GCC sukuk issuance is expected to slow during 2026 as prolonged geopolitical tensions in the Middle East weigh on investor sentiment, economic growth and regional financing activity.
According to S&P Global, growth across the global Islamic finance sector is projected to cool to between 5% and 10% this year, down from 10.2% recorded in 2025.
The ratings agency said the ongoing regional conflict has increased market uncertainty and risk aversion, particularly affecting foreign-currency sukuk issuance from Gulf Cooperation Council countries.
Sukuk, which are structured to comply with Islamic finance principles, remain a critical source of funding for governments, banks and corporations across the Gulf region.
S&P said weaker-than-expected global interest rate cuts and a growing shift toward conventional debt financing are also contributing to the expected slowdown in GCC sukuk issuance.
“The war has dampened the economic growth prospects of most Gulf Cooperation Council countries, which will inevitably result in lower growth opportunities for their banking systems, including Islamic banks,” the agency said.
Despite the broader caution, the first four months of 2026 still recorded relatively strong issuance activity.
GCC-specific sukuk offerings reportedly increased by 13.1% year-on-year during the period, although most of the growth came from local-currency issuance in Saudi Arabia rather than international foreign-currency deals.
The Gulf region remains central to the global sukuk market. Last year, GCC countries accounted for approximately 45% of worldwide sukuk issuance, reinforcing the region’s dominance within Islamic finance.
S&P also warned that several Gulf economies could face sharper economic slowdowns this year due to disruptions linked to the closure of the Strait of Hormuz and wider regional instability.
Countries including Qatar, United Arab Emirates, Kuwait and Bahrain may experience pressure across tourism, private investment, trade and supply chain sectors.
The ratings agency noted that slower economic activity could reduce financing demand and limit growth opportunities for both conventional and Islamic banking institutions across the Gulf.
However, S&P said strong credit expansion during the first quarter of the year — particularly in Kuwait and the UAE — may help absorb some of the economic shock.
Saudi Arabia is also expected to maintain lending growth, though at a slower pace than previously anticipated.
Analysts say the sukuk market remains relatively resilient because of continued demand from regional investors, sovereign funding requirements and the growing role of Islamic finance within Gulf capital markets.
Still, geopolitical uncertainty and volatile global borrowing conditions are likely to keep issuers cautious until market stability improves.
Industry observers also expect governments and major corporations to increasingly balance sukuk financing with conventional bond issuance depending on pricing conditions and investor appetite.
The slowdown comes at a time when Gulf economies are simultaneously pursuing large-scale infrastructure projects, economic diversification programs and energy transition investments that require substantial long-term financing.
Why This Matters
GCC sukuk issuance plays a major role in funding Gulf governments, banks and corporate expansion. Slower issuance could affect regional liquidity, infrastructure financing and broader Islamic finance growth.
What Happens Next
Market participants will closely monitor geopolitical developments, oil prices and global interest rate trends to assess whether sukuk issuance activity can recover later in 2026.
