Global sukuk issuance is expected to slow in the third quarter of 2024, coinciding with the summer holidays, before picking up in Q4 as corporates and sovereigns pursue funding diversification efforts, refinance debt, close budget deficits, and support development plans, according to Fitch Ratings.

“Sukuk continues to hold a significant debt capital market share in core Islamic finance markets. It also contributed to over 10% of all emerging-market US dollar debt issued in the first half (excluding China), and we expect it to expand over the next few years,” says Bashar Al Natoor, global head of Islamic finance at Fitch Ratings.

He also notes that 81% of all rated sukuk are investment-grade, 91% of issuers have stable outlook, and 7% have positive outlook.

In a non-rating action commentary, Fitch says it expects the Federal Reserve to cut interest rates in Q3, with the benchmark interest rate forecast at 5% at end-2024 and 3.75% at end-2025. This will provide impetus to issuance as many Gulf Cooperation Council countries and Türkiye have ongoing funding needs. Lower oil prices, from about US$80 per barrel this year to US$70/bbl in 2025, could also be a major driver.

However, a few markets, such as Qatar and Oman, are deleveraging amid government repayments, and Indonesia and Malaysia are exhibiting fiscal restraint with slower issuances.

“We expect Islamic banks to continue diversifying into sukuk, even though deposits will remain the key funding source. While corporates will likely continue being bank funding-reliant, diversification efforts could drive sukuk,” the rating agency says.

Global outstanding sukuk grew to about US$888 billion at the end of the first half, up 10.2% from a year ago. In Q224, US dollar sukuk issuance had a quarterly fall of 20.3% in core markets, while bonds fell further (27%) in the same markets.

From end-May 2024, only sukuk deemed materially compliant with the shariah standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and guidelines by the Higher Sharia Authority of the UAE central bank are included in the J.P. Morgan Global IG Sukuk Index. AAOIFI filters are also seen in other sukuk indices and funds.

This could affect international investor demand for non-AAOIFI-compliant sukuk, Fitch says. AAOIFI extended the feedback deadline for its Shariah Standard No. 62 exposure draft to the end of July.