What does Shariah Standard 62 mean for the sukuk market?

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

At the end of 2024, the global sukuk market was estimated to be worth US$1 trillion, with annual issuance of close to US$200 billion. In November 2023, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) released a draft of Shariah Standard No. 62 for public consultation. 

As of April 2025, the standard remains in draft form and is undergoing revisions based on industry feedback. We believe the proposed changes could have a material impact on the sukuk market, and we are actively monitoring developments.

Understanding AAOIFI and the proposed changes

AAOIFI is a Bahrain-based global standard-setting body. It was established to harmonise Islamic finance practices across jurisdictions and ensure that financial institutions operate in accordance with Shariah principles. 

Its Shariah standards are adopted – either fully, partially, or as guidance – by 21 countries and jurisdictions. The initial draft of Standard 62 proposes a substantial overhaul of sukuk structuring to enhance Shariah authenticity and investor protections. A key feature of the draft is the requirement for a legal transfer of asset ownership from issuer to investor. This marks a shift from symbolic or beneficial ownership to enforceable, asset-backed arrangements. 

The aim is to ensure that sukuk holders have tangible rights over the underlying assets, aligning the instruments more closely with Shariah principles of transparency and risk-sharing. AAOIFI has clarified that retroactive application of the standard to existing sukuk is unlikely. A transition period of one to three years is expected to be granted to facilitate compliance.

What could be the market impact?

We believe that the introduction of enforceable legal asset ownership is poised to reshape the sukuk landscape. Issuers may face increased transaction costs due to requirements such as asset registration, tax tracking and legal formalities. These costs could be passed on to investors, potentially reducing the attractiveness of sukuk instruments. 

Additionally, the structural changes may dampen issuance appetite, particularly among sovereigns and corporates that are reluctant to relinquish control over strategic assets. This shift in risk profile – from issuer creditworthiness to a focus on asset performance -introduces a more equity-like feel to the asset class. This may deter certain investors who are not equipped or mandated to take on such risk.

Enforcing asset ownership could also complicate sukuk classification. Rating agencies may need to reassess both new and grandfathered instruments, introducing potential rating uncertainty. Although unlikely, there is a theoretical risk that issuers facing financial distress could challenge their obligations under the sukuk on grounds of Shariah non-compliance, leading to restructuring scenarios.

Depending on the flexibility allowed during the transition period, we may see issuers front-load their funding needs using the current AAOIFI-compliant sukuk format. This could result in a temporary surge in supply. Conversely, we believe this supply may be absorbed by institutional investors who remain committed to AAOIFI-compliant instruments, especially if the new structure constrains future issuance. 

The future of Islamic finance

While Standard 62 may introduce short-term disruption, we believe the long-term trajectory of Islamic finance remains robust. Malaysia, Saudi Arabia, and Indonesia -collectively accounting for 68% of 2024’s total sukuk issuance, do not currently mandate AAOIFI standards. Instead, they follow their own national Shariah frameworks. These jurisdictions only need to align with AAOIFI standards should they wish to attract a broader base of AAOIFI-compliant investors. 

As a result, issuers from these jurisdictions may support issuing sukuk in compliance with standard 62 to the extent that the benefits of the expanded investor participation outweighs the associated cost. As these economies continue to grow, they are expected to remain key contributors to the global sukuk market, albeit at a potentially slower pace as the market adjusts to the new regulatory landscape.

Market positioning and investment strategy

Sukuk typically trade at a premium to conventional bonds due to technical support from local investors. Given the similar credit risk profiles, many international managers prefer conventional bonds for their higher yields. These managers may opportunistically invest in sukuk when spreads widen or during primary issuance. If the final version of Standard 62 does not materially alter the sukuk landscape, there may be limited upside potential for investors in grandfathered sukuk.

However, if the standard introduces significant structural changes, the impact on legacy sukuk will depend on the specific implementation details. Given the lower carry of sukuk relative to conventional bonds, we currently maintain an underweight position. Nonetheless, we recommend close monitoring of Standard 62 developments, as they could materially influence market dynamics and potential investment opportunities.