The heightened volatility in commodity prices, profit rates, and exchange rates following the onset of the Iran war has reinforced the importance of Islamic derivatives for risk management, Fitch Ratings says. However, adoption is fragmented, and varies by sector and country.
The majority of rated Islamic banks have deployed Islamic derivatives, but adoption is rare amongst rated Islamic insurance companies.
Islamic securitisation and sukuk issuances are beginning to embed Islamic derivatives into their structures. However, the Islamic derivatives market still lags conventional derivatives in most core Islamic finance markets. There is a lack of sharia-compliant alternatives to credit, equity, commodity, futures, and digital asset derivatives, the agency notes.
Key barriers include sharia restrictions, limited standardisation, infrastructure gaps, awareness gaps, and still-evolving financial systems in many OIC countries.
The conventional derivatives market is also underdeveloped across most OIC countries compared to other regions. The combined turnover of over-the-counter (OTC) interest-rate derivatives in Saudi Arabia, UAE, Bahrain, Malaysia, Indonesia, and Turkiye accounted for less than 1% of global volumes in April 2025 (BIS data).
About 75% of Fitch-rated Islamic banks used or offered Islamic derivatives in 2025–1Q26. This included 100% adoption at rated GCC Islamic banks. These are primarily profit-rate swaps, forward foreign-exchange contracts, and cross-currency swaps, and, in some cases, commodity hedging solutions. These instruments perform similar economic functions as conventional derivatives, supporting risk mitigation and potentially enhancing credit profiles. The remaining rated Islamic banks that did not actively deploy derivatives were mainly in Indonesia, Jordan, Iraq, Nigeria, and Tunisia.
Malaysia stands out as one of the most advanced jurisdictions for Islamic finance, offering both OTC and exchange-traded Islamic derivatives. However, conventional derivatives still dominate the market, and Fitch estimates only 1% of derivates were Islamic in 2025, it said.
In GCC countries (excluding Oman), OTC Islamic derivatives are more accessible, while exchange-traded Islamic derivatives are largely absent or nascent. No derivatives were traded on the Saudi Exchange in 1Q26 and most of 2025, the region’s largest stock exchange, despite their introduction in 2020.
The UAE is a leader among emerging markets in global OTC interest-rate derivative turnover. Volumes reached a daily average of $68 billion in 2025, up sharply from $4 billion in 2022 (including the Dubai Financial Services Authority), positioning the UAE as the 11th largest globally, according to BIS data. In April 2026, Dubai’s Virtual Assets Regulatory Authority further advanced the market by announcing a regulatory framework for exchange-traded derivatives in virtual assets.
Just under two thirds of Fitch-rated Islamic banks were investment grade at end-1Q26, with around 80% on Stable Outlooks. Most GCC Islamic banks have been resilient to the Iran war as they have sound financial metrics and ample liquidity and capital buffers. When Fitch is assessing a bank’s risk profile, high exposures to structural or traded market risks, which are weakly mitigated or managed would be deemed negative. In contrast, moderate and well-managed exposure to structural or traded market risks would be deemed positive.
For Islamic and conventional insurance companies, Fitch evaluates whether capital and earnings are reasonably protected from large loss exposures via mitigation techniques, the most common of which is reinsurance. Other forms of mitigation can include derivative contracts such as options, forwards or futures. - TradeArabia News Service
