Sukuk Market Struggles Across Borders as Issuance Disappoints

In 2021, the global Sukuk market demonstrated robust growth, with issuances totaling US$202.1 billion, a 9% increase compared to the previous year. This growth contributed to a cumulative US$713 billion in outstanding Sukuk by the end of 2021, underscoring the market’s significance within Islamic finance. However, the first half of 2022 saw a notable decline in issuance, dropping to US$74.5 billion from US$93.3 billion in the same period of 2021, according to an S&P Global Ratings report. This 20% year-on-year decrease was driven by several factors, including elevated energy prices, which reduced the financing needs of issuers in oil-exporting countries, a key segment of the Sukuk market. Additionally, global economic uncertainties, such as rising interest rates and inflationary pressures, may have further dampened issuance activity.

Structural and Legal Challenges in Globalizing Sukuk

Despite its growth, the Sukuk industry remains fragmented, characterized as a collection of localized markets rather than a cohesive, globalized financial ecosystem. After five decades of development, Islamic finance continues to be concentrated in oil-exporting nations, particularly in the Gulf Cooperation Council (GCC) and Southeast Asia. According to S&P Global Ratings, the industry struggles to expand beyond its traditional strongholds due to several structural and legal challenges:

• Complexity of Sukuk Structuring: Sukuk instruments, which must comply with Sharia principles prohibiting interest (riba) and speculative risk (gharar), require intricate structuring to align with both Islamic jurisprudence and modern financial standards. This complexity increases costs and timelines, deterring issuers in noncore markets.

• Divergent Sharia Interpretations: Variations in Sharia scholars’ preferences across jurisdictions create legal and regulatory inconsistencies, posing challenges for cross-border Sukuk issuances. These differences often result in prolonged approval processes and limited standardization, hindering global market integration.

• Limited Appeal in Non-Muslim Jurisdictions: In markets like the United Kingdom, Islamic finance remains a niche segment despite supportive measures, such as the issuance of two sovereign Sukuk and the listing of multiple Sukuk on the London Stock Exchange (LSE). The lack of familiarity with Islamic finance principles and the perceived complexity of Sukuk products continue to limit their adoption in non-Muslim-majority regions.

These challenges collectively impede the development of a truly global Sukuk market, restricting its growth potential and competitiveness compared to conventional financial instruments.

Regional Developments: Saudi Arabia and Malaysia

The Islamic Corporation for the Development of the Private Sector (ICD) highlighted significant progress in domestic Sukuk markets, particularly in Saudi Arabia and Malaysia, in its 2022 Islamic Finance Development Report. Saudi Arabia has emerged as a key player, narrowing the corporate Sukuk issuance gap with Malaysia, the traditional Ascending to 31% growth, Saudi Arabia’s Sukuk issuance increased from US$38 billion in 2020 to US$49.9 billion in 2021. A significant driver of this growth was the issuance of a landmark corporate Sukuk by Aramco, the largest of its kind in 2021, which bolstered Saudi Arabia’s position as a leading Sukuk market. This growth reflects the Kingdom’s strategic efforts to diversify its economy and develop its Islamic finance ecosystem, supported by initiatives such as Saudi Vision 2030, which emphasizes financial market development.

Malaysia, meanwhile, continues to lead the global Sukuk market, leveraging its well-established Islamic finance infrastructure and regulatory framework. The country’s dominance is attributed to its standardized Sukuk structures, supportive government policies, and a robust domestic investor base. Together, Malaysia and Saudi Arabia account for a significant share of global Sukuk issuance, reinforcing their roles as hubs for Islamic finance.

Future Outlook and Opportunities

The Sukuk market faces both challenges and opportunities as it seeks to expand its global footprint. To enhance competitiveness and attract noncore issuers, the industry must address structural barriers, such as standardizing Sukuk frameworks and streamlining issuance processes. Collaborative efforts among regulators, financial institutions, and Sharia scholars could foster greater harmonization of standards, enabling cross-border issuances and broader market access. Additionally, increased education and awareness campaigns in non-Muslim jurisdictions could stimulate demand for Sukuk as an ethical and asset-backed investment alternative.

Emerging trends, such as the rise of green and sustainable Sukuk, present opportunities to align Islamic finance with global environmental, social, and governance (ESG) priorities. For instance, Saudi Arabia and Malaysia have begun issuing green Sukuk to fund environmentally friendly projects, tapping into growing investor interest in sustainable finance. By leveraging such innovations and addressing structural challenges, the Sukuk market could unlock significant growth potential in the coming years.