Global sukuk market increasingly becoming attractive for mainstream investors

Khaleej Times

3 hours ago

At $930 billion in size, the market for sukuk – often described as the Islamic world's equivalent to bonds – is becoming increasingly difficult for mainstream investors to overlook.
While sukuk-focused funds remain small, with just $5.8 billion in assets under management, the space has seen notable developments in recent years, including the rise of passive ETFs, a study showed.
While the sukuk market grew to $930 billion in outstanding securities by the end of 2024 (up from $863 billion in 2023), the market for funds investing in sukuk is tiny by comparison, data from Morningstar shows. Sukuk funds totalled $5.8 billion in assets in May 2025 (up from $5.0 billion a year earlier). Islamic banks dominate sukuk ownership, resulting in a market characterized by shallow trading and low liquidity.
The market for sukuk funds aimed at global investors includes a small but growing cohort of both passive and active options. Fees for passive sukuk ETFs, which largely focus on the investment-grade market, fees range from 0.35 per cent to 0.50 per cent (reasonable, though higher than comparable bond options). Fees for US dollar-denominated actively-managed sukuk funds average 1.34 per cent (pricey compared to conventional global diversified or emerging-markets bond funds). Active sukuk funds often have more room to boost yields by investing in riskier, below-investment-grade issuers.
'As the global sukuk market expands, its relevance and appeal to investors seeking Shariah-compliant options have grown. Still, the market's concentration in specific geographies and heavy exposure to a few issuers makes it less suitable as a long-term core allocation compared to more diversified conventional bond strategies. However, for investors restricted to Shariah-compliant vehicles, the range of both active and passive sukuk funds is widening. Sukuk have not been immune to short-term volatility as geopolitical risks exploded in the Middle East in 2025, but many sukuk managers argue that issuers in the region retain strong fundamentals, and that credit deterioration should be fairly contained,' commented Shannon Kirwin, Principal, Fixed Income Ratings at Morningstar.
The sukuk market's infrequent trading and largely buy-and-hold investor base have yielded a key benefit for sukuk investors: historically lower price volatility compared to conventional bonds. However, this feature could diminish if funds become a more meaningful portion of the market – and it should not be mistaken for a lack of credit risk.
Standards boards, particularly the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAIOFI) and the Malaysia-based Islamic Financial Services Board (IFSB) play important roles in establishing and maintaining norms in the sukuk market. Currently, the AAIOFI is considering tightening its standards for the treatment of asset-based sukuk (its upcoming Standard 62), which some observers worry could prove disruptive to the market. Fund managers and experts who spoke with Morningstar for this paper, however, expressed optimism that the board would ultimately err on the side of preserving market stability.
Despite its lower price volatility, the sukuk market's strong geographic skew towards a few regional markets (Gulf countries dominate hard-currency issuance while Malaysia dominates local-currency issuance) makes the asset class less suitable as a core portfolio building block for conventional investors than a diversified global bond allocation, analysts say. However, for Muslim investors otherwise unable to tap fixed-income funds, the sukuk market offers a compelling solution.