Balancing Shariah Authenticity and Market Stability: A Scenario-Based Framework for Implementing AAOIFI Shariah Standard No. 62 in the Global Sukuk Market

Abstract

This work develops a scenario-based policy framework for the prospective implementation of AAOIFI Shariah Standard No. 62 in global sukuk markets. The analysis suggests that immediate, rigorous enforcement would advance Shariah authenticity yet risk near-term destabilisation: issuance could retrench, the pricing premia could widen, and the rating treatment could bifurcate or even become inapplicable for instruments with pronounced risk-sharing. By contrast, calibrated sequencing, targeted legal reforms to perfect title transfer, and harmonised supervisory guidance can mitigate fragmentation and sustain investor confidence while re-anchoring sukuk to their risk-sharing foundations. Taken together, aligning religious fidelity with market pragmatism is achievable: a measured adoption of Standard 62 can reinforce the ethical underpinnings of Islamic capital markets without compromising their capacity for resilient growth.

1. Introduction

Sukuk have become a cornerstone of Islamic capital markets, funding governments and corporations across Islamic capital markets (Akinde et al., 2025). The global sukuk market exceeded $850 billion outstanding by the end of 2023, highlighting its economic importance. Jurisdictions such as the GCC countries and Malaysia dominate issuance, together accounting for a large majority of global sukuk floatation (Saturna Capital, 2024). This growth underscores sukuk’s role in mobilising capital in a Shariah-compliant manner—an alternative to conventional interest-bearing bonds that is vital for Muslim-majority economies and Islamic finance investors.

Over the last five years, issuance patterns have oscillated with global rates and fiscal cycles, yet the medium-term trajectory remains upward. In relative terms, sukuk are still a very small slice of the world’s debt markets: measured against around $313 trillion in global debt in 2023, outstanding sukuk represent roughly 0.27% by value (Fitch Ratings, 2024; IIF, 2024). Issuance is concentrated among a handful of jurisdictions. In 2023, the top issuers were Saudi Arabia and Malaysia, followed by Indonesia, the UAE and Türkiye, with Pakistan also active; Saudi Arabia alone accounted for more than a third of global primary sukuk in that year (Saturna Capital, 2024). Green and sustainability-labelled sukuk have emerged as a fast-growing segment, with issuance of $11–12 billion in the first nine months of 2024, led by the GCC and Southeast Asia, signalling the market’s potential alignment with energy transition finance (Zawya, 2024).

However, the authenticity of certain sukuk structures has been a subject of ongoing debate. Many sukuk issued over the past two decades have been “asset-based” rather than truly “asset-backed.” In asset-based sukuk, investors have a beneficial claim on an asset, but ultimate recourse is to the issuer’s credit (similar to unsecured debt), and principal is often effectively guaranteed by a purchase undertaking (Abad & O’Malley, 2024). This approach has raised concerns among Shariah scholars that sukuk too closely mimic conventional bonds, compromising the Islamic principle of risk-sharing. Notably, in 2007, an eminent scholar criticised that an estimated 85% of sukuk then in the market were not genuinely Shariah-compliant due to capital guarantees and repurchase agreements ensuring fixed returns (Usmani, 2008). Following his critique, there was a marked shift towards ijara (lease-based) sukuk structures and a temporary slowdown in issuance as the market reassessed compliance (Merzaban, 2009). The episode highlighted a fundamental tension between Shariah authenticity and the marketability of sukuk: investors and issuers had gravitated to risk-mitigated designs that scholars viewed as diluting Islamic principles.

In response to such concerns and the continued innovation in Islamic finance, AAOIFI has periodically updated guidelines to steer markets closer to Shariah intent. The latest and most consequential effort is the proposed Shariah Standard No. 62 on Sukuk (AAOIFI, 2023). This prospective standard aims to strengthen Shariah compliance in sukuk offerings, effectively rewriting the rulebook for how sukuk must be structured. The draft Standard No. 62 mandates “true sale” of underlying assets to sukuk investors, meaning that the legal title (not just beneficial ownership) should transfer to an issuing special purpose vehicle (SPV) for the benefit of investors (AAOIFI, 2023). Sukukholders would thus share the rewards and risks (al-ghunm wa al-ghurm) of the assets, in line with Islamic jurisprudence, rather than simply receiving contractual interest-like payments from the issuer. Furthermore, the standard seeks to prohibit explicit or implicit capital guarantees. For example, fixed repurchase agreements at maturity have been used to assure investors of principal repayment in most sukuk to date (AAOIFI, 2023). By eliminating guaranteed returns and enforcing real asset ownership, AAOIFI’s initiative strives to realign sukuk with its original spirit as investment partnership certificates, not debt instruments.

The implications of these changes are profound. For the sukuk market, which has thrived by attracting a broad range of investors, a shift towards full risk-sharing and asset-backed structures presents both opportunities and risks. On one hand, Standard No. 62 could enhance the religious and ethical integrity of Islamic finance, answering critics who argue that some Islamic products have been Islamic in form but not in substance (Askari et al., 2012; Chapra, 2008). It represents a philosophical pivot towards stricter adherence to Shariah, potentially increasing trust among pious investors and scholars. On the other hand, there is widespread industry concern that these stricter requirements will introduce legal complexities, higher transaction costs, and new risks that could dampen issuer and investor appetite (Hussain & Gupta, 2024). Market participants note that if sukuk become significantly less comparable to conventional bonds in risk–return profile, demand, especially from international and non-Islamic investors, could weaken, reducing liquidity and pricing competitiveness (Fitch Ratings, 2025a). In the worst case, a hastily implemented standard could fragment the global sukuk market, as some jurisdictions or institutions adopt the new rules while others do not, creating parallel markets with different compliance benchmarks.

Given this backdrop, there is a pressing need to analyse how AAOIFI’s Standard 62 might play out across various markets and what steps can smooth its implementation. This paper seeks to explore two central dimensions of the issue: (i) the Shariah authenticity gains envisioned by the standard, i.e., alignment with Islamic legal principles and its acceptance among scholars; and (ii) the market stability implications, i.e., effects on sukuk issuance volume, pricing, investor behaviour, and financial system stability, especially in leading sukuk-issuing regions. The analysis considers differing perspectives, including those of regulators, scholars, issuers, investors, and rating agencies, to provide a holistic understanding. The goal is to map out a path that can reconcile religious integrity with financial viability in the sukuk market’s next chapter of growth. In doing so, the paper contributes by framing the strict versus flexible implementation of AAOIFI’s Shariah Standard No. 62 as a regulatory policy trade-off between Shariah authenticity and market stability (Khnifer, 2024), by offering a cross-jurisdictional comparison of implementation implications in the GCC, Malaysia, and Indonesia (Nagano, 2017; Rahman, 2010), and by integrating conceptual analyses of Shariah authenticity and governance with empirical data on sukuk issuance trends and yield spreads (Chapra, 2008; Godlewski et al., 2013).

This study’s novelty lies in formalising the regulatory policy trade-off between Shariah authenticity and market stability into an operational framework; offering cross-jurisdictional scenarios for Standard 62 adoption that are anchored in legal-operational constraints (true sale, title perfection, insolvency remoteness) rather than purely narrative conjecture; and articulating implementable policy levers—sequencing, targeted legal reforms, and ratings-methodology innovation—to mitigate transition risk. The policy implications include concrete guidance for regulators on phased adoption and for market infrastructures, courts, collateral registries, and tax codes, to enable risk-sharing while preserving orderly market functioning.

In addition to the authenticity–stability framework, this study advances the development of the global sukuk market by operationalising a bridge between environmental finance practices and Shariah-sound structuring. Specifically, it maps environmental process pillars widely used in green bonds: (i) use-of-proceeds taxonomies and eligibility screens; (ii) project evaluation and selection governance; (iii) SPV-level management and ring-fencing of proceeds; and (iv) periodic allocation and impact reporting, onto Standard 62’s requirements for true sale, perfected title, and the avoidance of par-value undertakings. This integration blueprint clarifies how issuers can issue green, asset-backed sukuk without re-introducing de facto guarantees, and how regulators can supervise disclosures and verification in ways that sustain cross-border investor confidence. In short, Standard 62 can be a catalyst, rather than a constraint, for credible, sustainability-labelled sukuk.

2. Background

2.1. Theoretical Underpinnings: Risk-Sharing, Ownership, and Shariah Objectives

A clear theoretical foundation motivates the paper’s emphasis on risk-sharing. In Islamic jurisprudence, entitlement to gain (al-ghunm) is legitimised only by bearing risk (al-ghurm). Investment sukuk, therefore, derives permissibility from genuine exposure to the performance of identifiable assets or ventures, with ownership (milk) or usufruct (manfa‘ah) clearly apportioned to investors. This aligns with maqāṣid al-Shariah—particularly justice and prevention of harm—and differentiates sukuk from fixed-income instruments that insulate investors from loss (Askari et al., 2012; Chapra, 2008).

From a regulatory economics perspective, Standard 62 can be read through the lenses of institutional change and standard-setting. Pressures for isomorphic convergence, e.g., towards AAOIFI’s stricter benchmark, compete with jurisdiction-specific path dependence and regulatory pragmatism, yielding heterogeneous implementation (DiMaggio & Powell, 1983). This tension explains why ‘form’-emphasising schools (prevalent in parts of the GCC) and ‘substance/maslahah’-oriented approaches (notably in Malaysia) have long coexisted in sukuk governance (Alam et al., 2018).

Empirically, evidence on whether stricter Shariah adherence aids or hinders market development is mixed. Event-study and primary-market papers alternately find neutral to negative stock-price reactions to sukuk announcements (Godlewski et al., 2013) or limited pricing differentials once issuer- and issue-level covariates are controlled (e.g., Almaskati, 2022). Other studies document spread asymmetries and governance-sensitive effects (Aloui & Ben Hamida, 2021). These findings support the positioning: Standard 62’s impact will be mediated less by labels and more by enforceable ownership, collateral quality, and legal certainty, factors that these scenarios make explicit.

2.2. Literature Review

2.2.1. Sukuk Structures and the Principle of Risk-Sharing

From their inception, sukuk were conceived as instruments that embody partnership and asset-based financing rather than pure debt. The AAOIFI Shariah Standard 17, issued in 2003, defined investment sukuk as certificates representing undivided ownership shares in tangible assets or ventures. This broad definition accommodated a variety of structures, from lease-backed ijara sukuk to equity-like musharaka (joint venture) or mudaraba (profit-sharing) sukuk (Umar et al., 2023). In theory, investors in sukuk are entitled to returns linked to underlying asset performance and bear commensurate risk. Profit-and-loss sharing is a cornerstone of Islamic finance, reflecting the concept that reward (al-ghunm) is justified only by bearing risk (al-ghurm).

In practice, however, many sukuk came to replicate fixed-income characteristics to meet investor expectations and conventional benchmarks. By the late 2000s, the majority of sukuk issuance featured mechanisms to shield investors from risk, such as purchase undertakings where the issuer (or obligor) promises to buy back the asset at face value at maturity or upon default. Such features effectively ensure that investors receive their principal regardless of asset performance, thereby contravening the spirit of risk-sharing. Studies have categorised sukuk into two types to reflect this reality: asset-based sukuk, wherein investors have only a beneficial interest and rely on the obligor’s credit (with implicit guarantees), versus asset-backed sukuk, wherein a true sale of assets to the sukuk vehicle grants investors legal title and insolvency-remoteness from the issuer (Abad & O’Malley, 2024). In asset-backed structures, investors theoretically have no recourse to the originator’s balance sheet and must enforce their claims against the underlying assets, bearing any loss if asset values fall short—a structure much closer to ideal Shariah compliance. In their early empirical analyses, Godlewski et al. (2013) found that fully asset-backed sukuk are relatively rare, as issuers and investors often prefer the lower risk of asset-based structures despite their weaker Shariah credentials.

Scholarly discourse has often highlighted this tension. Usmani’s (2008) critique—that sukuk should be treated as equity-like instruments where investors share in venture outcomes, rather than debt with guaranteed coupons—was a watershed moment in sukuk literature. Following that, AAOIFI in 2008 issued guidance discouraging fixed buyback guarantees in partnership sukuk. While this led to some structural tweaks (for instance, allowing variable redemption amounts in musharaka sukuk or using NAV-based redemptions), the market largely adapted by shifting to ijara sukuk, which could maintain fixed payouts labelled as “rent.” Ijara (lease) sukuk became popular since rent is seen as a legitimate return from asset usage, yet many ijara sukuk still included a binding promise that the issuer would purchase the asset at par at maturity—thus preserving principal certainty for investors. This practice kept sukuk attractive to a broad investor base but left a question mark on true risk transfer.

Another stream of literature examines sukuk default cases to assess differences in investor outcomes between asset-based and asset-backed structures. A frequently cited example is the East Cameron Gas sukuk (2006) issued in the United States—one of the first truly asset-backed sukuk, where investors had ownership in an oil-and-gas asset and no recourse to the issuer’s other assets. When the issuer went bankrupt, sukuk holders faced the risk of losing value, mitigated only by what could be recovered from the asset (Jobst, 2007). In contrast, most sukuk defaults in the GCC (e.g., the Dar Al-Arkan sukuk in 2009 or the Dana Gas case in 2017) were resolved via issuer support or restructuring, wherein the obligors ultimately paid investors, effectively treating sukuk like conventional debt (though Dana Gas controversially argued its own sukuk was not Shariah-compliant to void payment obligations, highlighting legal uncertainties). Recent analysis by Wilson (2022) indicates that investors in asset-based sukuk tend to recover similarly to unsecured bondholders—relying on the issuer’s solvency—whereas true asset-backed sukuk could, in theory, yield higher recoveries if asset values hold, but also pose a higher loss risk if assets underperform. This variance underscores why many investors have been wary of fully asset-backed sukuk: they introduce real economic risk of loss, which, while Shariah-appropriate, diverges from the capital preservation mindset prevalent in fixed-income markets.

2.2.2. Green and Sustainability Sukuk Under Standard 62: Interfacing with Environmental Principles

Green and sustainability sukuk have expanded rapidly, yet most issues to date relied on asset-based structures whose environmental claims were largely process-based while investors’ economic exposure remained issuer-credit–like. Standard 62’s emphasis on true sale and risk-sharing re-anchors investors’ payoffs to identifiable assets or ventures, which is complementary to environmental labelling: environmental eligibility and impact metrics can be tied to the very assets that drive returns. Interfacing environmental principles with Standard 62 entails: defining asset-level eligibility and exclusion screens that are Shariah-consistent; documenting governance for project evaluation and ongoing monitoring by the SPV/trustee and Shariah board; ring-fencing and tracking proceeds at SPV level, with asset-performance updates incorporated into investor reports; and aligning post-issuance allocation and impact reporting with the asset pool’s realised performance. This synthesis turns environmental labelling from a disclosure overlay into a risk-sharing feature: environmental under-performance can, within the bounds of Shariah-permissible structures, flow through to returns, enhancing credibility while respecting the prohibition of guaranteed principal.

2.2.3. Regulatory Harmonisation and AAOIFI’s Role

The growth of Islamic finance has been accompanied by attempts to harmonise Shariah standards across jurisdictions in order to facilitate cross-border investment and product development. AAOIFI has been at the forefront, issuing not only accounting standards but also Shariah standards that cover everything from murabahah transactions to takaful insurance. However, adoption of AAOIFI standards has been uneven. The GCC countries, Pakistan, and several other Middle Eastern jurisdictions have formally or informally incorporated AAOIFI guidelines into their regulatory framework. For instance, Bahrain and Oman require Islamic banks to comply with AAOIFI Shariah standards, and Oman’s central bank has been particularly stringent in ensuring that local sukuk abide by such standards. In contrast, Malaysia—the world’s largest sukuk market—does not formally adopt AAOIFI standards, relying instead on its own national Shariah Advisory Council under Bank Negara Malaysia and the Securities Commission. Malaysian standards historically have been more flexible on certain issues (e.g., allowing the sale of debt (bay’ al-dayn), which AAOIFI disallows, and tolerating the kind of purchase undertakings now under scrutiny). This divergence means that a global sukuk issuer must navigate different expectations: a structure accepted in Kuala Lumpur might be deemed non-compliant in Riyadh, or vice versa (Rahman, 2010).

Prior research has pointed out that the lack of standardisation increases transaction costs and hampers the creation of a truly global sukuk market (Nagano, 2017). Prior research has also shown that sukuk market growth depends on macroeconomic, institutional, and regulatory conditions, highlighting how implementation of standards interacts with broader structural drivers (Akinde et al., 2025). Harmonisation efforts have had some success: for example, the International Islamic Financial Market (IIFM) has developed standardised documentation templates for sukuk, and the Islamic Financial Services Board (IFSB) provides prudential standards that complement AAOIFI’s Shariah-focused standards. Nonetheless, differences in interpretation remain. Alam et al. (2018) noted that while Middle Eastern scholars emphasise form (legal form of contracts) in determining Shariah compliance, Malaysian scholars often emphasise substance (economic outcomes and maslahah—public benefit). This philosophical difference has allowed Malaysian practice to be more pragmatic in structuring sukuk that international investors would buy, even if purists sometimes critique them.

Against this backdrop, AAOIFI’s Standard 62 can be seen as the latest move in a long push-pull between standardisation and local adaptation. If widely adopted, it would impose a higher uniform benchmark of authenticity. However, given varying market maturity and legal infrastructure, not all jurisdictions may be ready or willing to implement the standard as written. Past experiences are instructive: AAOIFI introduced Shariah Standard 59 in 2020–2021, dealing with sale-based transactions and tangibility ratios for sukuk, to ensure a certain percentage of tangible assets in asset portfolios (Fitch Ratings, 2024). While Standard 59 led to some documentation changes, like stricter tangibility clauses and early dissolution triggers in sukuk contracts, it did not fundamentally alter prevalent sukuk structures; most sukuk continued to operate as senior unsecured obligations in economic effect. This was largely because regulators and market players found ways to comply with the letter of the standard (e.g., maintaining required ratios) without changing the bond-like nature of instruments. The lesson is that implementation matters: if Standard 62 is implemented flexibly, markets may adapt around it; if implemented strictly, it could cause a more dramatic shift.

Rating agency reports and industry white papers form a crucial part of the contemporary literature, as they gauge market sentiment on Standard 62. Fitch Ratings and others have published commentaries in late 2024 and 2025 expressing concern that the sukuk market fragmentation could increase if jurisdictions take divergent paths on the new standard (Fitch Ratings, 2024). They also highlight the uncertain timeline and note that regulators are likely to be pragmatic, possibly phasing in requirements over several years and allowing leeway to preserve financial stability (Fitch Ratings, 2025a). Some scholars, writing in industry outlets, argue that Standard 62, while initially disruptive, is a necessary correction that should ultimately be welcomed as it purifies the market (Khnifer, 2024). These voices suggest the market’s long-term credibility and resilience will improve if sukuk truly reflect profit-and-loss sharing, even if growth moderates in the short term. The debate in the literature thus centres on whether strict Shariah adherence will bolster or hinder the development of Islamic finance. This paper contributes to the debate by providing an up-to-date analysis grounded in the latest developments and by proposing practical solutions to navigate the path forward.

3. Research Strategy

Scenario Design and Sensitivity

Expert sources cited in this study are limited to publicly attributable materials by: Shariah scholars specialising in fiqh al-mu‘āmalāt with demonstrable track record on capital-market rulings; standard-setting bodies (AAOIFI, IFSB, IIFM) and regulators/HSAs with formal authority; tier-1 rating agencies (Fitch, S&P, Moody’s) and leading law firms with dedicated Islamic-finance practices. The study privileges primary texts (exposure drafts, standards, official speeches) and triangulate with independent industry reports.1

Source selection followed three steps: (1) scoping of jurisdictions with the highest primary issuance and/or stock (GCC, Malaysia, Indonesia); (2) extraction of legal-operational constraints (true sale feasibility, tax neutrality, insolvency remoteness, foreign-ownership limits); (3) cross-validation of market statistics via at least two independent datasets, e.g., LSEG Refinitiv, IIFM, Fitch.

An Authenticity–Stability conceptual framework (Figure 1) is developed that decomposes each dimension into measurable components, offering a scaffold for future empirical index construction. The Authenticity Index (A) is defined as a composite of (i) effective title transfer; (ii) absence of fixed-price undertakings; (iii) asset performance linkage; and (iv) Shariah-board endorsement stringency. A Stability-Risk Index (S) synthesises: (i) issuance continuity; (ii) pricing dispersion; (iii) rating eligibility/volatility; and (iv) legal enforcement uncertainty. Policy levers shift positions on the (A, S) plane; phased adoption aims to increase A while preventing sharp rises in S.

Next, two stylised regimes—strict vs. flexible adoption—are operationalised by varying three levers: (a) title transfer (‘true sale’) enforceability; (b) presence/absence of fixed-price undertakings; and (c) supervisory tolerance/phase-in. Outcome indicators include issuance volumes, average primary-market spread vs. conventional comparable, rating eligibility, and investor-base composition. Sensitivity checks vary legal enforceability and tax costs to illustrate boundary cases. These are presented as qualitative ranges, consistent with the paper’s foresight remit.

4. Methodology

Given the forward-looking and international nature of the research question, a qualitative, comparative case study approach was adopted. The study does not utilise primary datasets (as the new standard was still under review at the time of writing and not yet implemented), but rather relies on secondary sources and scenario analysis. The methodological steps were as follows:

(i) Cross-jurisdictional analysis: Key jurisdictions that play pivotal roles in the sukuk market are selected—primarily the GCC region (with focus on Saudi Arabia, the UAE, Bahrain, and Oman) and Southeast Asia (Malaysia and Indonesia)—to examine their regulatory stances and preparedness for Standard 62. These cases were chosen because the GCC and Malaysia together account for the bulk of sukuk issuance and represent contrasting approaches to Shariah governance. Regulatory documents are reviewed, central bank guidelines, and public statements from these jurisdictions for any indication of how they might treat AAOIFI’s new standard. In the absence of direct statements (since Standard 62 was still in draft), the work inferred likely approaches based on each jurisdiction’s historical adherence to AAOIFI and the flexibility of its legal system regarding asset transfer.

(ii) Synthesis of industry reports and expert opinions: The paper gathered observations from Islamic finance standard-setters, rating agencies, law firms, and industry analysts concerning Standard 62 and its implications. Notably, reports by Fitch Ratings (2024, 2025a) and a briefing by Hussain and Gupta (2024) were analysed to capture prevailing expectations and concerns in the market. These sources often encapsulate expert consensus and are valuable for identifying potential impact channels (e.g., on ratings or investor behaviour). Where possible, the study cross-verified factual statements (for instance, about legal constraints or market statistics) with additional sources to ensure accuracy.

(iii) Scenario development: Using the information collected, scenarios of how the sukuk market might react under different implementation regimes of Standard 62 is developed: positing a “strict adoption” scenario (where major markets enforce immediate compliance with true sale and no guarantees) and a “flexible adoption” scenario (where implementation is gradual or with carve-outs, allowing conventional features to some extent). These scenarios were informed by historical precedents and analogies to regulatory changes in other markets.

(iv) Impact assessment on issuance and ratings: Although hard data are not yet available for post-Standard 62 issuance, historical issuance data is utilised and current market snapshots to gauge possible impacts. For instance, the work notes the proportion of sukuk that are currently asset-based (the vast majority) and considered how many might be unviable or need restructuring under the new rules. It also examined how credit rating criteria might change. Fitch’s and S&P’s existing criteria for sukuk were reviewed to see under what conditions an instrument could become unrateable. For example, Fitch’s Sukuk Rating Criteria suggests that if sukuk holders bear asset performance risk to the extent that the repayment amount is uncertain, the instrument may not meet the definition of debt and thus fall outside traditional rating methodologies. This qualitative analysis was supplemented by looking at market data such as yield spreads between sukuk and conventional bonds, to infer how investor risk perception might shift.

(v) Stakeholder consultation (literature-based): While no primary interviews were conducted, the study incorporates viewpoints of different stakeholders as found in the literature—including policymaker perspectives, e.g., statements from regulatory bodies via press releases or speeches, financial institution perspectives, e.g., anecdotal reports of Islamic banks’ plans or concerns from news articles, and Shariah scholar perspectives, gleaned from forums or public commentary on the draft standard.

The methodology’s strength lies in triangulating multiple sources to form a comprehensive picture. Its limitation, however, is the lack of direct empirical observation of Standard 62 in action (since implementation was pending). To counter this, the analysis remains conditional—identifying potential effects and emphasising factors that would influence outcomes in one direction or another. In essence, this research provides a grounded foresight analysis: it uses current evidence and historical lessons to project future implications, offering policymakers and industry players a framework to anticipate and manage the transition toward more authentic sukuk structures.

5. Analysis and Findings

5.1. Interpretation Caveat on Trends and Causality

The issuance trends reported for 2020–2025 are not adduced as causal effects of Standard 62, which remained a proposal over most of the period, but as contextual backdrop. Any association is explicitly framed as conditional and forward-looking. Therefore, avoiding causal attribution and use the scenarios solely to illustrate plausible transition dynamics given specific legal-structural assumptions.

5.2. Findings

This section presents the findings along three key dimensions: (a) how different jurisdictions are likely to implement or respond to AAOIFI Standard 62, ranging from strict adoption to flexible or non-adoption; (b) how investors and the sukuk market at large are expected to react, in terms of issuance volume, pricing, and ratings; and (c) the legal and operational feasibility of enforcing the new requirements in major markets. Throughout, it draws on evidence from the gathered sources to support these insights.

5.2.1. Jurisdictional Implementation Approaches

The analysis indicates a divergence between regions in their approach to Standard 62. Within the GCC, there is strong inertia towards AAOIFI compliance, yet also a recognition of practical constraints. For example, Bahrain, as AAOIFI’s home base, and Oman have traditionally mirrored AAOIFI Shariah standards in local regulations. It is plausible these regulators will lean toward strict implementation of Standard 62, perhaps making it a condition for Shariah compliance certification of new sukuk. Indeed, some market observers expect that GCC regulators who adopt the standard will also allow a transition period but ultimately insist on actual asset transfers and risk-sharing features in domestic sukuk (Fitch Ratings, 2025a, 2025b). Saudi Arabia and the UAE present more complex cases: both have significant sukuk issuance and international investor bases. Saudi regulators, e.g., the Capital Market Authority (CMA), have not explicitly committed to AAOIFI standards historically, but Saudi banks do follow many AAOIFI guidelines. The UAE, meanwhile, established a Higher Sharia Authority that might consider AAOIFI standards as a reference but also values consistency with global market norms. Issuers in the UAE often treat sukuk issuance as a signalling device vis-à-vis conventional bonds, which influences how regulatory shifts are absorbed (Nasreen et al., 2020). However, both countries may opt for a moderate implementation, possibly endorsing the principles of Standard 62 but building in flexibility, such as permitting sovereign issuers to retain certain guarantees or phasing in requirements over several years. A supporting reason is that these nations have ambitious capital market goals; a sudden imposition that could chill the sukuk market would run counter to their financial sector development agendas.

Malaysia, which accounts for a substantial portion of outstanding sukuk, over 45% by some measures (Saturna Capital, 2024), is unlikely to adopt AAOIFI Standard 62 in full given its independent framework. The Securities Commission Malaysia has its own comprehensive guidelines for sukuk, and the National Shariah Advisory Council’s rulings hold sway. Historically, Malaysian sukuk guidelines have allowed structures, like mixed asset pools and fixed-price guarantees, that maximise practicality and investor acceptance. Therefore, there is little appetite in Malaysia for a wholesale shift to asset-backed-only sukuk. Malaysian regulators might observe how Standard 62 unfolds elsewhere, but unless there is a concerted global push or market demand for Standard-62-compliant instruments, Malaysia will maintain its current practice. This creates a potential fault line: the GCC vs. Malaysia. If, say, Bahrain or Dubai insists on Standard 62 for local issuers, one could see a scenario where an issuer that finds those rules onerous might choose to issue in Malaysia (under its frameworks) to tap investors who are indifferent to AAOIFI compliance. Conversely, if Gulf investors, such as Islamic banks in the GCC, decide they will only invest in instruments meeting the new standard, issuers in Malaysia might have to consider compliance to attract that liquidity. Thus, regulatory fragmentation could lead to market arbitrage or segmentation—a point raised by Fitch Ratings (2025a): “Market fragmentation could increase if adoption and implementation varied by jurisdiction or entity.”

Within the GCC itself, not all countries may move in lockstep. The UAE and Saudi Arabia may prioritise continuity; Oman and Bahrain may prioritise compliance. Kuwait’s stance is unclear—Kuwaiti regulators often follow a cautious approach and may align with AAOIFI in principle but delay enforcement until the market is ready. Beyond the GCC and Malaysia, other important markets include Indonesia, which often strikes a middle ground; it adheres to many global standards but also follows its national Shariah board (the DSN-MUI) and Pakistan, which tends to follow AAOIFI in banking. Indonesia has a large domestic sukuk market and might be concerned about the impact on financing costs if risk-sharing is mandated, so it may implement it gradually. Pakistan, under an increasingly assertive Islamic finance drive, might more readily embrace AAOIFI’s guidance to strengthen the Islamic character of its sukuk. These differences affirm that context matters: legal infrastructure, e.g., ease of asset transfer, presence of trust laws, market development stage, and the prevailing interpretation of Shariah all influence how Standard 62 will be received.

5.2.2. Market Trends

Figure 2 illustrates the quarterly global sukuk issuance volumes from Q1 2020 to Q2 2025. The red dashed line marks the announcement of AAOIFI Shariah Standard No. 62.

Global sukuk issuance between 2020 and 2025 has been shaped by macroeconomic conditions and policy shifts, with the proposed AAOIFI Shariah Standard No. 62 emerging as a potential inflexion point. In 2020, issuance contracted sharply in the second quarter due to the COVID-19 pandemic, before rebounding strongly in the second half, leading to a record full-year issuance of about $182 billion. This recovery gathered momentum in 2021, when quarterly volumes exceeded $50 billion for the first time, and total issuance reached nearly $197 billion, reflecting favourable liquidity conditions and pent-up sovereign financing needs.

Momentum moderated in 2022 as higher global interest rates and improved fiscal positions in oil-exporting economies dampened issuance. While US dollar-denominated sukuk volumes declined, robust local-currency issuance in Malaysia, Saudi Arabia, and Indonesia kept global totals broadly stable at $194 billion. By contrast, 2023 marked a clear slowdown, with total issuance declining to around $168 billion. Rising funding costs and weaker sovereign demand contributed to the contraction, but uncertainty around AAOIFI’s Standard No. 62, exposed in November 2023, may also have induced some issuer caution, particularly in the final quarter of the year.

Notably, issuance rebounded in early 2024, suggesting that the announcement of Standard 62 did not trigger a structural break but rather added a layer of uncertainty. Issuers may have accelerated deals ahead of possible regulatory changes, while others waited for clarity before re-entering the market. By the first half of 2025, issuance totalled about $101 billion, a 15% year-on-year decline, reflecting higher global rates and seasonal issuance patterns. Overall, the data indicate that macroeconomic factors remain the dominant drivers of sukuk issuance. However, Standard 62 represents a looming regulatory shift, and its eventual strict or flexible implementation could significantly influence market dynamics beyond 2025.

Likewise, Figure 3 illustrates the quarterly global sukuk vs. conventional bond yield spreads (Q1 2020 to Q2 2025). Global sukuk yield spreads relative to conventional bonds have remained narrow from 2020 to 2025, showing strong integration between Islamic and conventional debt markets. During the COVID-19 shock in early 2020, spreads briefly spiked as sukuk sold off more steeply than bonds, reflecting temporary liquidity stress. By late 2020, spreads normalised, and through 2021, sukuk often traded at slightly lower yields than comparable bonds, indicating robust investor demand. In 2022, spreads widened modestly amid global rate hikes and geopolitical tensions, but quickly converged again. By 2023, average spreads hovered around 20–25 bps, narrowing further to about 10 bps in 2024. The announcement of AAOIFI’s Shariah Standard No. 62 in November 2023 did not trigger any measurable divergence, suggesting investors adopted a wait-and-see stance. By mid-2025, sukuk and bond yields were moving in lockstep, highlighting that risk perceptions remain driven primarily by macroeconomic conditions rather than sukuk’s structural differences.

5.2.3. Investor Response

Investors are at the heart of whether stricter sukuk structures will succeed. The consensus from industry feedback is that if Standard 62 is applied in a stringent way, the immediate reaction may be one of caution or even aversion. Sukuk investors have historically valued the instrument’s stability and predictable returns; many conventional investors treat sukuk as interchangeable with bonds for portfolio allocation, with the bonus of diversification and, for Islamic investors, religious compliance. The introduction of greater uncertainty in returns or principal recovery could force a reassessment. Evidence of strong co-movement between sukuk and conventional bonds underscores why stricter enforcement could alter pricing dynamics and investor allocation strategies. Several possible market responses anticipated:

5.2.4. Sukuk Issuance Volume

In the short term, sukuk issuance could decline in jurisdictions enforcing the new standard. Issuers who find the new requirements cumbersome might delay or reduce issuance, or seek alternative funding, i.e., like conventional bonds or loans, if those are accessible. Fitch Ratings (2025a) noted that adoption of Standard 62, if disruptive, “may affect some Islamic banks’ overall funding and liquidity profiles” due to potential sukuk market disruption. This implies that banks, key issuers and investors in sukuk might have to adjust funding plans. Empirical projection is difficult, but one can recall 2008–2009 when Usmani’s statements, combined with the financial crisis, led to a sharp sukuk issuance drop, from $50 billion in 2007 to under $15 billion in 2008 (Merzaban, 2009). While that contraction was also due to global conditions, a part of the market freeze in early 2008 was attributed to uncertainty over Shariah compliance of structures (Merzaban, 2009). One might see an analogous pause as issuers and scholars work out acceptable structures under Standard 62.

5.2.5. Yield and Pricing

If risk-sharing truly increases, investors will likely demand a higher yield to compensate. Sukuk could start trading more like hybrid instruments or junior debt in terms of risk premium. For example, a sukuk lacking a fixed redemption guarantee might be seen as having equity-like tail risk, leading to wider credit spreads or even difficulty in pricing. Conversely, some high-quality issuers might structure asset-backed sukuk so robustly, with strong collateral and legal safeguards, that their sukuk could achieve slightly better pricing than unsecured debt. Fitch posited that if sukuk becomes secured debt with collateral, theoretically, they might be rated (and priced) above the issuer’s senior unsecured rating in certain cases (Fitch Ratings, 2024). But this would require clarity on the enforceability of investor claims, which in many jurisdictions is untested.

5.2.6. Credit Ratings

One immediate technical effect is on how credit rating agencies evaluate sukuk. Currently, most sukuk carry the same rating as the issuer’s senior unsecured debt, reflecting the asset-based (but recourse) nature. If Standard 62 forces a shift to asset-backed structures with no recourse, rating agencies have warned of two divergent outcomes. In some cases, if collateralization is clear, ratings could bifurcate—some sukuk might be rated higher than the issuer (due to collateral), and others might not qualify as debt at all and thus be unrated or rated on a different scale. Sukuk with quasi-equity features, e.g., variable payoff based on asset market value at maturity, could be unrateable under traditional criteria (Fitch Ratings, 2025a). If a sukuk’s repayment amount is subject to market risk (like asset market value), it may fall outside the scope of debt rating methodologies (Fitch Ratings, 2024). This possibility might dissuade some issuers—many issuers want a credit rating to broaden investor appeal; if adopting the new structure means losing a rating, they may be reluctant. On the other hand, should a rated sukuk instrument become secured (asset-backed) debt, rating agencies would need to analyse recovery prospects. In the majority of Muslim-majority countries, legal systems are such that even secured creditors do not necessarily have strong recovery prospects in insolvency. Thus, investors cannot be assured that owning an asset via sukuk gives them the same protection as, say, holding collateral in New York or London markets. This uncertainty could weigh on ratings or at least result in conservative assumptions, possibly no uplift for collateral. In summary, Standard 62 could either complicate or depress credit ratings for sukuk in the near term, until a track record is established.

5.2.7. Investor Base

The composition of investors might shift. Some Islamic investors, like dedicated Islamic funds or Muslim high-net-worth individuals, might actually prefer the more authentic sukuk and continue to invest, even with lower liquidity or higher risk, due to religious conviction. In contrast, conventional investors who have been buying sukuk for yield pickup or diversification could reduce their participation if sukuk start behaving too differently from bonds, e.g., variable returns or no guaranteed principal. Demand from international investors might soften, as Fitch warned: demand could be affected if sukuk are less comparable to bonds (Fitch Ratings, 2025a). This could result in a more segmented investor market—a core of Shariah-focused buyers versus others. Over time, new investors might also be attracted: for instance, those interested in ethical finance or ESG investments might appreciate sukuk that truly share risks—one could argue it aligns with fairness and justice, principles overlapping with ESG. But that is speculative and would depend on effective marketing of sukuk as ethical investments beyond the Muslim community. Moreover, evidence of herding behaviour in Islamic financial markets suggests that in times of uncertainty, investors may collectively follow each other’s actions, potentially amplifying market reactions.

5.2.8. Regional Impact and Concentration

Any downturn in sukuk issuance or demand will have uneven regional impacts. Findings suggest the implications are especially pronounced for the GCC and Malaysia, which are the two poles of the sukuk world. The GCC, which in 2023 accounted for about 54.5% of global sukuk issuance by value (Saturna Capital, 2024), could see a significant volume decline if major issuers like Saudi Arabia or the UAE scaled back international sukuk plans pending clarity on the standard. The GCC governments frequently issue sukuk to fund budgets, despite high oil revenues, as part of debt market development strategies, so any hesitation can dent global volumes. Malaysia, while perhaps not adopting the standard domestically, could still feel ripple effects: if global funds shift allocations away from sukuk generally due to uncertainty, even Malaysian sukuk might face yield pressures. Conversely, and an important point, Malaysia might benefit in relative terms if it does not enforce the strict requirements: issuers preferring conventional structures might favour issuing in Malaysian ringgit or under Malaysian law to avoid the stricter jurisdictions. This could make Malaysia an even larger hub for sukuk, but also potentially isolate it if the rest of the world goes the other way. The GCC vs. Malaysia gap could complicate cross-border investments. For example, a GCC investor might question the Shariah compliance of a Malaysian sukuk that does not meet Standard 62, or a Malaysian issuer might need to clarify compliance status in offering documents when marketing to Middle Eastern investors.

In summary, the investor response is likely to be cautious initially, with a “wait-and-see” attitude prevailing until the exact form of the final standard and the extent of adoption are clear. The market could experience short-term instability, lower issuance, widening spreads, and rating transitions, especially in strict adopters of Standard 62. Over the medium term, however, creative solutions and market adaptation could restore confidence. It is also possible that if only a subset of jurisdictions implements the changes, issuers and investors will gravitate towards whichever environment they find more favourable, thereby rebalancing issuance rather than destroying it outright.

5.3. Investor Protection, Recourse, and Recovery Under Standard 62

Standard 62 alters the centre of gravity of investor protection, from obligor-level promises to asset-anchored rights. Below are delineated four protection modules:

(i) Recourse and Enforcement Waterfall: In the absence of par repurchase, sukukholders’ recourse runs through the SPV/trustee to the asset pool. The enforcement waterfall should identify trigger events; empower a security agent/trustee to enforce security over assets and assigned receivables/leases; stipulate disposal or workout mechanics; and allocate recoveries net of servicing and enforcement costs.

(ii) Legal Certainty and Perfection: Investor rights depend on a perfected transfer of title/usufruct and registered security interests where relevant. Transaction documents should evidence true sale, insolvency-remoteness, and assignment of underlying contracts, with notice/consent mechanics, supported by capacity/enforceability opinions and, where used, trust deeds or parallel security under local law.

(iii) Ratings and Rating-Eligibility: Where collateral and enforcement are clear, asset-backed sukuk can be analysed on a secured-debt basis; where redemption is variable and materially exposed to asset market risk, instruments may fall outside standard debt criteria. Issuers should therefore disclose: collateral packages, perfection status, priority ranking, substitution policies, cash-flow mechanics, and stress-case behaviour to avoid ‘unrateability’ and to anchor investor pricing.

(iv) Recovery Modelling and Reporting: Expected recoveries turn on asset valuation bases, market value vs. income approach, liquidation timelines, and servicing competence. Periodic reports should include pool-level DSCR/occupancy/production metrics (as applicable), valuation updates, performance triggers, substitution limits, and reserve-account levels (including Shariah-permissible liquidity/takaful features that do not constitute a par guarantee). There are also implications for investors: due diligence should prioritise verification of title and security perfection; the enforceability of dispute resolution; independence and powers of trustee/security agent; clarity on events of default and voting/quorum for enforcement; and transparency of asset-level risks, including those tied to environmental performance in green sukuk.

5.4. Legal and Operational Feasibility

Implementing the core tenets of Standard 62, true sale of assets and no guarantees, is not merely a financial or compliance challenge, but very much a legal and operational challenge. The analysis reveals a number of practical obstacles that regulators and issuers must contend with:

5.4.1. Asset Transfer and Title Perfection

Requiring an “actual transfer of ownership” in an ijara sukuk (or any sukuk) means that the underlying assets—whether real estate, equipment, or usufruct rights—must be transferred to a special purpose vehicle and ultimately to the sukuk holders. In many jurisdictions, transferring title of assets like land or buildings triggers significant transaction costs, such as taxes, registration fees, or simply procedural delays. Some countries have laws exempting sukuk transfers from certain taxes (Malaysia, for instance, has provided tax neutrality for asset transfers in Islamic finance to encourage sukuk issuance (Mohd Daud, 2011)), but not all have such provisions. If every sukuk must involve formal asset conveyance, it could “increase fees and time spent structuring the transaction,” as noted by Hussain and Gupta (2024). They also point out that large-scale issuances could become unattractive due to the administrative burden and cost overhead. Additionally, certain assets cannot be easily transferred: for example, public infrastructure assets might be legally non-transferable or require legislative approval to sell to an SPV. Sovereign issuers in the GCC might baulk at transferring ownership of, say, government buildings or infrastructure to certificate holders, especially if foreign investors are among them, potentially conflicting with laws against foreign ownership of national assets (Fitch Ratings, 2024).

5.4.2. Balance Sheet and Accounting Impacts

A true sale to an SPV in a sukuk can mean that the originator (issuer) derecognises the asset from its balance sheet, similar to a securitisation. For banks or companies, removing assets could affect their financial ratios. Fitch Ratings (2025a) notes that if Islamic banks have to move to asset-backed sukuk, the derecognition could reduce their balance sheet size and debt, which might impact liquidity ratios and profitability (as assets generating income are off books), and even regulatory capital ratios if not properly accounted. While reducing debt might sound positive (deleveraging), losing assets could lower income, and any mismatch could hurt earnings metrics. Corporate issuers might find this undesirable unless they specifically aim for off-balance-sheet treatment. The appeal of asset-backed financing is sometimes to achieve true sale and off-balance-sheet funding, but not all issuers want that (many prefer to keep strategic assets within the group). Furthermore, accounting standards (e.g., IFRS) would need to be satisfied that it is a genuine sale—if there are any features that give the originator control or beneficial interest, auditors might insist the assets stay on the balance sheet, defeating the purpose.

5.4.3. Enforcement and Investor Recourse

A critical legal question is what happens if an issuer defaults. Under asset-based sukuk, investors typically have recourse to the issuer as an obligor (hence similar to bondholders). Under asset-backed sukuk per Standard 62, investors would only have recourse to the assets. But if an issuer defaults or enters bankruptcy, how smoothly can sukuk investors enforce claims on those assets? In many jurisdictions, especially emerging markets, the insolvency regimes are untested for sukuk. Sukuk holders might find themselves in line with other secured creditors, or worse, discover that their claim on the asset is entangled in legal uncertainty if, for example, the transfer to the SPV is challenged. Fitch Ratings (2024) highlighted that a few Islamic finance markets have established precedents on how courts would treat sukuk holders in a default. If a sukuk is structured as secured debt, it might require clear security agreements, collateral registries, and legal opinions to assure enforceability—infrastructure that is not uniformly present across the GCC or other Muslim-majority countries. The lack of clarity on these points means that legal risk premiums could be priced in by investors or that some legal systems might need reform to accommodate this new type of claim.

5.4.4. Operational Capability and Documentation

Implementing Standard 62 means a lot of documentation changes. Legal firms would need to draft new clauses to reflect risk-sharing:, e.g., removal of guaranteed rental streams if asset performance is poor, or stipulating variable redemption amounts. The gulf between traditional sukuk documentation and truly risk-sharing instruments is significant. Market practitioners will have to develop standardised language and new legal frameworks to capture the intended Shariah outcomes. Additionally, operational capabilities—such as servicing the assets, managing SPVs, and handling asset transfers—will need to be scaled up. Not all issuers have experience with complex asset-backed structures, and the servicing of such sukuk may require more active asset management (for instance, monitoring asset performance and handling asset disposal at maturity). Regulators might need to issue detailed guidelines to clarify how Standard 62-compliant sukuk should be structured and what legal protections must be in place. There is also a need for capacity building among Shariah scholars, lawyers, and bankers to ensure a common understanding of the new requirements and how to implement them without causing disputes or unintended consequences.

Finally, the transition toward stricter standards raises the question of regulatory harmonisation itself. If some jurisdictions implement Standard 62 swiftly while others delay or opt out, the lack of harmonisation could create friction in cross-border investment. In the medium term, international coordination—perhaps through bodies like the IFSB or IIFM—may be necessary to guide a smooth global transition. Otherwise, issuers and investors might face uncertainty when operating across markets with divergent Shariah compliance expectations.

6. Discussion

Preventing unrateability for risk-sharing sukuk will require methodological innovation. Two avenues are promising: (i) secured-debt style frameworks that rate asset-backed sukuk on expected recovery, where legal opinions support perfection and priority of security interests; and (ii) purpose-built scales or suffixes for variable-redemption instruments, akin to hybrid capital notching, which transparently price tail-risk without defaulting to ‘NR’. Fitch and peers have already signalled that such a bifurcation is possible, depending on collateral clarity and cash-flow certainty (Fitch Ratings, 2024, 2025a).

Policy levers to balance authenticity and stability include: phased tangibility and true-sale thresholds; tax neutrality for asset transfers; establishment of collateral registries and SPV regimes; and HSA guidance that delineates acceptable contingency-support mechanisms (e.g., reserve accounts, takaful wraps) that stop short of guaranteed par redemptions.

Balancing Shariah authenticity with financial stability emerges as the central challenge in the implementation of Standard 62. The discussion synthesises insights from the previous sections to outline potential strategies and policy considerations that could reconcile these objectives. A phased implementation appears to be a prudent approach: regulators could introduce the new requirements gradually, allowing markets to adjust and innovate solutions (such as liquidity facilities or partial guarantees that are Shariah-acceptable) to cope with the increased risk-sharing. For example, transitional measures might include initially mandating true sale for only a portion of each sukuk issuance or providing government-backed incentives or backstops for early adopters. This would mirror how some regulatory changes in conventional finance are rolled out with grace periods or pilot programmes.

Stakeholder engagement is also crucial. Dialogues among standard-setters, scholars, market players, and investors can identify practical bottlenecks and inform refinements of the standard. AAOIFI’s exposure draft process itself has solicited industry feedback; continuing this engagement post-issuance can help in interpreting the standard’s clauses in light of real-world complexities. One concrete suggestion is the formation of a joint task force (perhaps under the IFSB or Islamic Development Bank) that tracks implementation experiences across countries and publishes guidance or best practices. This could help less-prepared markets learn from early adopters and avoid fragmentation.

On the market side, innovation will be key to maintaining stability. Innovative structures such as sukuk linked to social financing or awqaf demonstrate how flexible adaptation can reconcile Shariah authenticity with market needs. Financial engineers and Shariah scholars might collaborate to design sukuk that meet the letter of Standard 62 while still providing some investor comfort. For instance, structures could be developed where returns are linked to asset performance within a band, or where partial credit enhancement is provided via third-party mechanisms (like takaful schemes or a reserve fund) without violating the no-guarantee rule. Similarly, rating agencies may need to adapt their frameworks—possibly introducing new rating categories or qualifiers for risk-sharing sukuk—to give investors and issuers clearer guidance on how these instruments will be assessed. If rating agencies can establish methodologies for asset-backed sukuk that reward strong collateral and structural protections, issuers might be encouraged that a high rating (and thus lower cost) is still achievable under the new paradigm.

Legal reforms are another piece of the puzzle. Governments, especially in major Islamic finance centres, may consider updating laws to facilitate asset transfers and investor rights. This could include tax exemptions for sukuk asset transfers (to prevent cost spikes), clearer definitions of investor ownership rights in insolvency, and perhaps special provisions for government-related entities to issue asset-backed sukuk without contravening public asset ownership rules. Harmonising such laws within regions (e.g., across the GCC) could also reduce the risk of regulatory arbitrage mentioned earlier.

Investor education and communication should not be overlooked. The “shock” of stricter sukuk can be mitigated if investors are well-informed about the rationale and long-term benefits. Islamic finance institutions and scholars may need to proactively highlight the ethical and stability advantages of true risk-sharing to build investor buy-in. Over time, if markets see that even risk-sharing sukuk can perform well and that default recoveries might in some cases be better (thanks to collateral), confidence could grow. In addition, new classes of investors—such as socially responsible investment funds or faith-based investors who previously avoided sukuk due to authenticity concerns—might enter the market, providing fresh demand.

Finally, it is important to monitor macroeconomic implications. If Standard 62 were to significantly constrain sukuk issuance in certain countries, those economies might need alternative financing channels to avoid a funding shortfall. Policymakers should thus coordinate any implementation of the standard with broader financial sector plans, ensuring that critical financing needs, for infrastructure, budget deficits, etc., can still be met. This might involve interim measures like allowing exceptions for strategic issuers or using multilateral development banks to support sukuk issuance during the transition.

In summary, the path forward requires a delicate mix of flexibility and conviction. The industry must hold firm to Shariah principles—indeed, Standard 62 is a timely reminder of Islamic finance’s distinctive identity—but it must also pragmatically manage the transition. With thoughtful sequencing, robust dialogue among stakeholders, and supportive market and legal innovations, the global sukuk market can evolve toward greater authenticity without undermining the stability and growth it has achieved.

7. Conclusions

AAOIFI’s proposed Shariah Standard No. 62 presents a fundamental policy trade-off for the sukuk industry: the pursuit of strict Shariah authenticity versus the preservation of market stability. The analysis accentuates that both values—religious integrity and financial viability—are essential and attainable with a carefully calibrated approach. A one-size-fits-all, strict implementation of Standard 62 would maximise Shariah compliance but also risk short-term disruption: sukuk issuance could contract, investors might lose confidence in untested risk-sharing structures, and legal frictions could multiply. Conversely, a more flexible or phased adoption can safeguard market stability and investor confidence, even if it means a more gradual realisation of full risk-sharing. The key is balance—aligning the pace of reform with each jurisdiction’s readiness and providing guidance and support as market participants adapt.

In sum, aligning Islamic principles with financial practicality is not only possible but imperative for the sustainable growth of Islamic finance. Sukuk originated as instruments of just, asset-linked financing; returning to that spirit can strengthen the industry so long as stakeholders manage the transition prudently. Through international coordination, regulatory pragmatism, and industry collaboration, the adoption of Standard 62 can reinforce the ethical foundations of the sukuk market without undermining its expansion. The journey toward stricter Shariah compliance thus marks a maturation of Islamic finance itself—an evolution that stays true to its religious roots while embracing the innovations needed for a resilient and globally competitive future. Future research could incorporate the advanced modelling of volatility and asymmetries in Islamic markets to empirically test the effects of regulatory shifts.

This study is a foresight analysis based on secondary sources, while Standard 62 remains in draft. It does not include primary stakeholder interviews or investor surveys, nor does it estimate structural models linking legal variables to pricing outcomes. Future research should: (i) undertake multi-country surveys and interviews across issuers, investors and scholars; (ii) develop jurisdictional ‘authenticity’ and ‘stability-risk’ indices for panel regressions; and (iii) evaluate post-implementation issuance, spreads and ratings once natural experiments emerge.

Practically, the path to a stable, more authentic, and greener, global sukuk market runs through investor-centred legal certainty: perfected title, enforceable security, clear enforcement waterfalls, and disciplined disclosures. By combining these elements with asset-level environmental process and reporting, Standard 62 can underpin a credible segment of green, asset-backed sukuk that serves investors and policymakers alike.