Sukuk are financial certificates that are the closest Islamic law–compliant instrument to conventional bonds. Total sukuk issuance in 2024 was approximately $180 billion, and the market continues to be on pace to reach a total outstanding amount of $1 trillion in the next few years.
There were many notable international transactions in 2024, such as Indonesia’s 30-year green sukuk, a $5 billion issue from Saudi Arabia, and a $2.5 billion sustainability sukuk issued by the Islamic Development Bank. These transactions demonstrate the impressive depth of this market. The largest jurisdictions for issuance during the year were Malaysia, Saudi Arabia, and Indonesia.
Although year-on-year growth of sukuk volumes remains impressive, the key to unlocking the market’s full growth potential is attracting more conventional institutional investors. Outside the core Islamic finance centers in the Gulf Cooperation Council and Southeast Asia (and some regular sukuk buyers in Europe and the United States), institutional investors are unaware of sukuk or consider it an exotic product that is outside their investment mandate. If more of these investors treated sukuk as equivalent to bonds as fixed income investments, the sukuk market could reach another level of development.
Over the years, commentators have pointed out commonalities between sukuk and green bonds. For example, both instruments focus on use of the proceeds and use external and independent validation bodies (Shariah boards in the case of sukuk and third-party opinion providers in the case of green bonds). Even more fundamentally, sukuk and green bonds both provide investors products that conform to their ethical beliefs as well as their expected financial returns.
Moreover, the emergence of green sukuk, which were first issued in Malaysia in 2017, has brought the two products together. Since that first issuance, green sukuk (together with sustainable sukuk) has grown to represent around 10% of the overall sukuk market. Issuers in this market include a broad range of entities, from sovereigns (such as Indonesia) and supra-nationals (such as the Islamic Development Bank) to corporates and financial institutions. Despite the similarities between sukuk and green bonds and the development of a green sukuk market, sukuk and green bonds have largely stayed in their own separate spheres. Sukuk and green bonds have thrived among different investor bases in different regions of the world. Figure 1 shows the growth of the green bond, sukuk, and sustainable sukuk markets.
Recent moves to standardize the green sukuk market hold the potential to create a bridge between the two investment universes. Most critically among these developments was the publication in April 2024 of guidance on green, social, and sustainability sukuk, which was jointly prepared by the Islamic Development Bank, the International Capital Market Association, and the London Stock Exchange. For many conventional investors, guidance of this type, promulgated by well-known market leaders, should have the effect of wrapping the unfamiliar (sukuk) in something that is familiar and tested (the well-developed green and social bond framework).
We call this the “Tofu Hamburger” effect. When tofu was first being popularized in the United States in the 1970s, the soy milk–based protein was unfamiliar to most American consumers. Like a conventional pension fund presented with sukuk for the first time, a consumer might well have decided that the product was simply too exotic to consider buying it. To get those consumers comfortable with tofu, it took wrapping the product in something familiar and well-understood, like a hamburger bun.
The joint guidance has the potential to serve as the hamburger bun equivalent in this analogy. It could make sukuk feel less alien to wide swaths of conventional investors.
Despite the headwinds in 2024 caused by persistent inflation and geopolitical uncertainty, the sukuk market had strong year marked by a diverse range of issuers accessing the market, as well as record deals in terms of both size and maturity. We expect continued strong performance in 2025 and believe that green sukuk holds the key to taking the market to the next level of capacity for sukuk issuers.
Source: blogs.worldbank.org
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