Sharia standard 62 may disrupt sukuk market, says S&P

Reuters/Mohamed Azakir

• Issuance ‘could be put on hold’
• Sukuk could get more expensive
• Good performance so far in 2024

Global sukuk issuances are likely to suffer next year if the proposed standard 62 sukuk changes to sharia guidelines are implemented, according to credit rating agency S&P.

“Adopting Accounting and Auditing Organization for Islamic Financial Institutions standard 62 guidelines as they have been presented could disrupt the market,” it said in a new report.

The proposed standard, which aims to transition the industry towards asset-backed sukuk, will not affect 2024 issuance but is likely to become a factor from next year.

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However, investor and issuer appetite for such instruments and the legal implications of moving assets off balance sheets under the current market structure are difficult to estimate.

Such a move could either lead to further market fragmentation or issuance could be put on hold until sukuk structurers figure out a middle ground, S&P’s report said.

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In late 2023, AAOIFI published its exposure draft of Sharia standard 62 on sukuk, but has twice extended the deadline for industry feedback. The final deadline was set for July 31 2024, instead of the original March 31 2024.

If adopted as proposed, standard 62 could significantly alter the sukuk market, S&P said.

Implementing the new standard could make sukuk more expensive than conventional issuances, it said, and in some jurisdictions, issuers or investors will have to incur the cost of asset registration, making it uneconomical.

S&P maintained its global sukuk issuance forecast at $160 billion to $170 billion after a good performance in the first half of 2024.

Total issuance reached $91.9 billion over the first six months of the year, up slightly from last year’s $91.3 billion. However, foreign currency issuances increased by 24 percent year on year, reaching $32.7 billion by June 30.

The main contributors were Saudi Arabia, the UAE, Oman, Malaysia and Kuwait issuers.