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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is an adviser on Islamic finance, a member of the Council on Foreign Relations and millennium fellow at the Atlantic Council
The global sukuk market for Islamic finance faces a pivotal moment. A new framework from the Accounting and Auditing Organization for Islamic Financial Institutions threatens to destabilise a $1tn market that has become a vital funding source for sovereigns and corporates across the Middle East, Asia and beyond.
The spiritual imperative behind proposed changes to AAOIFI’s Shariah Standard 62 is deeply respected. They seek to make sukuk debt appear less like debt with charged interest, something that is prohibited under Islamic law.
However, the real-world effects could fracture a market that has flourished precisely because of its consistency and investor confidence. The stakes for global Islamic finance could not be higher.
For decades, the sukuk market has operated on pragmatic foundations. Most issuances have been “asset-based”, allowing investors to hold beneficial interests in tangible assets without requiring formal legal title transfers. This has enabled widespread adoption across diverse jurisdictions, while maintaining alignment with Islamic values.
The Standard 62 changes propose a shift to “asset-backed” sukuk, requiring full legal ownership to be transferred to investors. Under current usual practice, an asset against which sukuk finance is being raised remains in the name of its owner. The sukuk holder collects a profit payment each period (generally on a quarterly basis) and is paid back the full debt amount at maturity. Thus sukuk holders, in effect, take on credit risk with no direct recourse to the asset in a default scenario.
Under Standard 62, the asset is likely to be transferred to a special purpose vehicle owned by the sukuk holders. They will receive a profit payment each month from that asset and at maturity the sponsor buys the asset back. While this both makes the security truly asset-backed and more like equity under Islamic law, its implementation may sometimes prove unworkable in practice.
Key markets such as Saudi Arabia, the United Arab Emirates and Indonesia — which account for a significant share of global sukuk issuance — have varying legal frameworks and restrictions on asset transfers that would complicate compliance. For many sovereign issuers, transferring ownership of infrastructure or natural resources is not just operationally burdensome, but politically infeasible.
More concerning is the transformation of sukuk’s financial profile. By introducing direct exposure to underlying assets, sukuk may begin to resemble equity rather than fixed income — undermining the appeal for investors who treat them as Shariah-compliant bond equivalents.
Fitch Ratings has already warned that such instruments could become unrateable under conventional credit frameworks. This would present a major barrier for institutional investors governed by rating mandates — including pension funds and sovereign wealth vehicles — many of which have only recently begun allocating capital to sukuk markets.
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One of Islamic finance’s great achievements has been the growing standardisation of sukuk documentation and structures. If the Standard 62 changes are adopted inconsistently — as seems likely given jurisdictional constraints — it could fracture the market into incompatible regimes, each with its own interpretation of Shariah compliance. This would introduce legal uncertainty, reduce liquidity and increase the cost of capital.
Strengthening the ethical and religious foundations of Islamic finance must be a continuous process. But reforms must also reflect market realities. AAOIFI has signalled that industry feedback is being considered with the final standard expected to be issued in 2025. That presents a critical opportunity to ensure the standard achieves both Shariah authenticity and operational viability.
Three principles should guide this process. First, any transition must be gradual, with existing rules applying to outstanding issuances and Standard 62 to new issuances. Second, the framework must allow for jurisdictional flexibility, particularly in legal systems where asset transfer is not straightforward. And third, AAOIFI should engage with credit rating agencies to ensure sukuk remains compatible with institutional investment standards.
The sukuk market has evolved through principled flexibility, allowing Islamic principles to find practical expression in modern financial systems. The path chosen by AAOIFI will shape the trajectory of this market for decades to come.
