Islamic Finance in Italy: A Regulatory Vacuum Amidst Global Growth

How a €28 Billion Gulf Trade Partner Can Unlock a $6 Trillion Market

By: Zubair Mughal, CEO - AlHuda CIBE, UAE

Global Islamic finance is experiencing a remarkable growth phase, with total assets reaching approximately USD 5.2 trillion in 2025, reflecting a year-on-year increase of 14.9%, and is projected to hit the USD 6 trillion mark by 2026. The global sukuk market also reached record levels, with total issuance soaring to USD 264.8 billion in 2025, and some reports even citing figures exceeding USD 300 billion, representing a 25% year-on-year increase. While the epicenter of this growth remains in core Islamic finance countries, the industry is also extending its reach into Western markets, with Europe presenting a highly fragmented yet dynamic landscape.

The United Kingdom continues to serve as the undisputed Western hub, hosting five fully-fledged Islamic banks, while the UK Islamic finance market itself was valued at approximately USD 7.81 billion in 2025. The London Stock Exchange remains the largest listing venue globally for hard-currency sukuk, with over a 40% market share. Meanwhile, smaller European jurisdictions such as Luxembourg have successfully leveraged their sophisticated fund industries to list green sukuk, and Malta recently published a consultation proposing definitive regulatory pathways for sukuk issuance and listing.

In stark contrast to these European competitors, Italy presents a unique paradox. The country is home to a significant Muslim population of approximately 1.7 million, which now constitutes over 30% of the foreign resident demographic. It is also the second most practiced religion in the country, second only to Christianity. Deep and growing trade ties with the Gulf region further underscore the missed opportunity, as Italy trade with the Middle East is substantial. In 2025, Italy exports to the broader Middle East region, including Israel and Lebanon, exceeded €28 billion. Trade with the UAE alone is particularly robust, with exports projected to exceed €9 billion in 2025, after reaching €7.8 billion in 2024. In the first half of 2025, non-oil trade between the UAE and Italy reached approximately €6 billion. Similarly, Saudi Arabia, Italy's 19th-largest export market, imported €6.3 billion worth of Italian goods in 2025, a 1.5% increase from the previous year. Furthermore, the growing halal market in Italy itself, with the halal meat market alone valued at USD 697.57 million in 2024 and projected to reach USD 789.46 million by 2027, signals a significant internal demand for Sharia-compliant products.

Despite these compelling indicators, Italy has made no meaningful legislative progress towards accommodating Islamic finance. It has no enabling law for sukuk, no Sharia governance framework, and no tax equalization for Murabaha transactions, leaving it in a state of regulatory inertia. A notable development, however, occurred in February 2025, when Italy's development finance institution, CassaDepositi e Prestiti (CDP), signed a Memorandum of Understanding (MoU) with the Islamic Development Bank (IsDB) Group. This marks the first collaboration initiative between the two financial institutions. The partnership focuses on knowledge-sharing, co-financing, and co-investment in sectors such as environmental sustainability, energy, food security, and infrastructure, aligning with Italy's Mattei Plan for Africa. While this represents a significant diplomatic step, it does not yet address the domestic regulatory vacuum.

On the regulatory front, Legislative Decree No. 208 came into force on January 9, 2026. Though not addressing Islamic finance directly, it signals Italy's broader financial evolution. Academic and policy dialogue is slowly advancing: Deputy Minister Maurice Leo stated in 2025 that "Italy can be an important interlocutor for Islamic finance," while the University of Salento and ICC Italia now offer courses on the subject. Still, the gap between talk and legislative action remains wide.

The potential for Islamic finance to aid financial inclusion for Italy's 1.7 million Muslims is gaining attention, as conventional interest-based banking is not Sharia-compliant. The Takaful insurance market is also growing. This dual opportunity—serving the Muslim community and attracting Gulf investment—makes reform compelling. The cost of inaction is high: Italy loses Gulf FDI and fails to serve its halal economy (worth ~USD 4 billion), while smaller European jurisdictions move ahead to capture a share of the $6 trillion global Islamic finance market.

In the global effort to develop Islamic finance ecosystems, AlHuda Centre of Islamic Banking and Economics (AlHuda CIBE) has emerged as a pivotal player. As a globally recognized organization with extensive experience across Asia, the Middle East, Africa, and Europe, AlHuda CIBE provides state-of-the-art advisory consultancy and education in Islamic banking and finance. The center has worked with central banks, commercial banks, and government entities to design regulatory frameworks, develop Shariah-compliant financial products, and build local capacity.

Its recent engagements include supporting Somaliland in developing a comprehensive Islamic banking and capital market ecosystem, including sovereign sukuk structures, advising Punjab Provincial Cooperative Bank on its transition to a fully Shariah-compliant model, and stepping in to support Uzbekistan's emerging Islamic finance industry through training, capacity building, and Shariah advisory services. With over twenty years of global experience, AlHuda CIBE continues to promote ethical and Shariah-compliant financial systems by supporting institutions that aim to integrate innovation with strong governance and compliance foundations. For Italy, which currently lacks domestic Sharia scholars and regulatory expertise, engaging with such established global advisory centers could provide a shortcut to developing the necessary institutional and human capital for a future Islamic finance sector.

(Zubair Mughal is a prominent global expert in Islamic Banking and Finance and currently serves as CEO of AlHuda Centre of Islamic Banking and Economics (UAE). He can be reached at zubair.mughal@alhudacibe.com)