S&P Global Ratings forecasts that sukuk issuance will amount to $190 billion to $200 billion in 2025, following the market's strong performance last year. Total issuance reached $193.4 billion in 2024, down slightly from the previous year's $197.8 billion. However, a notable difference was the 29% rise in foreign-currency issuance to $72.7 billion as of Dec. 31, 2024. The main contributors to this increase were issuers from Malaysia, GCC countries led by Saudi Arabia, and Indonesia. We expect foreign currency-denominated issuance to remain elevated in 2025.

Many issuers wanted to benefit from the improving global liquidity conditions in 2024, with major central banks starting to ease their monetary policy and avoid any potential disruption that could come from local or geopolitical developments. In 2025, we expect monetary easing to continue, albeit at a slower pace than previously expected. This, combined with high financing needs in core Islamic finance countries due to ongoing economic diversification programs, will lead issuers to take any windows of opportunity to issue in the market, we believe. We also think that the potential impact from the adoption of Standard 62 of the Accounting and Auditing Organization for the Islamic Financial Institutions (AAOIFI) will come in 2026 at the earliest, as we understand the organization is continuing to receive feedback from the market. We are uncertain whether the feedback will lead to any fundamental changes to the original proposals, which we still regard as potentially highly disruptive for the industry.

Evolving Sharia requirements have already led to a weakening of legal documents in some of the structures we have observed, specifically for sukuk in which equity holdings are used as underlying assets. In our view, some of these sukuk may contain additional risks compared with traditional sukuk and conventional financial obligations, which could lead to potential uncertainty about their resolution. At some stage, the industry will have to rethink the best way to reconcile Sharia requirements with the market appetite for fixed-income instruments. Collaboration between the industry stakeholders could help to achieve this objective.

Monetary Easing And Core Countries' Financing Needs Will Likely Underpin A Strong 2025

Global sukuk issuance stabilized in 2024 (see chart 1), reaching $193.4 billion at year-end compared with $197.8 billion a year earlier. This performance was underpinned by a significant increase in foreign currency-denominated issuance and a drop in local-currency issuance. It was further aided by strong financing needs in core Islamic finance countries, the need to attract foreign capital, and improving global liquidity conditions, with major central banks starting to ease their monetary policy.

In 2025, we expect the total volume of issuance to approach 2023 levels of about $190 billion to $200 billion, with foreign currency-denominated issuance contributing $70 billion to $80 billion as monetary easing continues and economic conditions in core Islamic finance countries remain supportive. Geopolitical risk has not yet dragged on issuance but could pose some downside risk, though our base case does not expect significant disruption.

Chart 1

The volume of local currency-denominated sukuk issuance declined in 2024.

Local currency-denominated sukuk issuance fell by 14.6% year on year, primarily due to lower issuance in Malaysia, Pakistan, Turkiye, and Indonesia (see chart 2). The largest drop in local-currency issuance was in Malaysia, where government issuance decreased because of a smaller fiscal deficit due to the reduction of subsidies. Similarly, Malaysia's central bank's issuance fell as a result of tighter liquidity conditions for the Islamic banks as their financing growth continued to outpace deposit growth. Pakistan also saw lower local-currency issuance, as the government's fiscal position remains under pressure and monetary conditions remain tight, as did Turkiye, where tight monetary conditions resulted in lower local currency-denominated issuance. However, local-currency issuance in Saudi Arabia resumed its growing trend as the government tapped the market with jumbo issuance and started issuing retail sukuk.

Chart 2

Foreign currency-denominated sukuk issuance increased significantly in 2024.

Significant financing needs in core Islamic finance countries and improving liquidity conditions, with major central banks starting monetary easing, led to a surge in issuance on the international sukuk market in 2024. Many issuers also wanted to avoid any potential disruption that could come from local or geopolitical developments. Overall, total issuance in foreign currency rose to $72.7 billion in 2024 from $56.5 billion in 2023 (see chart 3).

The increase was mainly attributable to the GCC, Malaysia and Indonesia. Among GCC countries, Saudi Arabia and Kuwait led the way, with banks, corporations and the government of Saudi Arabia stepping up their foreign-currency issuance, while banks and corporations in Qatar and Oman were also more active in this area. The United Arab Emirates (UAE) ended the year with marginally lower foreign-currency sukuk issuance than last year. In Malaysia, performance was mainly underpinned by increased issuance by the International Islamic Liquidity Management Corporation (IILM) and a couple of issuances by the central bank and the sovereign wealth fund. Indonesia's higher sukuk volumes were due to the country's increased sovereign issuance.

In 2025, not only do we expect monetary easing to continue but we also think financing needs in core Islamic finance countries will remain high and lead issuers to take any opportunity the market has to offer. We therefore forecast that the volume of foreign currency-denominated sukuk issuance will reach $70 billion to $80 billion in 2025. It is worth noting that we did not see significant activity by non-traditional issuers in this area in 2024 and we expect such activity to remain sporadic in 2025.

Chart 3

Market Disruption Could Be On The Horizon

In late 2023, the AAOIFI published its exposure draft of Sharia Standard 62 on sukuk and gave the industry until July 31, 2024 to provide feedback. The organization is planning to hold other market consultations on this standard in the first half of 2025. In our view, if the standard is adopted as presented, it could change the nature of sukuk as an instrument, expose investors to higher risks, and increase market fragmentation. However, we think that the potential disruption from this standard will come in 2026 at the earliest. We are uncertain whether market feedback to the AAOIFI will lead to any fundamental changes to the original proposals.

If adopted as proposed, Sharia Standard 62 will result in the sukuk market shifting from structures in which the contractual obligations of sukuk sponsors underpin repayment to structures in which the underlying assets have a more prominent role. In our view, this could affect the market in several ways:

• Sukuk may become more expensive than conventional issuances. This is because of costs related to asset registration applied to certain asset classes, such as real estate, in certain core Islamic finance countries, such as the United Arab Emirates, as the draft new standard requires a true sale of assets. This could make some transactions uncompetitive compared with conventional instruments.
• Investors may be exposed to asset-related risks. Transferring an asset comes with risks; the risk of confiscation or asset nationalization could become more relevant, as issuers may no longer be able to bear such risk. Some structures could also expose investors to the market value of the assets, and issuers may use this to avoid their remaining payment obligations if the value of the underlying assets drops materially.
• Potential legal issues: In some countries, sukuk may become difficult to structure if foreign investors cannot own the assets. In addition, the proposed Standard 62 stipulates that Sharia should be the governing law of sukuk, while the market norm is to use English law. If English law continues to be used, the standard specifies that its application should not contradict the principles of Sharia as determined by the AAOIFI Sharia standards.

This indicates to us that if the standard is adopted as is, the market for AAOIFI adopters could be substantially disrupted until sukuk structurers find ways to restore the fixed-income characteristics of the instrument and its attractiveness for fixed-income investors. If structurers cannot find a way to do this, the sukuk market could experience fundamental changes, and we are uncertain about investors' appetite for adopting these changes. Some market commentators believe the market will remain resilient, arguing that it survived the adoption of Sharia Standard 59 (governing the sale of debt in 2021) and even the comments made by scholars on the compliance of sukuk with Sharia in the past.

We don't share this opinion. In our view, if Standard 62 is adopted as proposed, it could introduce significant changes to the credit characteristics of sukuk. This could also lead to the complexity of the instrument increasing further. Ultimately, market fragmentation between AAOIFI adopters and non-adopters may become more prominent. This could encourage some adopters to transition away from the standards if their ability to tap capital markets is significantly restricted. Assuming the standard is approved later this year, the disruption would likely begin in 2026. We note that a change to the standards is unlikely to affect existing sukuk, because, as we understand it, any changes to the contractual obligations of these instruments are subject to their investors' consent.

Some Structures Come With Additional Risks

We note that, in some structures, sponsors have used shares as underlying assets. In Asia, this was typically combined with a Murabaha transaction that was used to pay principal and the periodic distribution amounts owed to investors, as we saw in the Khazanah Global Sukuk Bhd. $5 billion program. In the GCC, this structure is unlikely to be considered as acceptable due to local Sharia requirements.

Therefore, sponsors have combined this structure with an obligation to subscribe to a hedging mechanism to ensure the price of the shares is always at least equal to the principal and the last periodic distribution amount owed to investors (in the context of normal or early dissolution of the sukuk). Generally, the terms and conditions of the sukuk require this hedging mechanism to be renewed annually. If the sponsor is unable to implement this hedging mechanism within a specific time frame or is unable to renew it on an annual basis, the legal documents typically require the principal to be returned to the investors without any periodic distribution amount (in case of inability to implement the initial hedging mechanism at the transaction's inception) and the sukuk dissolved.

In order to ensure that investors are exposed to the creditworthiness of the sponsor and not the value of shares, we understand that the sponsors have typically undertaken to make up any shortfall in the amount owed to investors (principal and periodic distributions) and the amount derived from the hedging mechanism. While this shortfall obligation exposes investors to the credit risk of the sponsor, the additional costs incurred by the sponsor to put in place the hedging mechanism may render sukuk more expensive than conventional bonds.

In light of this, we believe there is a heightened risk that an issuer might decide to ignore its contractual obligations to put in place and annually renew the hedging mechanism and to dissolve the transaction. However, the risk remains that the Sharia scholars (internal or external to the transaction) may question the Sharia compliance of this strategy, potentially leading to uncertainty over how the transaction could unwind and thereby increase uncertainty for investors. Therefore, we consider that these structures contain additional risk compared with traditional sukuk and conventional financial obligations.

Sustainable Sukuk Remain On The Backburner

The total volume of sustainable sukuk issuance amounted to $11.9 billion in 2024, compared with $11.4 billion in 2023, and accounted for about 25%-30% of sustainable issuance in the Middle East in 2024. We expect the issuance volume of sustainable sukuk to hover at approximately $10 billion to $12 billion in 2025, in the absence of any major acceleration in the implementation of net zero policies by core Islamic finance countries or regulatory action. We expect demand for sustainable sukuk will continue to grow, further supported by the introduction of the International Capital Market Association's Islamic finance guidelines in April 2024 and other regulatory initiatives.

Saudi Arabian issuers contributed the highest share of total sustainable sukuk issuance, at 38%, in 2024, underpinned primarily by Saudi bank issuance. Indonesia was the second-largest market thanks to sovereign issuance. While the volume of sustainable sukuk issuance in the UAE fell by 60% compared with the 2023 figure, which was boosted by COP28-related activity, the country still contributed 15% of the overall issuance volume. We expect to see an acceleration of issuance if and when there is an acceleration in the climate transition of GCC issuers and renewable energy targets, as well as regulators offering incentives to take the sustainable issuance route.

Chart 4

Most of this category of issuance in 2024 was in the form of sustainability sukuk, which focus on raising funds for projects with both environmental and social benefits. This is because the financial institutions were the leading sustainable issuers in 2024, whereas green instruments made up the majority of issuance in 2023 and social sukuk volume remained marginal.

A Busy Year Ahead

With a forecast of $190 billion to $200 billion in issuance, our expectation that foreign currency-denominated issuance will remain elevated in 2025, and the AAOIFI's continued consultation on its draft of Standard 62, 2025 is looking like another busy year for the sukuk market.

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