Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) recently held public hearings on its proposed Sharia Standard 62, a development that S&P Global Ratings believes will significantly shape the future of the sukuk market.

While the AAOIFI is likely to grant issuers a transition period for implementation, the new standard could still lead to a decline in sukuk issuance, according to S&P Global Ratings.

The AAOIFI indicated during the hearings that it expects to approve Standard 62 in 2025, with issuers likely having between one and three years to comply.

“Depending on the final timeline that the AAOIFI gives the market, this development could give sukuk structurers more time to develop structures that strike a balance between complying with the new requirements and making the sukuk attractive to fixed-income investors, if this is still possible,” said S&P Global Ratings credit analyst Mohamed Damak. “However, the adoption of the standard could cause a decline in sukuk issuance.”

If implemented as proposed, Sharia Standard 62 will shift the sukuk market away from structures where sukuk sponsors’ contractual obligations underpin repayments, towards structures where underlying assets play a more prominent role, S&P Global Ratings noted.

“Notwithstanding the fact that issuers will have more time to adjust to the new requirements, investors will likely face new risks relating to asset performance and value,” Mr Damak added.

S&P Global Ratings believes that if the standard is adopted as proposed, some investors and issuers may seek alternatives to the sukuk market, as issuing sukuk could become more challenging from a risk/reward perspective.

This could also incentivise some adopters to move away from the standards if their access to capital markets is significantly restricted. 

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