Dubai, UAE: The global Sukuk market is facing increasing pressure amid rising geopolitical tensions between Iran and the United States, raising concerns over declining investor confidence, reduced issuance, and potential contraction across key Islamic finance regions.
The impact is particularly significant for major Sukuk-issuing economies in the Gulf Cooperation Council (GCC) and Asia, where stable geopolitical and economic conditions are essential for sustaining issuance activity. Under the current uncertainty, market participants are adopting a cautious approach, resulting in a noticeable slowdown, and in some cases, a temporary halt, in new Sukuk offerings.
Muhammad Zubair Mughal, CEO of AlHuda Centre of Islamic Banking and Economics, highlighted the severity of the situation, stating: “If tensions persist, the Sukuk market could shrink by 10% to 15%. The current environment resembles the disruption experienced during the COVID-19 pandemic, when uncertainty significantly reduced market activity.”
He further emphasized immediate concerns regarding upcoming maturities: “A key risk lies in the significant volume of Sukuk maturing over the next 3 to 6 months. With tightening liquidity, rising risk premiums, and limited refinancing options, issuers- particularly in exposed regions, may face challenges in meeting repayment obligations. This could lead to increased defaults or distressed rollovers if conditions do not improve.”
Geopolitical uncertainty has also led to rising risk premiums across global fixed-income markets, with investors demanding higher returns. Consequently, Sukuk spreads have widened, increasing borrowing costs for both sovereign and corporate issuers and discouraging new market participation.
The slowdown in issuance is becoming more evident as governments and corporates delay or cancel planned transactions due to volatile pricing conditions. This challenge is more pronounced in oil-dependent economies, where fiscal planning is closely linked to energy revenues. Fluctuations in oil prices are further complicating sovereign funding strategies and raising concerns about timely repayment of maturing Sukuk.
At the same time, emerging markets are experiencing capital outflows and currency depreciation, increasing perceived credit risks and weakening investor appetite. These interconnected factors are contributing to a fragile environment where both new issuance and refinancing activity remain constrained.
Historically, the Sukuk market has experienced disruptions during major global crises, including the 2007–2008 financial crises and the COVID-19 pandemic. While those events were driven by financial and economic shocks, however, the current situation reflects a geopolitical risk. This prolonged nature could result in sustained issuance constraints, reduced cross-border investment flows, and increased reliance on domestic funding sources.
While projections of a 10% to 15% contraction reflect growing concern, the immediate challenge lies in the short-term maturity. A significant portion of upcoming Sukuk- particularly from issuers in vulnerable or oil-dependent economies may face difficulties in securing refinancing or generating sufficient liquidity for repayment.
Despite these challenges, the long-term fundamentals of the Sukuk market remain strong, supported by its asset-backed structure and growing global demand for Shariah-compliant financial instruments. However, restoring geopolitical stability will be critical to maintaining market resilience and avoiding short-term repayment pressures.
