Key Takeaways

  • Total sukuk issuance dropped to $155.8 billion in 2022 compared with $170.4 billion in 2021, mainly due to a decline in foreign-currency-denominated instruments.
  • We believe lower and more expensive global liquidity, increasing regulatory complexity, and reduced financing needs in some core Islamic finance countries will hold back the market this year.
  • Consequently, we forecast a further decline in total issuance to about $150 billion in 2023, despite governments' continued local currency issuances to support their capital markets

S&P Global Ratings believes that sukuk issuance volumes will continue to decline in 2023, albeit at a slower pace than 2022. We expect lower and more expensive global liquidity, increased complexity, and reduced financing needs for issuers in some core Islamic finance countries to deter the market.

Notably, future standards development and certain Sharia scholars' preference for a higher proportion of profit-and-loss sharing in sukuk could pose additional legal challenges, in our view.

We continue to believe that if sukuk become an equity-like instrument, investor and issuer appetite will likely diminish significantly, in particular amid already expensive liquidity.

However, we see supportive factors in other areas.

Corporates are likely to contribute to issuance volumes, particularly in countries with government transformation visions or plans, such as Saudi Arabia, where well capitalized banking systems will not have the capacity to finance all the projects.

We also see continued momentum via the energy transition and increased awareness of environmental, social, and governance considerations among issuers in key Islamic finance countries. However, the sukuk market seems to be lagging the conventional one when it comes to automation and issuance of digital instruments, which could accelerate growth and make the process more appealing.

Issuance Numbers Won't Recover in 2023

In 2022, total sukuk issuance reached $155.8 billion versus $170.4 billion a year earlier (see chart 1). Declines occurred in most core Islamic finance countries, with only a few exceptions such as Malaysia (higher growth) and Turkey (pursuing all financing sources available) seeing marginally higher numbers (see chart 2). More importantly, issuance in foreign currency plummeted (see chart 3).

We expect this trend to continue in 2023 and forecast sukuk issuance will reduce again to $150 billion, with further risks building. Three factors explain our view:

The world is getting used to more expensive global liquidity. High inflation prompted major central banks to accelerate interest rate increases. This has reduced global liquidity and made it more expensive. Investors' risk aversion has also increased, with major segments of capital markets (for example speculative-grade issuers) experiencing significantly lower activity in 2022 compared with 2021. The sukuk market, as a component of the global capital market, is not immune to these trends. We may see some upside in activity if inflation trends down sustainably and central banks slow the pace of their interest rate increases.

Issuers have reduced financing needs. High oil prices have boosted the balance sheets of several issuers in core Islamic finance countries. Moreover, in some, particularly Qatar and the United Arab Emirates (UAE), an investment cycle has just ended. In others, where government transformation visions are being implemented--such as Saudi Arabia--we expect some corporates to hit the sukuk market because the banking system won't be able to absorb all the investments. We also expect the Saudi government to continue issuing sukuk in local currency to develop the local capital market, although recent pressure on banks' liquidity resulted in lower activity than 2021.

Regulatory uncertainty is still high. Sukuk are more complex and time-consuming than conventional bonds. Therefore, new issuers are mainly taking the Islamic route because they expect to increase their investor base compared with purely conventional transactions. Regulatory uncertainty remains high and resides in the fragile equilibrium between making sukuk a fixed-income instrument and Sharia scholars' push for more profit-and-loss sharing. In our view, if sukuk lose their fixed-income characteristics while adding significant risks compared to bonds they will become a less attractive option, reducing the market's prospects.

Sustainability Sukuk Are Becoming More Prevalent

Despite the natural alignment of Islamic finance and sustainable finance, sustainability sukuk issuance remains limited, albeit expanding (see chart 4). From green to social, we expect to see higher volumes as issuers meet investor demands and core Islamic finance countries seek to reduce their carbon footprints.

Many of these countries are developing and implementing strategies to transition to greener economies, which could imply future growth potential for green sukuk issuance. We expect to see much more activity in this space as issuers tap global investor interest. Furthermore, but less visible, Islamic finance's social aspect holds appeal as the economic impacts of various political/geopolitical shocks continue to hit populations in some countries.

Digitalization Still Has A Long Way To Go

In the digital space, we are seeing more conventional than Islamic activity. One could argue that this is a necessary step because the conventional market has traditionally led the Islamic one.

However, even when companies have tried to develop the necessary infrastructure, issuer and investor take up appears limited. In any case, we believe that digital sukuk could provide a quicker and cheaper way for issuers to tap Islamic finance markets due to the limited number of intermediaries involved. The benefits may also include enhanced transaction security, traceability, and integrity, which could further strengthen compliance with Sharia. However, this assumes the availability of reliable technology, readiness of legal frameworks to accommodate these instruments, and presence of standard legal documents that can be used as a template.

Reducing the time, cost, and minimum issuance volume requirement in this way could open the sukuk market to more issuers. However, investors in digital sukuk will continue to bear traditional risks, including credit market and liquidity risk. They will also be exposed to higher operational risks from technology stability and cyber risks and need a means to transact digitally, for example, a stable Islamic coin or a central bank digital currency. Despite this, we expect to see more digital transactions in 2023

Related Research

  • Saudi Capital Markets Will Be Key To Powering Corporate Investments, Nov. 29, 2022
  • Islamic Finance In The U.K. Is Still Learning To Crawl, Sept. 01, 2022
  • Global Sukuk Issuance 2022: How Low Can It Go?, July 4, 2022


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Mohamed Damak, Dubai
Sapna Jagtiani, Dubai
Puneet Tuli, Dubai