Global sukuk issuance is expected to reach $160 billion to $170 billion in 2024, from $168.4 billion in 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.
Over the first half of 2024, the market has demonstrated a good performance, with total issuance reaching $91.9 billion over the first six months of this year, up slightly from last year’s $91.3 billion (see chart 1). But a notable difference is the 23.8 percent increase in foreign currency issuances, which reached $32.7 billion by June 30, 2024, up from $26.4 billion a year earlier. The main contributors to this increase were issuers from Saudi Arabia, the United Arab Emirate, Oman, Malaysia and Kuwait.
Local currency-denominated sukuk issuance drops
Local currency-denominated sukuk issuance has dropped by 8.8 percent year-on-year, primarily due to lower issuances in Türkiye, Pakistan, UAE and Malaysia (see chart 2). In the UAE, the decline can be explained by lower local-currency denominated issuance by the federal government and other authorities. We have observed that local currency issuance in Saudi Arabia has resumed its growing trend. The government has tapped the market with jumbo issuances and has also started to issue retail sukuk.
Improved visibility on the medium-term trajectory of interest rates has benefited foreign currency-denominated sukuk issuance — we expect the U.S. Federal Reserve to start cutting rates in December 2024. Simultaneously, high financing needs in core Islamic finance countries explain the increased issuance, which is notably funding an ongoing economic transformation program in Saudi Arabia and strong growth in the UAE’s non-oil economy.
We have seen a high issuance volume in Saudi Arabia, where the government and banks continue to tap into the market (see chart 2). Now, we expect the Saudi banking system to shift to a moderate net external debt position in the next few months. We have also observed UAE real estate developers and banks accessing the sukuk market. The real estate sector has sustained its strong performance, prompting developers to rush into launching new projects while real estate prices remain high. We have noted that other countries are also contributing to higher foreign currency issuances. In fact, three transactions settling in July total an additional $3.6 billion. We did not see issuers outside core Islamic finance countries coming into the market in the first half of 2024.
GCC banks lead sustainable sukuk issuances
The total volume of sustainable sukuk issuance reached $5.2 billion during the first half of 2024, down from $5.7 billion during the same period last year, though a large transaction from a frequent sustainable sukuk issuer was settled in early July. We expect the issuance volume of sustainable sukuk to hover at approximately $10 billion to $12 billion in the absence of any major acceleration in the implementation of net-zero policies by core Islamic finance countries or regulatory action. It is also worth noting that 80 percent of sustainability issuance in the first six months of 2024 came from Gulf Cooperation Council banks as they begin their climate transition journey.
Read: Global sukuk issuances rise to $91.9 billion in H1 2024, says S&P
New standard on the horizon
We expect the adoption of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Standard 62 — in its current proposal — would have a significant effect on the sukuk market in the medium term. This will not affect 2024 issuance but will likely be a consideration from next year. A key requirement of the standard is that the ownership and risks related to the underlying assets are to be transferred to sukuk holders. As such, the market will shift from structures where the contractual obligations of sukuk sponsors underpin the repayment to structures where the underlying assets have a more prominent role.
However, it is difficult to anticipate the appetite for such instruments from both investors and issuers, as well as the legality and costs of moving assets in some core markets. This could either lead to further market fragmentation, or worse, issuance could be put on hold until sukuk structurers figure out a middle ground. A more conservative interpretation of Sharia is already affecting some market structures. But, even if Standard 62 is adopted, it is unlikely to disrupt existing sukuk, since we understand that any changes in contractual obligations are subject to investors’ consent.
Dr. Mohamed Damak is managing director and global head of Islamic finance, S&P Global Ratings.
