RIYADH: Global sukuk issuances reached $91.9 billion in the first half of 2024, marking a marginal year-on-year increase of 0.87 percent, driven by issuers from Saudi Arabia and the UAE. 

According to the latest report from S&P Global, foreign currency issuances reached $32.7 billion in the first six months of 2024, marking a 23.8 percent surge compared to the same period the previous year.  

The credit rating agency highlighted that improved visibility on the medium-term trajectory of interest rates has boosted foreign currency-denominated sukuk issuance. 

A sukuk is an Islamic financial certificate that represents ownership of an asset and complies with Shariah law, distinguishing it from conventional bonds. 

Saudi Arabia has strategically expanded its sukuk issuance to diversify financing sources and promote Islamic finance within its economy, supporting infrastructure and economic development while attracting global investors seeking Shariah-compliant opportunities. 

“High financing needs in core Islamic finance countries, stable rates, and improved clarity on the future path of rate cuts explain the continued increase in foreign currency-denominated issuances,” stated S&P Global. 

Its findings follow a recent report by Saudi Arabia’s Capital Market Authority, indicating significant growth in the Kingdom’s sukuk and debt capital market since 2019, exceeding SR30 billion, and achieving an annual growth rate of 7.9 percent. 

Moreover, Saudi Arabia’s National Debt Management Center reported completing the issuance of a riyal-denominated Islamic bond for June totaling SR4.4 billion. The Kingdom had issued sukuk amounting to SR3.23 billion in May, SR7.39 billion in April, and SR4.4 billion in March. 

Global forecast  

Meanwhile, S&P Global has maintained its global sukuk issuance forecast at around $160 billion to $170 billion, buoyed by strong market performance in the first half of 2024. 

The US-based firm emphasized that the Islamic bond market’s steady growth will be propelled by economic diversification initiatives in countries such as Saudi Arabia, as well as the robust expansion of the non-oil sectors in the UAE. 

The report also underscored contributions to the sukuk market’s growth from countries like Oman, Malaysia, and Kuwait. 

It added that geopolitical risks are not expected to adversely impact the issuances of these Shariah-compliant debt products globally. 

“Geopolitical risk has not yet dragged on issuance but could pose some downside risk, though, under our base-case scenario, we do not expect significant disruption,” said the agency.  

S&P noted that the adoption of the Accounting and Auditing Organization for Islamic Financial Institutions’ Sharia Standard 62 might lower issuance volumes in the medium term if it significantly changes the nature and risk profile of sukuk instruments. 

In late 2023, the AAOIFI released its exposure draft of Sharia Standard 62 on sukuk, delaying the industry feedback deadline twice, with the final extension set to July 31, 2024, from March 31, 2024. 

According to the credit rating agency, the proposed draft could potentially alter the nature of the sukuk market and lead to increased fragmentation.  

The guidelines cover Shariah requirements for issuances, asset backing, and ownership transfer. They also address investment structures, financing mechanisms, and trading and settlement procedures. 

“A key requirement of the standard is that the ownership and risks related to the underlying assets are to be transferred to sukuk holders. As such, the market will shift from structures where the contractual obligations of sukuk sponsors underpin the repayment to structures where the underlying assets have a more prominent role,” said S&P Global.  

The report further noted that the adoption of these proposed standards could make these Islamic bonds more expensive than conventional issuances.  

It added: “However, it is difficult to anticipate the appetite for such instruments from both investors and issuers, as well as the legality of moving assets off their balance sheets, given the current market structure. This could either lead to further market fragmentation or worse, issuance could be put on hold until sukuk structures figure out a middle ground.”  

The report, however, added that the adoption of the AAOIFI’s Standard 62 guidelines is unlikely to disrupt existing sukuk, since any changes in contractual obligations are subject to investors’ consent.  

Local issuances  

Despite the growth of foreign issuances, local currency-denominated issuances witnessed a decline of 8.8 percent in the first half of this year compared to the same period in 2023. 

S&P Global noted that this downturn was driven by the drop in local currency issuances in countries like Turkiye, the UAE, and Pakistan.  

“The largest drop of local currency issuances was in Turkiye, where monetary tightening combined with better fiscal policy coordination continues to help rebalance the economy,” said the report.  

It added: “In the UAE, the decline can be explained by lower local-currency denominated issuance by the Federal Government and other authorities. For Pakistan, the issue might be related to a lack of data on issuances in the first half of 2024.”  

On a positive note, the report underscored the growth of Saudi Arabia’s local currency issuance.  

“We have observed that local currency issuance in Saudi Arabia has resumed its growing trend. The government has tapped the market with jumbo issuances and has also started to issue retail sukuk,” added S&P Global.  

On the other hand, financing needs in core Islamic finance countries, stable rates, and improved clarity on the future path of rate cuts drove the continued increase in foreign currency-denominated issuances.  

“We have seen a high issuance volume in Saudi where the government and banks continue to tap into the market to finance various projects related to the economic transformation plan. We now expect the Saudi banking system to shift to a moderate net external debt position in the next few months,” said the report.  

S&P Global added that countries like the UAE, Malaysia, Kuwait and Qatar also witnessed a rise in foreign currency-denominated issuances during the first half of this year.  

Sustainable sukuk  

According to the analysis, the total volume of sustainable sukuk issuance reached $5.2 billion during the first half of 2024, down from $5.7 billion during the same period last year.  

The credit rating agency projected that the volume of these green bonds is expected to hover around $10 billion to $12 billion, barring any significant acceleration in the implementation of net-zero policies by key Islamic finance countries or regulatory actions. 

Sustainable sukuk is a Shariah-compliant financial tool wherein issuers utilize the proceeds solely to finance investments in renewable energy or other environmental assets. 

The report also highlighted that 80 percent of sustainability issuance in the first six months of 2024 came from banks in the Gulf Cooperation Council region as they started pursuing their climate transition journey.  

In May, another analysis by Fitch Ratings projected that the global sukuk market linked to environmental, social, and governance principles is expected to exceed $50 billion in the next two years.  

The credit rating agency noted that the projected growth of the market is driven by new ESG mandates, regulatory frameworks, and government-led sustainability initiatives. 

Fitch also revealed that the GCC debt capital market has reached $940 billion in outstanding sukuk and is steadily approaching the $1 trillion mark.