Research and active engagement: Spotlight on Sukuk

This article is an extract from our Q4 2025 Active Fixed Income outlook.

‘Sukuk’ are Shariah-compliant financial instruments that confer partial ownership in an underlying asset or project and seek to generate returns based on profits rather than interest. That’s because Shariah law prohibits the payment or receipt of interest, as well as investment in sectors such as gambling, alcohol, weaponry and some meat-based products.

The sukuk market, a cornerstone of Shariah-compliant finance, is on the cusp of a significant transformation. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has proposed Shariah Standard No. 62, which aims to enhance the authenticity and investor protection of sukuk instruments.

As this draft standard undergoes industry consultation and revision, its potential implications for issuers, investors and the broader Islamic finance ecosystem are becoming increasingly apparent. This article explores the recent developments, current market positioning, future outlook and associated risks surrounding Standard 62.

The past – what just happened?

 In November 2023, AAOIFI released a draft of Shariah Standard No. 62 for public consultation. This marked a pivotal moment for the global sukuk market, which had reached an estimated value of US$1 trillion by the end of 2024, with annual issuance nearing US$200 billion.

The draft standard proposes a fundamental shift in sukuk structuring, particularly the requirement for a legal transfer of asset ownership from issuer to investor. This move aims to replace symbolic or beneficial ownership with enforceable, asset-backed arrangements, thereby aligning sukuk more closely with Shariah principles of transparency and risk-sharing. As of April 2025, the standard remains in draft form, with revisions underway based on industry feedback.

The present – potential market impact

The proposed changes have sparked considerable debate within the market. If implemented, the requirement for enforceable asset ownership could increase transaction costs due to legal formalities, asset registration and tax tracking. These costs may be passed on to investors, potentially reducing the appeal of sukuk instruments. Issuers, particularly sovereigns and corporates, may be hesitant to relinquish control over strategic assets, which could dampen issuance appetite. The shift in risk profile – from issuer creditworthiness to asset performance – could make sukuk investments more equity-like, which may not align with the mandates of certain investors.

From a market positioning perspective, sukuk typically trade at a premium to conventional bonds due to strong local investor support. However, international managers often favour conventional bonds for their higher yields and similar credit risk profiles. These managers may engage with sukuk opportunistically, especially during primary issuance or when spreads widen. Given the lower carry of sukuk, many maintain an underweight position, awaiting clarity on the final form of Standard 62.

Outlook

Despite potential short-term disruptions, we believe the long-term outlook for Islamic finance remains positive. Key sukuk-issuing countries such as Malaysia, Saudi Arabia and Indonesia currently follow their own national Shariah frameworks and do not mandate AAOIFI standards. These jurisdictions, which accounted for 68% of 2024’s total sukuk issuance,2 may adopt Standard 62 selectively, depending on the benefits of attracting AAOIFI-compliant investors. As these economies continue to grow, they are expected to remain central to the sukuk market, albeit with possible adjustments in issuance pace and structure.

The transition period of one to three years proposed by AAOIFI could lead to a temporary surge in sukuk supply, as issuers seek to front-load funding under the current framework. Institutional investors committed to AAOIFI-compliant instruments may absorb this supply, especially if future issuance becomes more constrained.

What could go wrong?

Several risks accompany the implementation of Standard 62. Increased transaction costs and structural complexity may deter issuers and investors alike. Rating agencies may need to reassess both new and grandfathered sukuk, introducing potential rating uncertainty. In extreme cases, issuers facing financial distress could challenge their obligations on grounds of Shariah non-compliance, potentially leading to restructuring scenarios. The equity-like risk profile may also alienate investors who are not equipped to manage asset performance risk.

Ultimately, we believe the success of Standard 62 will depend on the flexibility of its implementation and the willingness of market participants to adapt to a more rigorous Shariah framework.

Read our Q4 2025 Active Fixed Income outlook.