The global market for Islamic financial services topped $2trn at the end of 2014, up 12% on the previous year, a new Islamic report published by TheCityUK has revealed.

TheCityUK projects this figure to reach $3trn by 2018, driven by a growing domestic demand in emerging markets.

Chris Cummings, CEO of TheCityUK, said: “The global Islamic finance industry is a vibrant, dynamic and rapidly expanding part of the worldwide financial system. It also boasts considerable growth potential. Sharia-compliant assets make up only 1% of the world’s financial assets today, yet 1 in 5 people globally are Muslim.”

The GCC region accounted for the largest proportion of Islamic financial assets at the end of 2014 at around 38% and was followed by the Middle East and North Africa (MENA) region (excluding GCC) with 35%.

Although Islamic financial assets are still primarily in the GCC countries,the engagement with the industry, particularly with sukuk in the UK, South Africa, Luxembourg and Hong Kong is important for further growth and development of the industry, the TheCityUK said.

According to the report, the growing reach of Islamic finance offers a number of possible benefits.

“Aspects of Islamic financial practice may reduce its exposure to unanticipated events in the conventional financial sector. The system promotes proactive control over financing arrangements that introduce leverage – preferring where possible equity based alternatives on a risk shared basis that better support economic growth.”

Islamic finance encompasses a wide range of services.

Banking, which accounts for nearly 80% of Islamic finance assets, and sukuk 16% represent forms of finance that are most well established.

Funds with 4% and takaful (a risk sharing entity that allows for the transparent sharing of risk by pooling individual contributions for the benefit of all subscribers) 1% account for the remainder.

“Products that may be the subject of innovation include private equity and private wealth management,” TheCityUK said.

The Islamic funds sector has developed considerably in the past decade although it remains a niche sector of the global Islamic finance industry.

TheCityUK estimates that the market for Islamic funds worldwide increased to a record $77bn in 2014, up around 5% on the previous year.

There are around 1,100 funds worldwide, up more than four-fold from 250 a decade earlier.

EY estimate that the available pool for Islamic funds is over $500bn and growing, so Islamic funds under management currently represent a small proportion of the potential Islamic market.

TheCityUK said that Islamic finance offers a great deal of potential for global infrastructure development.

The infrastructure development needs of Islamic economies are large and in many cases approaching historic peaks.

Estimates of the world’s overall infrastructure investment needs for energy, road and rail transport, telecommunications and water are in the range of $50-$70trn through to 2030.

“With efforts to diversify funding solutions for infrastructure development in general, a growing number of Islamic funds will emerge in the infrastructure space.”