Key Takeaways
- The stabilization of global liquidity conditions and high financing needs in core Islamic finance countries significantly increased foreign currency-denominated sukuk issuance in 2023.
- We forecast global sukuk issuance will total $160 billion-$170 billion in 2024, including foreign currency-denominated issuance of $45 billion-$50 billion.
- Sustainable sukuk will continue to contribute to the increase in sukuk issuance, which is still low. The recently concluded COP28 in the UAE highlighted the role Islamic finance and sukuk can play in addressing climate change.
- The potential adoption of the accounting and auditing organization for Islamic financial institutions' (AAOIFI's) Sharia standard 62 might reduce issuance volumes over the medium term because it could materially alter the nature and risk characteristics of sukuk instruments.
We expect global sukuk issuance will reach about $160 billion-$170 billion in 2024, from $168.4 billion at year-end 2023 and $179.4 billion in 2022. The drop in issuance volumes in 2023, which mainly resulted from tighter liquidity conditions in Saudi Arabia's banking system and Indonesia's lower fiscal deficit, was somewhat compensated by an increase in foreign currency-denominated sukuk issuance.
Better visibility on the medium-term trajectory of interest rates, particularly toward the end of 2023, benefited foreign currency-denominated sukuk issuance, which increased by a third in 2023, compared with 2022. We expect interest rates will remain broadly supportive in 2024. Although the Fed might cut interest rates later than markets expect, financing needs in core Islamic finance countries remain high, given ongoing economic transformation programs. It is also worth noting that Saudi Arabia and its Vision 2030 program boosted issuance in 2023 and will continue to do so in 2024.
Another area of strong growth are sustainable sukuk, whose issuance volumes continued to increase in 2023, albeit from a low base. As Islamic finance remains concentrated in oil exporting countries that aim to reduce their carbon footprints, we expect the increase in sustainable sukuk issuance will continue. Similarly, we think digitalization could unlock some opportunities as it could streamline sukuk issuance. Yet, this would require the harmonization of legal documents and a standardized interpretation of the Sharia.
It's Not That Easy
The lack of a standardized interpretation of the Sharia could cause some disruption over the medium term, especially considering the potential adoption of the AAOIFI's Sharia standard 62. Among others, this standard, which is still in the drafting stage, requires that the ownership and the risks related to the underlying assets are transferred to sukuk holders. As a result, the repayment of the sukuk may become more dependent on the performance of the underlying assets, their market value, or the sukuk holders' decision to sell these assets to third parties. This could have a material effect on the current sukuk structures and the risks borne by sukuk holders.
More Supportive Liquidity Conditions Will Propel Issuance In 2024
Global sukuk issuance declined by 6.1% to $168.4 billion in 2023, compared with $179.4 billion in 2022 (see chart 1). We expect issuance will reach about $160 billion-$170 billion in 2024, thanks to higher financing needs in some core Islamic finance countries and potentially easing global liquidity conditions. Geopolitical risks and their effects on regional market sentiments as well as potentially postponed interest rate cuts because of stickier inflation could pose downside risks to our forecast.
The volume of local currency-denominated sukuk issuance reduced. Local currency-denominated sukuk issuance dropped by 16.8% year-on-year, primarily due to lower issuances in Saudi Arabia and Indonesia (see chart 2). Liquidity preservation in the banking system was at the top of Saudi Arabia's agenda, as demonstrated by the government's and its related entities' continued liquidity injections in the banking system and a reduction in local currency-denominated sukuk issuance. In Indonesia, rapid fiscal consolidation and an associated drop in the government's financing needs reduced the government's local currency-denominated sukuk issuance. In contrast, the UAE's and Turkiye's local currency-denominated issuances increased, thanks to higher government issuances. We expect an increase in issuance in the UAE over the next few years as authorities continue their efforts to develop the local capital market.
Chart 1
Chart 2
On the other hand, the volume of foreign currency-denominated sukuk increased. More clarity on the path of major central banks' policy rates meant foreign currency-denominated sukuk issuance increased by almost a third in 2023, compared with 2022 (see chart 3). The market resumed rising to 2021 highs, thanks to higher foreign currency-denominated issuances in Saudi Arabia, the UAE, and a few new entrants to the sukuk market, including Egypt, U.S.-based aircraft operating lessor Air Lease Corp., and the Philippines. In February 2023, Egypt sold its debut sukuk at a price that was similar to that of conventional bonds. One month later, Air Lease Corp. completed its first sukuk issuance by using some of its leased aircrafts as underlying assets and in November 2023, the Philippines sold a $1 billion sukuk that was 4.9x oversubscribed. We expect the foreign currency-denominated sukuk market will continue to benefit from tailwinds as interest rate cuts will likely materialize in mid-2024 and financing needs in core Islamic finance countries, such as Saudi Arabia, will remain high.
Chart 3
Sustainable Sukuk Become More Prevalent
The total volume of sustainable sukuk issuance continued to increase in 2023, compared with 2022 (see chart 4). We expect higher volumes as issuers meet investors' demands and core Islamic finance countries seek to reduce their carbon footprints. COP28 shed more light on the opportunities of Islamic finance in general and sukuk in particular to tackle climate change.
Chart 4
The implementation of strategies to achieve net-zero emissions by core Islamic finance countries, such as the Gulf Cooperation Council countries, could drive sustainable sukuk issuances. We expect more activity in this space as issuers aim to attract global investors' attention and regulators offer incentives. When analyzing sustainable sukuk issued in 2023, we note three peculiarities.
Green sukuk accounted for the majority of sustainable sukuk issuance in 2023 (see chart 5). This is consistent with Islamic finance countries' energy and climate transition agendas, in our view.
Chart 5
Companies are the main issuers of sustainable sukuk, closely followed by banks (see chart 6). Banks have started to enter the sustainable sukuk market over the past couple of years to diversify their investor base and contribute to the financing of green and social projects, which are generally in line with the strategy of their home countries.
Chart 6
UAE issuers accounted for 40% of total sustainable sukuk issuance in 2023 (see chart 7). This is not only related to COP28, which recently concluded in the country, but also because UAE regulators exempted sustainable sukuk from registration fees in 2023.
Chart 7
Digitalization Can Propel Issuance
The advance of tokenization affects the sukuk market. In our view, digital sukuk could provide a quicker and cheaper way for issuers to tap into Islamic finance markets, due to the limited number of intermediaries involved. Other benefits may include enhanced transaction security, traceability, and integrity, which could further strengthen compliance with Sharia. However, this requires the availability of reliable technology, legal frameworks to accommodate these instruments, and templated legal documents. A standardized interpretation of Sharia and their harmonization across geographies are also critical factors for success.
Reducing the time, cost, and minimum volume requirements of sukuk issuances could open up the sukuk market to more issuers. In addition to traditional risks, including credit market and liquidity risks, investors in digital sukuk will face operational risks related to the technology and cyber security. Digital sukuk would also require an Islamic stable coin or a central bank digital currency.
Buckle Up
In late 2023, the AAOIFI published its exposure draft of Sharia standard 62 on sukuk. It subsequently extended the deadline for industry feedback to March 31, 2024. If it is adopted, Sharia standard 62 could have a significant effect on the sukuk market. Among others, the standard requires that the ownership and the risks related to the underlying assets are transferred to sukuk holders. This could weaken sukuk sponsors' contractual obligations if repayments become dependent on the performance of the underlying assets, their market value, or the sukuk holders' decision to sell these assets to third parties. As a result, some conventional fixed income investors might shy away from the sukuk market, which could change the pricing dynamics of such transactions to account for potential additional risks. At this stage, it is hard to tell whether Sharia standard 62 will be revised and how countries that adopted AAOIFI standards may react to the potential disruption of their sukuk markets. Another potential outcome of Sharia standard 62 could lead to a higher fragmentation of the sukuk market and a more pronounced difference between adopters and non-adopters of the standard. Even if the standard is approved this year, its implementation may be deferred to the following years, which could cause a rush into sukuk before the standard's adoption.
Related Research
- Islamic Finance's Role In The Climate Transition, Nov. 14, 2023
- The Global Sukuk Market Is Showing Pockets Of Opportunity, July 12, 2023
- Credit FAQ: Can GCC Banks Weather Funding Risks?, June 5, 2023
- Islamic Finance 2023-2024: Growth Beyond Core Markets Remains Elusive, May 1, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Mohamed Damak, Dubai + 97143727153; mohamed.damak@spglobal.com |
| Secondary Contacts: | Nikita Anand, Singapore + 65 6216 1050; nikita.anand@spglobal.com |
| Sapna Jagtiani, Dubai + 97143727122; sapna.jagtiani@spglobal.com | |
| Samira Mensah, Johannesburg + 27 11 214 4869; samira.mensah@spglobal.com | |
| Benjamin J Young, Dubai +971 4 372 7191; benjamin.young@spglobal.com | |
| Puneet Tuli, Dubai + 97143727157; puneet.tuli@spglobal.com |
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