Fitch Ratings report an 8.5% year-on-year growth in Sukuk issuances, bolstered by favourable financing conditions and increased demand

Global Sukuk, the Shariah-compliant debt instruments that allow investors to gain partial ownership of an issuer’s assets, has surged to an impressive $900 billion by the end of the third quarter of 2024. This marks an 8.5% increase from the previous year, driven primarily by improved financing conditions following the US Federal Reserve’s recent decision to lower interest rates.

The Fed’s cut to 5% in September is anticipated to further stimulate the sukuk market, with Fitch Ratings projecting rates to drop to 4.5% by the end of 2024 and potentially 3.5% by 2025. This favourable interest rate environment is expected to encourage increased sukuk issuances in the short term.

Fitch Ratings noted that several factors contribute to this growth. Key among them are the refinancing of upcoming maturities and the funding and diversification objectives of Islamic nations. These elements are expected to propel sukuk issuances throughout the remainder of 2024 and into 2025.

Sukuk, often referred to as Islamic bonds, are unique financial products compliant with Shariah law, allowing investors to hold ownership stakes in tangible assets until the debt matures. The recent report from Fitch coincides with Saudi energy giant Aramco’s successful completion of a $3 billion international sukuk issuance, which saw demand surpass expectations, achieving six times oversubscription.

Bashar Al-Natoor, global head of Islamic finance at Fitch Ratings, highlighted the current landscape: “We are seeing a build-up of sukuk pipeline partially supported by the recent Fed cut. However, downside risks include Shariah-related complexities, rising geopolitical tensions, and oil price volatility that could impede market growth.”

Al-Natoor further emphasised the overall sound credit conditions in the sukuk market, with 81.5% of Fitch-rated sukuk classified as investment-grade. Furthermore, 95% of sukuk issuers hold Stable Outlooks, and there have been no defaults reported to date.

In the Gulf Cooperation Council (GCC) region, the overall debt capital market stands at approximately $1 trillion, with sukuk accounting for a substantial 37%. The analysis suggests that the demand for emerging market US dollar debt is likely to increase, with sukuk comprising over 10% of this market segment.

Fitch’s report also highlighted the increasing diversity within the sukuk market, noting the inaugural sukuk issuance by AerCap Holdings, based in Ireland, as well as Kuwait’s first sustainable sukuk from Warba Bank. These developments illustrate the growing appeal and adaptability of sukuk instruments in various sectors.

In a separate report released by Fitch Ratings in August, it was noted that the UK is emerging as a Western hub for Islamic finance. The London Stock Exchange (LSE) ranks as the third-largest global listing venue for US dollar sukuk, currently holding a 35% share of the market, valued at around $80 billion outstanding at the end of the first half of 2024.

This substantial growth in the sukuk market reflects a broader trend towards the diversification of funding sources and investment opportunities within the Islamic finance landscape. As the market continues to evolve, stakeholders remain optimistic about the prospects for sukuk in the global financial arena.