investment options in Islamic finance.

Challenges and Considerations

Despite the positive outlook, certain challenges remain. The heavy concentration of the investor base within banks presents a risk to market liquidity and diversification. Encouraging broader participation from institutional investors, pension funds, and international investors will be essential to mitigating these risks.

Additionally, while the UAE has made significant strides in currency diversification, further efforts are needed to encourage dirham-denominated corporate debt issuances. Strengthening the domestic debt market and increasing access to alternative funding sources will be crucial for long-term sustainability.

Conclusion

The UAE’s debt capital market is on a solid growth trajectory, supported by favorable regulatory frameworks, a strong banking sector, and an evolving investor landscape. With a projected value of $400 billion in the coming years, the UAE is cementing its position as a major player in global debt markets.

As the market continues to expand, greater emphasis on sustainability, technology-driven innovations, and diversification will be key to ensuring resilience and long-term stability. The UAE’s leadership in Islamic finance and sustainable investing further strengthens its reputation as a forward-thinking financial hub in the Middle East and beyond.

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photo source: Google

By: Montel Kamau

Serrari Financial Analyst

7th January, 2025