From sustainability to AI, Sukuk reimagined

In recent years, the Sukuk market has witnessed significant growth, but challenges remain. In our latest insight we delve into the key aspects driving change.

• 2023 record issuance of Islamic bonds: Sukuk; diversification driving globalisation 
• ESG and Green Sukuk Issuance tripled from 2019 to 2023 fuelled by transition financing needs.
• Digitisation and sustainability are adding to the appeal of Sukuk as a global alternative investment asset class.

2023 was the highest on record in terms of Sukuk issuance with USD214.9 billion issued according to LSEG’s data which considers the re-opening of Sukuk issued prior 2023, up from USD195.6 in 2022, and taking the outstanding Sukuk market to a staggering USD836.7 billion, representing the second biggest asset class in the Islamic finance industry after Islamic banking according to the ICD-LSEG Islamic Finance Development 2023 report. 

It is no secret that Sukuk issuance thrived despite challenges such as the Covid19 pandemic and the continuous hikes in interest rates, but it is worth noting emerging trends in the Sukuk landscape are believed to have helped Sukuk embrace the change. The following five trends have shaped the market in 20223 and are expected to continue to play a critical role in the growth of the market in the next couple of years. 

Issuers of Sukuk are increasingly embracing the drive for sustainability. In 2023, green and sustainability Sukuk issuance reached USD 13.1 billion, or 6.5% of the total Sukuk issuance. This growth of this segment has outpaced that of the overall Sukuk market, as issuance of green and sustainability Sukuk more than tripled between 2019 and 2023. Meanwhile, overall Sukuk issuance grew at an average of 6.8% during this period. Benefiting from tax incentives, transition financing needs, renewable energy projects, sustainable housing, and agriculture, among other climate-related developments, Green and ESG Sukuk spiralled up.

COP28 taking place in the UAE in December 2023, gave a further push for issuance from the Gulf states. UAE just announced the extension of year of sustainability for another year 2024, let alone the tax incentives or fees waivers by exchanges such as DFSA and Bursa Malaysia – all of which will fuel the growth.

Selling Sukuk in domestic markets and in local currencies was for years, a Malaysian proficiency, and a Southeast Asian in a best-case scenario. This is no longer the case. Saudi Arabia’s local currency Sukuk in 2023 represented 53% of the Kingdom’s issuance. Neighbouring UAE rolled out its treasury Sukuk in April 2023.  Other growing domestic markets include Turkey and some African nations such as Tanzania, Nigerian as well as South Africa which returned to the market in 2023 with a local currency 3-tranche sovereign.

UAE claims the Islamic T-Sukuk issuance programme will contribute to building the UAE dirham denominated yield curve, providing safe investment alternatives for investors, strengthening the local debt capital market, developing the investment environment, as well as supporting sustainable economic growth.

In 2013, 11 countries saw Sukuk issuance, 8 of which were in Southeast Asia and the GCC. In contrast, 2023, 22 countries saw Sukuk issuance including the USA, Philippines, Kenya, and Kazakhstan. Mexico and Kenya could be next in line with sovereign issuances. Issuers from more than 33 countries had issued Sukuk by end of 2023.

Initially designed as a Shariah-compliant equivalent of bond targeting Shariah-sensitive investors, Sukuk is increasingly being issued in non-OIC countries and for many reasons including tapping investors pools of wealth form the Gulf and Asia, diversifying a portfolio or hedging against risks. A such, it positioned itself a cross-boarded form of alternative investment. Digitisation and sustainability added even more appeal to the asset class.

Kenya’s CMA – non-OIC - approval of first-ever Sukuk bond issuance, The Linzi Sukuk, signified a notable diversification of the capital markets, offering investors an ethical and socially responsible investment option according to CMA.

There has always been calls for standardisation as this would help deepen the market, reduce cost, and spur issuance. In 2022, we saw UAE adopt AAOIFI standards and direct all issuers to abide by them. This also means that potentially non-UAE issuers might follow suit if they wish to attract UAE funds.

On the legislative and regulatory side, corporates and governments are increasingly rolling out their sustainability frameworks followed by selling green or ESG Sukuk. Same for regulations and guidelines whether on an exchange, or country or even multinational level. In December on the sidelines of COP8, ICMA, IsDB and LSEG signed announced a collaboration to develop a practitioners guide on the issuance of Green Sukuk. The guidance will help among other things to improve investors’ awareness of Sukuk as an asset class in the global fixed income markets according to the join press release.

In 2020, Sukuk Prihatin – Malaysia’s first ever digital Sukuk was launched as part of the government’s National Economic Recovery Plan post Covid19 pandemic.  In October 2023, the country’s Fusang Exchange located in Labuan, listed the world’s first tokenised Sukuk linked to a sovereign instrument, making an A-1 rated Sukuk available to global institutions aiming to ease liquidity issues in Islamic finance.

It is yet to see how AI will transform the Sukuk landscape; but there is a rising talk about how AI could potentially be used to improve efficiency, reduce costs, and increase the accessibility of Sukuk to a wider range of investors – which would be another opportunity for Sukuk to confirm again its adaptability, resilience, and appeal.