The global sukuk market is set to experience another active year in 2025, with total issuance projected to range between $190 billion and $200 billion, following a performance of $193.4 billion in 2024. This outlook is supported by continued monetary easing by major central banks and high financing needs in key Islamic finance markets, particularly in the GCC, Malaysia and Indonesia. However, the sukuk market faces growing uncertainty due to the anticipated adoption of AAOIFI Standard 62, a regulatory development that could significantly alter sukuk structures and impact investor sentiment.
While foreign-currency sukuk issuance increased by 29% in 2024, reaching $72.7 billion, local-currency sukuk issuance saw a 14.6% decline, driven by fiscal tightening and monetary policy adjustments in key markets. This year is expected to maintain a strong level of issuance, but challenges remain, including potential regulatory disruptions, geopolitical uncertainties and shifts in credit risk perceptions.
The sukuk market now faces a critical juncture where global liquidity conditions remain supportive, yet evolving regulatory frameworks could fundamentally reshape market participation and structure. Investors and issuers must navigate these complexities while seeking to capitalise on growth opportunities.
Trends in sukuk issuance
The rising trend of foreign-currency sukuk issuance reflects issuers’ attempts to capitalise on improving global liquidity conditions and secure funding ahead of potential geopolitical or regulatory disruptions. The GCC, Malaysia and Indonesia were the primary contributors to this surge in foreign-currency issuance, with sovereigns and corporate entities leveraging favourable market conditions to access international capital.
By contrast, local currency sukuk issuance declined in 2024 due to tightening fiscal policies in several key markets. Malaysia saw a drop in government sukuk issuance as fiscal deficits narrowed following subsidy reductions. Liquidity constraints in Pakistan and Türkiye limited local issuance, while Indonesia’s sovereign sukuk volume also fell amid fiscal adjustments. Saudi Arabia bucked this trend, increasing local-currency sukuk issuance, particularly through large sovereign offerings and retail sukuk.
For 2025, foreign-currency sukuk issuance is expected to remain elevated, with estimates ranging between $70 billion and $80 billion. This sustained activity is driven by the expectation that central banks will continue their monetary easing cycles and that issuers in core Islamic finance markets will continue to tap the capital markets to finance economic diversification and infrastructure projects. However, risks remain, particularly if geopolitical developments or regulatory shifts disrupt market confidence.
The impact of AAOIFI Standard 62
The anticipated adoption of AAOIFI Standard 62 is emerging as one of the most significant regulatory challenges facing the sukuk market. If implemented as currently proposed, the standard would require sukuk structures to shift from asset-based financing, where repayment is primarily tied to the issuer’s creditworthiness, to asset-backed structures, where the underlying assets play a more prominent role in repayment. This shift could have profound implications for both issuers and investors.
Under the proposed standard, issuers would need to undertake true asset transfers, increasing the registration and legal costs, particularly for real estate-backed sukuk. Investors would also be exposed to greater asset-related risks, as sukuk repayment would depend on the performance of the underlying assets rather than the credit standing of the issuer. This could lead to higher market fragmentation, with some jurisdictions facing legal complexities regarding asset ownership by foreign investors.
The regulatory shift also introduces challenges related to contractual governance. While the market norm has been to structure sukuk under English law, Standard 62 requires that sukuk contracts be governed by Sharia principles as interpreted by AAOIFI. This raises concerns about potential inconsistencies between existing legal frameworks and new Sharia interpretations, adding complexity to contract enforcement and investor protection mechanisms.
Although the AAOIFI has extended the implementation timeline, granting issuers between one and three years to comply, uncertainty remains over how investors will respond to the new requirements. Some issuers already facing financial pressure may attempt to use the new standard as a basis for sukuk restructuring, though existing contractual safeguards are expected to limit such manoeuvres. Market consultations will continue through 2025, making full-scale implementation unlikely before 2026.
If Standard 62 is adopted in its current form, the sukuk market could undergo a significant transformation, potentially altering investor demand and pricing dynamics. The extent of the disruption will depend on whether sukuk structurers can reconcile Sharia compliance requirements with investor expectations for fixed-income instruments.
Sustainable sukuk
The issuance of sustainable sukuk continued its upward trajectory in 2024, reaching $11.9 billion, up from $11.4 billion in 2023. Sustainable sukuk accounted for 25-30% of total sustainable bond issuance in the Middle East, but the pace of growth remained moderate, as the absence of strong regulatory incentives and net-zero policy acceleration limited broader adoption.
Saudi Arabia remained the largest issuer of sustainable sukuk, contributing 38% of total issuance, driven primarily by bank issuance. Indonesia followed as the second-largest market, largely due to sovereign sukuk issuance. While the UAE’s sustainable sukuk issuance declined by 60% compared to 2023, reflecting a post-COP28 slowdown, it still accounted for 15% of the overall market.
For 2025, sustainable sukuk issuance is projected to range between $10 billion and $12 billion, unless governments introduce stronger policy incentives. The introduction of the International Capital Market Association’s Islamic Finance Guidelines in April 2024 may help improve market transparency, but broader adoption will likely require additional tax incentives, capital relief measures or regulatory mandates.
Investor interest in ESG-linked financial instruments remains strong, but concerns over greenwashing and pricing misalignments may limit demand for sustainability-linked sukuk. While there is potential for expansion, meaningful growth will likely depend on greater alignment between regulatory policies and corporate sustainability goals.
Key risks and market uncertainties in 2025
The sukuk market in 2025 will be shaped by several key factors, including global monetary policy shifts, regulatory uncertainty and evolving credit risks.
The continuation of monetary easing by major central banks will provide a favourable liquidity environment for issuers, particularly in foreign-currency sukuk markets. However, local-currency sukuk issuance may remain constrained in jurisdictions experiencing fiscal tightening or monetary policy constraints.
The regulatory uncertainty surrounding AAOIFI Standard 62 presents a significant challenge for issuers and investors. If implemented in its current form, it could alter sukuk structures, increase transaction costs, and fragment market participation. The potential for reduced investor demand for asset-backed sukuk introduces pricing and liquidity risks. At the same time, issuers must assess whether compliance with the standard aligns with market expectations for fixed-income instruments.
Sovereign and corporate sukuk issuance will also be influenced by credit risk perceptions. The GCC sovereign market remains dominant, but fiscal pressures could impact sovereign credit ratings and borrowing costs. In the corporate space, companies may reassess funding strategies in light of potential changes in sukuk structuring, risk pricing and investor appetite.
Sustainable sukuk issuance, while maintaining steady growth, faces limitations due to regulatory gaps and inconsistent ESG standards. Expansion in this segment will depend on government-led initiatives, greater transparency in ESG disclosures, and incentives for issuers to prioritise sustainability-linked financing.
The sukuk market is poised for a challenging yet active year in 2025. With total issuance projected at $190 billion to $200 billion, strong liquidity conditions and high financing needs will support continued issuance. However, the potential adoption of AAOIFI Standard 62 introduces significant structural uncertainties, raising concerns over investor appetite and market fragmentation.
Foreign-currency sukuk will likely maintain strong issuance levels, while local-currency sukuk may face constraints due to fiscal tightening. Sustainable sukuk, though maintaining steady issuance, will require policy incentives for substantial growth.
As regulatory frameworks evolve, sukuk issuers and investors must prepare for a market landscape increasingly defined by regulatory shifts, credit risks, and structural realignments. This year will be pivotal in determining how the sukuk market adapts to these emerging challenges.
