Malaysia has emerged as the key driver of global sukuk issuance growth in the first half of 2026, offsetting weaker issuance across the Gulf Cooperation Council (GCC) as geopolitical tensions in the Middle East dampened foreign currency-denominated fundraising, according to S&P Global Ratings.
In a report released on July 13, the ratings agency maintained its forecast for global sukuk issuance to reach between US$270 billion and US$280 billion in 2026, after total issuance climbed to US$129 billion in the first six months of the year, up from US$112.3 billion during the same period in 2025.
S&P said local currency sukuk markets, particularly Malaysia, have become the primary engine of growth, helping to offset a sharp decline in foreign currency issuance from GCC countries affected by the ongoing regional conflict.
“Malaysia’s strong performance over the first half of 2026 offset a 9% decline in GCC issuance prompted by the Middle East war,” the report said.
Malaysia leads issuance growth
Local currency-denominated sukuk issuance increased by US$18.6 billion to US$87.6 billion during the first half of 2026, while foreign currency-denominated issuance fell by US$1.9 billion to US$41.4 billion. Malaysia was the single largest contributor to overall issuance growth, supported by higher issuance from the International Islamic Liquidity Management Corporation (IILM), which benefited from strong demand for short-term Shariah-compliant liquidity instruments amid heightened market volatility.
The increase in Malaysian issuance partially compensated for an US$11.3 billion decline in sukuk issuance across the GCC, where economic activity slowed due to reduced hydrocarbon production and weaker non-oil sector growth.
Saudi Arabia and Qatar recorded higher domestic currency issuance, but this was outweighed by lower foreign currency fundraising in markets such as the United Arab Emirates, Bahrain and Kuwait.
Geopolitical uncertainty weighs on foreign issuance
S&P noted that although the ceasefire reached in April 2026 and the Iran-United States Memorandum of Understanding signed in June created a temporary window for issuers to return to the market, foreign currency sukuk issuance has yet to recover to 2025 levels.
Many GCC issuers instead opted for conventional private placements during the period, attracted by faster execution, greater liquidity and simpler transaction structures.
The agency also revised its macroeconomic assumptions, now expecting the US Federal Reserve to keep interest rates unchanged through 2026 rather than embark on monetary easing as previously anticipated.
While the Iran-US agreement has improved market sentiment, S&P warned that renewed hostilities, continued uncertainty over peace negotiations and lingering disruptions to shipping and energy exports remain downside risks for sukuk issuance.
Local markets to remain growth driver
Despite the more challenging external environment, S&P expects local currency markets to continue supporting global sukuk issuance through the remainder of the year.
It said Malaysia, alongside Qatar, Saudi Arabia and Türkiye, should remain key contributors as domestic funding needs and investor demand continue to support issuance.
The agency maintained its forecast that total global sukuk issuance will increase modestly this year, driven primarily by local currency activity rather than international fundraising.
Regulatory changes unlikely to affect 2026 issuance
S&P also said proposed revisions to the Accounting and Auditing Organization for Islamic Financial Institutions’ (AAOIFI) Shariah Standard 62 are unlikely to affect issuance volumes this year.
Although the proposed amendments could eventually shift sukuk structures from sponsor-backed to asset-backed arrangements, the timing and final details remain uncertain.
The agency believes market appetite for sukuk involving full transfer of underlying asset ownership remains limited and does not expect any material impact on issuance during 2026.
Long-term outlook remains positive
While acknowledging near-term risks from geopolitical tensions, higher interest rates and oil price volatility, S&P maintained a positive medium-term outlook for the sukuk market.
It expects continued growth to be supported by expanding sustainable finance, regulatory reforms and technological advancements such as tokenisation and blockchain-based financial infrastructure, which could improve market efficiency and broaden investor participation over time.
