Islamic finance is poised to expand in 2020 and beyond, helped by growing use of Shariah-compliant products in the GCC region and Malaysia, according to a new report from Moody’s Investors Service.

"We expect sukuk issuance to remain stable at around $180 billion (Dh661bn) this year, and the takaful insurance market will see steady growth as insurance premiums pick up in newly-penetrated markets," said Nitish Bhojnagarwala, a vice president and senior credit officer at Moody's.

"However, downside risks are rising because of the coronavirus outbreak, as prolonged market disruption could dissuade issuers from coming to market," he added.

“There will be continued focus on the sukuk industry and increased issuance by the governments of the core Islamic finance markets. The deficit financing needs of some GCC sovereigns, amid weaker oil prices and higher sukuk refinancing ,will also provide support,” Moody’s said.

Mergers between Islamic and conventional banks in the GCC will drive one-off increases in assets, as they did in 2019, it added.

In Kuwait, the merger between Kuwait Finance House and Bahrain-based Ahli United Bank once completed, is likely to create the world's largest Islamic bank, surpassing Saudi Arabia-based Al Rajhi Bank.

Saudi Arabia will remain the world's largest Islamic banking market, while the sector will continue to expand rapidly in Malaysia, according to the report. Islamic Financing assets in the kingdom rose to $309bn as of September 2019 from $296bn in December 2018, according to the report.

“We expect Islamic finance penetration in Saudi Arabia to increase to 80 per cent of system-wide loans (including both conventional and Islamic financing assets) over the next 12-18 months, from 77 per cent in 2018, driven by increased demand from both corporate and retail clients."

Islamic banking penetration in the core Islamic financial markets of the Gulf Cooperation Council, Malaysia, Indonesia and Turkey, increased to 31.2 per cent in September 2019, from 25.5 per cent in 2013, while annual global sukuk issuance increased to $179bn from $131bn, it said.

In the GCC, Oman remains the fastest-growing Islamic banking market at a rate of 10 per cent in the first nine months of 2019.

Oman has two standalone Islamic banks and six Islamic windows at conventional banks offering Islamic services and the sector's market share has risen from zero to around 15 per cent of banking system financing assets as of September 2019, with potential for further growth, it said.

In Turkey and Indonesia, the penetration of Islamic banking remains relatively low at 5 per cent and 10 per cent, respectively.

The report also said demand for Islamic asset management is rising due to large Muslim populations, supportive legislation and growing investor demand for Shariah-compliant products.

“We expect Islamic assets to grow by a moderate 3 per cent to 4 per cent per annum in the short to medium term, constrained by weak economic growth prospects and geopolitical tensions in the Middle East, the largest Islamic region in the world.”

In 2018, Islamic assets under management (AUM) stood at $67.4bn.