The momentum in global sukuk issuance in the first half of 2026, which saw the volume rise to US$129 billion from US$112.3 billion in the same period of 2025, is likely to continue in the second half of the year.

The growth has been underpinned by the issuances in the local currency markets – notably in Malaysia, Qatar, Saudi Arabia and Turkiye – bucking the volatility that buffeted the market during the period.

“We expect the local markets will remain the engine of growth amid the ongoing geopolitical tensions and a more restrictive interest rate environment than previously anticipated, which will temper the foreign currency ( FX )-denominated issuance,” says S&P Global Ratings in its latest report on the sukuk market released on July 13.

New local currency-denominated sukuk increased by US$18.6 billion to US$87.6 billion by June 30 this year, while the FX-denominated issuances fell by US$1.9 billion to US$41.4 billion during the same period.

The ceasefire between the US and Iran in April 2026 followed by the memorandum of understanding in June 2026, created a window for issuers that had been preparing to access the market prior to the outbreak of the Middle East conflict in late February 2026. While some Gulf Cooperation Council ( GCC ) issuers rushed to the market, the resultant momentum failed to return the FX-denominated issuances to the 2025 levels.

Year on year, global sukuk issuance in 2026, S&P estimates, will modestly increase to between US$270 billion and US$280 billion. The declines in the volume in the United Arab Emirates, Bahrain and Saudi Arabia in the first half, S&P notes, were partially offset by the increased issuance in Malaysia, led by the International Islamic Liquidity Management Corporation ( IILM ).

The FX market contraction might have been more pronounced without the US$7.3 billion increase in Malaysian FX issuances. This increase, led by the IILM, was driven by the strong demand for short-term, Shariah-compliant liquid instruments amid the global volatility and partially offset a cumulative US$11.3 billion decline in GCC issuance volumes.

The decline in GCC volume, according to S&P, is largely due to a significant economic slowdown in the first half of 2026, stemming from reduced hydrocarbon output and non-oil economic activity, which caused the issuance to fall significantly in the UAE and Kuwait. Conversely, the sukuk market witnessed increased issuance in local currencies by the Qatari and Saudi Arabian governments.

Saudi Arabia’s recalibration of its fiscal financing contributed to a slowdown of foreign currency issuance. Additionally, the onset of the Middle East conflict prompted several GCC issuers to turn to the conventional private placement market, due to its ample liquidity, simplicity and the speed of execution.

The reduced lending growth among the Saudi Arabian banks, recalibration of megaprojects and shift to project execution further explain the reduced issuance from both the private sector and government-related entities.

In the UAE, the declining FX issuance was underpinned by reduced corporate activity, particularly by the real estate developers. Despite these headwinds, S&P Global observed an uptick in monthly issuance volumes following the April 2026 ceasefire, though the overall levels remain below the 2025 benchmarks.

The sukuk market will remain susceptible to near-term volatility, S&P argues, primarily driven by the spikes in geopolitical risks – which could trigger wider credit spreads and diminish investor appetite for GCC-linked sukuk – and macroeconomic shifts, such as an unexpected Federal Reserve policy pivots or significant fluctuations in the global oil prices.

However, despite these near-term headwinds, the rating agency maintains a positive medium-term outlook. Momentum should be driven by the expansion of sustainable finance, evidenced by the rising volume of sustainable issuance in recent years.

Furthermore, regulatory and technological advancements are potential accelerators. The implementation of new regulatory frameworks, tokenization and other fintech innovations should enhance market efficiency.

The resolution of interoperability challenges between legacy systems and blockchains, coupled with the integration of native on-chain liquidity via central bank digital currencies or stablecoins, S&P adds, will be critical to unlocking this potential.