Sukuk, commonly known as Islamic bonds, represent a unique financial instrument in the context of Islamic finance, distinguished by their adherence to Shariah compliance. Unlike conventional bonds that generate returns through fixed interest payments, sukuk generates returns through the ownership of underlying assets, thereby avoiding the prohibitions of Riba (interest) and excess Gharar (uncertainty). This Shariah-compliant structure renders sukuk an appealing option for both Muslim and non-Muslim investors seeking ethical and socially responsible investment opportunities.
The global sukuk market has witnessed significant growth over the last two decades, diversifying its presence across regions such as the Middle East, Southeast Asia, Europe, and Africa. This trend underscores the increasing acceptance of sukuk as a practical instrument for capital-raising by governments and corporations alike, facilitating developmental projects, infrastructure financing, and sovereign funding.
The process of issuing sukuk involves establishing a special purpose vehicle (SPV) that holds the underlying assets, with investors acquiring sukuk certificates that reflect their partial ownership of these assets and their entitlement to share in the generated profits. Sukuk can be structured in various forms, including Ijarah (leasing), Mudarabah (profit-sharing), Musharakah (joint venture), and Murabaha (cost-plus financing). Each structure provides adaptability to meet specific business and economic requirements while remaining in full compliance with Shariah principles, thus offering flexibility to issuers and investors alike.
Global Sukuk Market Size and Trends: The sukuk market has witnessed remarkable growth in recent years, from $904.5 billion in 2023 to a projected $1,084.8 billion till the end of 2024, reflecting a robust compound annual growth rate (CAGR) of 19.1%. This impressive rise can be attributed to the increasing prominence of Islamic finance, the diversification of funding sources, infrastructure development initiatives, and government-backed programs. Additionally, the growing volume of global sukuk issuances and a surge in cross-border transactions have further accelerated market expansion.
The outlook for the sukuk market indicates a continued upward trend, with projections suggesting it will reach $2,160.55 billion by the year 2028, supported by a compound annual growth rate (CAGR) of 18.8%. Various factors are anticipated to contribute to this sustained growth, including the ongoing recovery of the global economy, the implementation of the Belt and Road Initiative, the emergence of sustainable and green sukuk, and the increasing influence of Islamic fintech. Furthermore, the period under review is expected to witness innovations in sukuk structures, the digitalization of issuance processes, the enhancement of regulatory frameworks, a rise in cross-border collaborations, and an expanded role for the private sector. Collectively, these developments are poised to drive further growth and diversification within the sukuk landscape.
Fitch Ratings expects global sukuk growth to continue in 2024, driven by funding needs, refinancing, and lower interest rates. ESG sukuk emerged as a key theme, with USD 40 billion outstanding. GCC’s debt capital markets are approaching the USD 1 trillion mark, with 37% in the sukuk format. Saudi Arabia is expected to be a leading issuer, while Bahrain remains reliant on GCC funding and debt markets due to large deficits. The ratings of sukuk in Qatar and Turkiye improved following sovereign upgrades, with 8% of sukuk issuers rated with a Positive Outlook, up from 3.6% in 4Q23. Fitch rates USD 185 billion of sukuk globally, over 70% of which are USD-denominated and 80% investment-grade. Despite emerging challenges, the sukuk market is poised for continued expansion, underpinned by growing demand, new ESG initiatives, and solid performance in core markets.
Further, S&P projects global sukuk issuance to reach around $170 billion in 2024, slightly up from $168.4 billion in 2023 but below the $179.4 billion recorded in 2022. This growth has elevated the total global outstanding sukuk to an estimated $875 billion, spanning 27 currencies and surpassing the size of both the European high-yield and Swiss bond markets.
Key drivers of sukuk issuance encompass Saudi Arabia’s Vision 2030, which actively supports ongoing economic transformation, as well as the emergence of sustainable sukuk. Notably, issuers from the United Arab Emirates accounted for 40% of the total sustainable Sukuk issuance in 2023. The green sukuk segment has predominated, reflecting the Gulf Cooperation Council (GCC) countries’ commitment to energy and climate transition. In contrast, local currency-denominated sukuk issuance experienced a decline of 16.8% in 2023, driven primarily by liquidity concerns in Saudi Arabia and a rapid fiscal consolidation in Indonesia.
Furthermore, the prospective adoption of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Sharia Standard 62 could significantly reshape sukuk structures. This standard may necessitate the transfer of ownership and associated risks related to underlying assets to sukuk holders, thereby linking repayments to asset performance and market values. The advent of digitalization and tokenization offers promising opportunities to enhance the sukuk market by reducing costs and improving security. However, the successful implementation of these innovations depends on the development of reliable technology, comprehensive legal frameworks, and standardized interpretations of Sharia.
While favorable liquidity conditions, the growth of sustainable sukuk, and advancements in digital technology may alleviate certain challenges, geopolitical uncertainties and potential regulatory shifts present risks to sukuk issuance volumes in 2024.
Key Market Trends: The sukuk market is characterized by several key trends. Firstly, sovereign sukuk issuances dominate this market, constituting nearly 70% of the total market volume. Leading countries, such as Saudi Arabia, Indonesia, and Malaysia, are at the forefront, utilizing sukuk to diversify their funding sources, diminish reliance on conventional debt markets, and address budget deficits. Secondly, there is rapid growth in corporate sukuk, particularly within the energy, infrastructure, real estate, and financial services sectors. The COVID-19 pandemic has intensified the necessity for corporations to seek alternative financing options, resulting in a notable increase in issuances from Gulf Cooperation Council (GCC) countries and Southeast Asia. Lastly, the market has observed a significant emergence of green and sustainability-linked sukuk, with issuances amounting to approximately USD 10 billion in 2023. This trend reflects an increasing alignment with Environmental, Social, and Governance (ESG) standards.
The following is the Regional Overview and Country Analysis:
1. Middle East and North Africa (MENA): The MENA region, and specifically the Gulf Cooperation Council (GCC) countries, continues to serve as the epicenter of the global sukuk market. Saudi Arabia and the United Arab Emirates are the foremost issuers, with Saudi Arabia’s sovereign sukuk issuances exceeding USD 50 billion in 2023. The strategic emphasis of the MENA region on diversification and development projects, guided by national initiatives such as Saudi Vision 2030 and UAE Vision 2021, has significantly contributed to the growth of sukuk. As the largest issuer within the MENA region, Saudi Arabia has taken a leading role in sukuk issuance to finance extensive infrastructure projects and address budgetary gaps. The nation’s sovereign sukuk program, along with issuances from quasi-sovereign entities such as the Saudi Electricity Company, positions it as a key participant in the global sukuk market. Meanwhile, the UAE, particularly through the cities of Dubai and Abu Dhabi, has established itself as a central hub for sukuk listings and trading. With significant corporations including DP World and various government-related entities actively participating in sukuk issuance, the UAE is strategically situated as a vital market for investors.
2. Southeast Asia: Malaysia has established itself as the foremost global sukuk market, accounting for nearly 62% of global issuances. The country’s robust Islamic finance infrastructure, favorable regulatory environment, and active participation from sovereign and corporate issuers have solidified its leading position. With a mature Islamic finance ecosystem, Malaysia is the largest issuer of sukuk worldwide. The nation has pioneered numerous sukuk structures, including the first green sukuk and the retail sukuk market, which enables individual investors to participate.
Indonesia, on the other hand, has made significant advancements in utilizing sukuk for infrastructure development. Its sovereign sukuk program, which includes the issuance of green sukuk, has attracted international attention and support, positioning Indonesia as a key player in sustainable financing.
3. Africa: Africa’s progress in infrastructure financing has been characterized by a gradual yet steady development, reflecting its significant potential in this area. In the fiscal year 2023/24, Nigeria, South Africa, and Egypt successfully issued sukuk totaling $3.045 billion, signifying a strategic evolution in their public debt management approaches. Sukuk serves as an alternative to traditional bonds, adhering to Shariah principles by providing asset-backed returns rather than interest payments. However, sukuk issuance in Africa remains relatively limited, constituting only 2% of global totals. Notably, the aforementioned three countries represent 70% of Africa’s sukuk issuances since 2014, alongside other issuers such as Senegal, Togo, Morocco, Mali, and Côte d’Ivoire.
Despite robust investor interest, several challenges persist, including a lack of market depth, infrequent issuances, and insufficient awareness regarding sukuk. Nonetheless, international financial institutions such as the World Bank, the Islamic Development Bank, and the African Development Bank are actively promoting sukuk as a viable and sustainable financing solution for Africa’s infrastructure requirements, particularly in the context of the increasing emphasis on climate action and energy transition.
4. Europe and North America: Europe has shown growing interest in sukuk, primarily driven by the UK and Luxembourg. These countries have facilitated sukuk issuances through enabling regulatory frameworks and strategic positioning as gateways for Islamic finance into Europe.The UK was the first Western country to issue a sovereign sukuk in 2014, with a second issuance planned for 2024. The City of London’s financial ecosystem supports numerous listings and transactions in sukuk, catering to institutional investors.
While the sukuk market in North America remains nascent, it has seen periodic activity, primarily driven by corporate and institutional investors seeking diversification. Institutions in the U.S. and Canada have explored sukuk as an alternative financing tool, particularly for infrastructure development. However, the market here is less developed than in Europe, partly due to regulatory and awareness challenges.
The next wave of growth for the global sukuk market is anticipated to emerge from Central Asian countries, Turkey, Europe, and African regions, particularly East and West Africa. Central Asia, with nations like Kazakhstan and Uzbekistan, is showing increasing interest in Islamic finance to attract investments and diversify their financial markets. Turkey, with its strategic position bridging Europe and Asia, has already demonstrated significant potential through sovereign and corporate sukuk issuances and is expected to expand its participation further. Similarly, European countries refine its regulatory framework to attract sukuk investments. Meanwhile, East and West African nations are poised to leverage sukuk as a tool to address their infrastructure and development financing needs. With growing awareness and support from international financial institutions, these regions are likely to become pivotal markets for sukuk, reinforcing its role as a sustainable and Shariah-compliant financing mechanism globally.
Future Outlook and Growth Projections: The global sukuk market is anticipated to experience continued expansion and maturation, with investor interest increasingly extending beyond the traditional Gulf Cooperation Council (GCC) and Asian regions. Benchmark indices from leading providers such as FT Russell, S&P, Dow Jones, and JP Morgan are contributing to enhanced market visibility and liquidity. Key factors that will drive future growth encompass the establishment of clear regulatory standards, clarification of default scenarios, harmonization of legal documentation, and the development of standardized Shariah interpretations. Furthermore, the growing utilization of sukuk for infrastructure financing in both developed and emerging markets is expected to further stimulate demand. Given the alignment between Islamic finance and sustainability, the sukuk market is well-positioned to address broader economic and environmental, social, and governance (ESG) challenges, thereby fostering a positive outlook for its growth.
The sukuk market is composed of steady development in the coming years, influenced by following several significant trends shaping its evolution:
1. Increased Sovereign Issuances: In response to the need for alternative financing mechanisms aimed at mitigating fiscal deficits and fostering economic recovery, sovereign sukuk issuances are anticipated to remain robust, particularly within the Gulf Cooperation Council (GCC) countries and Southeast Asia.
2. Growing Demand for ESG-compliant Sukuk: The increasing alignment of sukuk with Environmental, Social, and Governance (ESG) principles is expected to stimulate further innovation and expansion in green and sustainability-linked sukuk, appealing to investors who prioritize ethical and responsible investment opportunities.
3. Technological Advancements: The emergence of digital sukuk, facilitated by blockchain technology and financial technology (fintech) innovations, is poised to transform the sukuk market, enhancing transparency, efficiency, and accessibility.
4. Geographical Expansion: Emerging markets, including Central Asia, Sub-Saharan Africa, and Latin America, are likely to consider sukuk as a viable instrument for financing infrastructure development and related projects.
5. Standardization and Harmonization: Ongoing initiatives to standardize sukuk frameworks globally, spearheaded by organizations such as the Islamic Financial Services Board (IFSB) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), will aim to minimize legal and structural complexities, thereby promoting greater cross-border sukuk issuances.
The AlHuda Centre of Islamic Banking and Economics (CIBE) Sukuk Department has been a trusted leader in the sukuk industry since 2006, delivering comprehensive Shariah-compliant solutions and expert sukuk structuring services. With a proven track record in facilitating innovative financial instruments, the department supports governments, corporations, and financial institutions in developing sukuk tailored to diverse economic needs. Combining deep Islamic finance expertise with global market insights, AlHuda CIBE ensures efficient, Shariah-compliant structures that drive economic growth while adhering to the highest standards of ethical finance.
Conclusion: The sukuk market has emerged as a significant component of global Islamic finance, offering a diverse range of opportunities for both issuers and investors. With a strong growth trajectory and an expanding geographical reach, coupled with a dedication to sustainability principles, sukuk are positioned to play an increasingly vital role in global financial markets. By providing a Shariah-compliant, ethical, and innovative financial instrument, sukuk will continue to promote financial inclusion, support infrastructure development, and advance sustainable economic growth across various regions.
