Islamic finance faced plenty of headwinds as 2022 got underway. Data from Fitch Ratings show second-quarter sukuk issuance fell by more than 17% quarter on quarter from core markets, such as the Gulf Cooperation Council (GCC), Malaysia, Indonesia, Turkey and Pakistan, after posting a growth of more than 11% in the first quarter.

Compared with conventional bonds, however, it is far less affected by recent market volatility. The recent oil price spike, however, did dampen issuance activity and will likely continue to do so as oil exporters in the GCC reduce their funding needs. Issuers also are grappling with complexities related to shariah compliance while rate hikes have lowered investors’ appetite for emerging market debt.

Longer-term demand for sukuk is unlikely to slow as investors seeking higher returns from emerging market debt and funding diversification – including from non-Muslim countries – takes root. The trend is expected to narrow the demand-supply gap in the sukuk market by 2026.

To be sure, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) issuance of new standards for financial reporting is affecting sukuk issuance in the short term. On the other hand, merger and acquisition activity in the GCC’s Islamic banking sector is expected to increase as many Islamic banks are looking to strengthen their competitive advantage, particularly in the areas of pricing and funding costs, and seeking growth opportunities.

The Asset Events presents the 5th Global Islamic Finance Issuers and Investors Leadership Dialogue. This exclusive dialogue brings together investors, policymakers, economists and industry players to discuss various key issues and developments in the sector.