In recent years, Sukuk has gained recognition as an ethical, Shariah-compliant alternative to conventional bonds. Rooted in Islamic finance principles such as the prohibition of interest (riba), asset-backed structures, and risk-sharing Sukuk is no longer limited to Muslim-majority countries and is now widely used by governments and investors globally.

What is Sukuk and How Is It Different from Conventional Bonds?

Sukuk represents ownership in a tangible asset, usufruct, or investment venture, offering investors returns linked to the asset’s performance rather than fixed interest, which is prohibited in Islamic finance. Unlike conventional bonds, which pay interest regardless of the issuer’s outcome, Sukuk aligns investor returns with actual asset or project performance. Sukuk structures vary commonly including Ijara (leasing), Murabaha (cost-plus sale), Mudarabah (profit-sharing), and Musharakah (joint venture) but all must comply with Shariah, emphasising asset-based financing and prohibiting money from being treated as a commodity.

Why Is Sukuk Commonly Used in Project Financing?

Sukuk’s asset-backed structure makes it ideal for financing large-scale infrastructure and development projects. Governments and corporations commonly use Sukuk to fund highways, schools, hospitals, airports, and utilities projects with tangible assets that generate future cash flows. For government-linked initiatives, Sukuk offers four main advantages:

1. Shariah compliance broadens the investor base.

By adhering to Islamic finance principles, Sukuk attracts not only conventional investors but also Islamic financial institutions and high net worth individuals seeking ethically aligned and Shariah-compliant investment opportunities. For example, Egypt’s planned issuance of USD 2 billion in Sukuk in 2025 is explicitly intended to appeal to both core Islamic markets and global Islamic finance participants.¹

2. Competitive pricing and strong demand in global capital markets.

Since returns are directly tied to the performance of the underlying assets, investors share in both the potential gains and risks. This feature is particularly attractive when the financed projects deliver demonstrable economic or social value. For instance, in April 2025, Abu Dhabi’s state oil company ADNOC issued USD 1.5 billion worth of Sukuk, which was oversubscribed with more than USD 3.85 billion in orders, reflecting strong investor confidence.²

3. Malaysia’s experience

Malaysia’s government-linked companies have leveraged Sukuk to finance a broad range of public infrastructure initiatives. In 2020, the government issued USD 1.3 billion in green Sukuk to fund sustainable infrastructure projects such as energy-efficient buildings and water-management systems.³ Additionally, in 2017, Malaysia raised MYR 250 million to finance a 50-megawatt solar power project, marking the issuance of the world’s first green Sukuk.⁴] These examples highlight Malaysia’s ability to use Sukuk for both infrastructure development and sustainability objectives.

4. Other GCC sovereigns and Vision 2030

Countries such as Saudi Arabia and the United Arab Emirates continue to issue Sukuk to fund projects under their Vision 2030 economic diversification agendas. In 2024, Gulf sovereign issuers remained dominant in the global Sukuk market, with significant allocations going toward infrastructure, energy, and utilities sectors that attract strong interest from regional and international Islamic finance investors.⁵

Sukuk: A Shariah-Compliant Instrument with Global Appeal

In the United Kingdom, the government issued a sovereign Sukuk in June 2014, becoming the first Western country to do so. The £200 million issuance was structured as an Al Ijarah Sukuk with a five-year tenor backed by rental income from three government office properties. It attracted approximately £2.3 billion in orders from sovereign wealth funds, central banks, and institutional investors across the Middle East, Asia, and the UK.⁶ This strong demand demonstrated global appetite for Shariah-compliant instruments, even in non-Islamic jurisdictions. Shortly thereafter, Luxembourg issued €200 million in sovereign Sukuk, facilitated by new legislation that allowed the securitisation of state-owned properties through a special purpose vehicle.⁷ This move aimed to diversify Luxembourg’s funding sources and build stronger investment ties with the Gulf region.

Hong Kong, a major international financial hub, amended its bond regulations in 2013 to accommodate Sukuk under its Government Bond Programme. Between 2014 and 2017, it successfully completed three rounds of sovereign Sukuk issuances totalling approximately USD 3 billion. Each issuance was heavily oversubscribed, highlighting the strength of Hong Kong’s legal and tax infrastructure in supporting Islamic finance and attracting investors from both regional and global markets.⁸

In Malaysia, foreign investors, both Muslim and non-Muslim, are actively involved in corporate and sovereign Sukuk markets. Malaysia issues more than half of the global Sukuk by value and maintains a strong AAA-rated regulatory framework. The country’s Sukuk offerings are seen as relatively low-risk compared to other emerging markets, making them an attractive option for investors seeking both compliance and stability.

Reluctance in Adoption of Sukuk

Despite its strengths, several barriers continue to inhibit wider participation in Sukuk markets, both in Malaysia and globally.

1. Complexity and lack of standardisation:

Sukuk structures are generally more complex than conventional bonds because they require customized documentation and Shariah supervisory board approval. One study observes that the lack of standardization in Sukuk documentation and interpretation of Shariah regarding Sukuk makes its secondary market thinner, increases the uncertainty in the Sukuk market, and boosts Sukuk issuance costs.⁹ This absence of universal standards raises issuance costs, extends preparation timelines, discourages new issuers, and consequently restricts market liquidity and growth

2. Perceived legal uncertainty:

Sukuk have demonstrated exceptionally low default rates, at approximately 0.24 % as of the end of Q1 2023 but concerns persist regarding their contractual enforceability.¹⁰ Legal disputes over asset ownership and creditor rights have revealed ambiguities in how Sukuk are treated across jurisdictions. Recovery mechanisms especially for sovereign issuers are still underdeveloped, fuelling investor apprehension about the resolution of potential defaults.

3. Shariah interpretation discrepancies:

There is no single global Shariah authority, and rulings vary significantly across jurisdictions. A structure approved by a Shariah board in Malaysia may not meet the requirements in Saudi Arabia or Bahrain. This lack of harmonisation often leads to prolonged approval processes and higher structuring expenses when issuers need to obtain multiple Shariah board endorsements. According to Fitch Ratings, not adhering to the standards set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Sukuk could face lower demand and reduced liquidity in markets where more stringent compliance is enforced.¹¹

4. Lack of awareness:

Some corporates and investors still view Sukuk as niche, confined to Islamic institutions, even as its global relevance and competitive terms grow.¹² According to the Islamic Development Bank, limited investor education especially in non-Muslim-majority countries remains a major barrier. A 2023 report by the International Islamic Financial Market found that only 35% of global fixed‑income investors were familiar with Sukuk, and fewer than 20% had invested in them.¹³ Nevertheless, the global Sukuk market reached USD 170 billion in 2024, driven by demand for ESG‑aligned instruments of which Sukuk is a significant and growing component.¹⁴

The Future of Sukuk

In 2024, global Sukuk issuance amounted to approximately USD 193.4 billion, with sustainable Sukuk making up over half of emerging-market ESG‑aligned debt, driven by strong regulation and rising investor demand for sustainability-linked instruments. In early 2024, Malaysia, Indonesia, the United Arab Emirates, and Saudi Arabia together accounted for 83% of sustainable Sukuk issuance.¹⁵ Malaysia remains a dominant force overall, holding around 36% of global Sukuk issuance and comprising roughly 60% of its domestic Debt Capital Market,¹⁶ supported by a mature regulatory framework, deep investor participation, and a strong track record of AAA-rated instrument, positioning it as a leading example of Islamic finance integrated with sustainability goals.¹⁷

References

1. Reuters, “Egypt plans to issue $2 billion sukuk in 2025, finance minister to Reuters,” April 9, 2025.
2. Reuters, “Abu Dhabi’s ADNOC sells USD 1.5 billion in 10‑year Sukuk, oversubscribed over USD 3.85 billion,” April 28, 2025.
3. ASEAN Green Finance State of the Market 2020, Climate Bonds Initiative
4. World Bank, Pioneering the Green Sukuk: Three Years On, July 2017
5. S&P Global Ratings, “Sukuk Market: Strong Performance Set To Continue In 2025,” noting that GCC issuers—led by Saudi Arabia and other Gulf countries—made up the majority of sovereign Sukuk volume in 2024 and channelled issuance into infrastructure, energy, and utilities
6. HM Treasury, ‘Government issues first Islamic bond’ (25 June 2014) GOV.UK https://www.gov.uk/government/news/government-issues-first-islamic-bond accessed 25 June 2025
7. Luxembourg approves bill paving way for Sukuk this year’ (Reuters, 10 July 2014) https://www.reuters.com/article/luxembourg-sukuk/luxembourg-moves-closer-to-debut-sukuk-idUSL6N0KH19Y20140107 accessed 25 June 2025.
8. Hong Kong Monetary Authority, ‘Successful offering of inaugural USD1 billion Sukuk under the Government Bond Programme’ (11 September 2014) https://www.hkma.gov.hk/eng/news-and-media/press-releases/2014/09/20140911-4/ accessed 25 June 2025; Hong Kong Monetary Authority, ‘HKSAR
9. Ahmet Ulusoy and Mehmet Ela, “Lack of Standardization in Sukuk Market,” Journal of Islamic Economics, Banking and Finance 13, no. 1 (January–March 2017): 147–69.
10. Fitch Ratings, Sukuk Recovery Is Still Untested in Most Islamic Finance Markets, June 14, 2023
11. Fitch Ratings, “Islamic Finance: Sukuk AAOIFI Compliance and Secondary Market Liquidity,” November 2023. Available at: https://www.fitchratings.com/research/ (accessed 25 June 2025).
12. Islamic Development Bank, Q4 2024 Newsletter (February 2025) https://iciec.isdb.org/wp-content/uploads/2025/02/Q4-Newsletter-2024.pdf accessed 4 July 2025.
13. International Islamic Financial Market (IIFM), IIFM Sukuk Report 2023 (August 2023); see summary figures on investor familiarity and investment percentages.
14. S&P Global, cited in Global Sukuk Market on the Rise (Franklin Templeton/Western Asset, June 2024) (projecting USD 170 billion issuance in 2024)
15. S&P Global via Nikko AM, “Sharia bonds: an overlooked diversification opportunity?” https://nikkoam.com/articles/2025/sharia-bonds-diversification-opportunity-july-2025
16. Fitch Ratings, “Malaysia’s Debt Capital Market Likely to Slow on Fiscal Consolidation – Sukuk Leadership Sustained” https://www.businesstoday.com.my/2025/03/19/malaysias-debt-capital-market-likely-to-slow-on-fiscal-consolidation-fitch/   
17. Bank for International Settlements, “Developing Malaysia’s bond and sukuk markets” (BIS Papers No 148, September 2023) 213