PETALING JAYA: The Islamic finance ecosystem stands out for its remarkable resilience and structural maturity at a time when geopolitical volatility continues to reshape the global financial landscape.

According to Bashar Al Natoor, managing director and global head of Islamic Finance at Fitch Ratings, the Malaysian market remains a unique “local story” that has successfully buffered itself against external shocks, including the recent conflict in the Middle East.

“During the crisis, the Gulf Cooperation Council (GCC) debt markets saw minimal dollar issuances, rising yields, and tighter liquidity, while Malaysia’s market remained resilient with steady foreign investor participation, growing non-sovereign issuance, and innovations like tokenised sukuk, supported by strong ringgit stability and regulatory development.

“It’s impacted by its own local story,” he told StarBiz recently in Kuala Lumpur.

He expects a resilient debt capital market which will continue to expand as envisioned in the new local Capital Market Masterplan (2026 to 2030).

Fitch Ratings projects that Malaysia’s debt capital market (DCM) will expand modestly to reach US$640bil outstanding by the end of 2026.

This growth is anchored by a deep domestic investor base, stable yields, and the ringgit’s performance as one of Asia’s most resilient currencies.

Unlike the GCC, where US dollar issuances were scarce during the height of the conflict, activity in the Malaysian market continued “almost as normal”, the rating agency noted.

A key trend for the remainder of 2026 is the strategic shift from sovereign to non-sovereign debt.

While the Malaysian government is engaging in fiscal consolidation – aiming to reduce federal debt to 60% of gross domestic product by 2030 – the private sector is picking up the mantle.

Non-sovereign issuance rose by 17% year-on-year in the first five months of 2026, accounting for 68% of total DCM activity. Bashar said this transition is a sign of market maturity.

“We expect more non-sovereign to go and issue into the market, and I think that stands out,” he stated, noting that corporate and bank issuers are increasingly defining the market’s trajectory.

Banks remain the largest non-sovereign contributors, often using sukuk for refinancing and opportunistic funding.

The local Islamic banking sector, meanwhile, continues to outpace conventional growth.

Islamic banking assets grew by 7% to reach US$312bil by the end of 2025, while conventional assets grew by only 4%, a Fitch report noted.

Islamic financing now represents 44% of total system loans, nearing the government’s 50% target.

Bashar attributed this success to the most “evolved ecosystem” in the world, which integrates issuers, investors, takaful (Islamic insurance), haj funds, and pension funds like the Employees Provident Fund into a cohesive syariah-compliant framework.

Malaysia has cemented its position as the world’s largest environmental, social and governance (ESG) sukuk market, holding a 31.6% share of global outstanding ESG sukuk as of mid-2026.

ESG-linked debt in the country rose by 44% to US$20bil, heavily supported by government tax incentives.

Sukuk remains the dominant vehicle for these sustainable investments, accounting for 94% of total ESG debt issuance, Fitch noted.

Innovation is also visible in the digital sphere.

Malaysia saw its first tokenised sukuk issuance in the first half of financial year 2026, and new regulations for private debt are expected to further enable this niche.

Bashar, however, warned the use of technology could present a challenge for Malaysia’s Islamic financial ecosystem, as technological advancements are vital for maintaining a competitive edge.

“While the Islamic capital market is domestic-centric, foreign interest remains stable. Foreign holdings of government debt stood at 21.6% at the end of the first quarter of financial year 2026, a high figure compared to other Organisation of Islamic Cooperation countries,” he said.

To further attract international capital, particularly from the GCC, the government plans to launch its first wakalah bi al-khadamat sukuk in 2026.

This structure is designed to bridge the gap between Malaysian and GCC syariah interpretations, potentially opening new inflows of Middle Eastern investments.