RIYADH: The ongoing conflcit in the Middle East could expose weaknesses in the legal structures of sukuk, particularly where the bonds are backed by physical assets that may be damaged in attacks, S&P Global Ratings said.
The agency said a small portion of sukuk it rates could face risks of total or partial loss if underlying assets are hit, raising questions about how well existing protections would work in a prolonged conflict.
While issuance volumes have remained resilient so far in 2026, S&P Global noted that the escalation of hostilities could test contractual frameworks underpinning Islamic bonds.
This comes as the Middle East conflict, which began on Feb. 28 with US- and Israel-led strikes on Iran, has caused damage to energy facilities, infrastructure and commercial property across the region, disrupting shipping routes and supply chains. A two-week ceasefire has paused fighting, but the situation remains fragile after initial talks in Islamabad failed to reach an agreement.
“Sukuk backed by industrial or commercial real estate, which represents about 3 percent of the sukuk we rate, are most vulnerable,” said S&P analyst Mohamed Damak.
He added: “Should their assets be damaged in an attack, it could test the robustness of sukuk legal provisions for risk coverage.”
The report highlighted that more than 50 percent of the over $180 billion in rated sukuk is located in the GCC, exposing a significant portion of the market to regional geopolitical developments.
S&P emphasized that sukuk legal frameworks typically include provisions requiring insurance coverage for underlying assets and obligating sponsors to cover any shortfalls.
However, the agency cautioned that “this has never been tested,” adding that less creditworthy issuers may seek to exploit legal ambiguities to share losses with investors in extreme scenarios.
The agency also warned that an increase in the likelihood of total or partial loss events, combined with uncertainty over sponsor support, could result in negative rating actions for affected sukuk instruments.
While its base case assumes that conflict intensity may ease in the near term, S&P said disruptions — including damage to infrastructure and supply chains — are likely to persist for months, maintaining pressure on regional credit conditions and investor confidence.
Despite geopolitical uncertainty, sukuk issuance reached $62.4 billion in the first quarter of 2026, up from $52.6 billion a year earlier, supported in part by increased foreign currency-denominated issuance, which accounted for nearly 20 percent of total volumes.
However, S&P said it expects issuance momentum to slow as market participants assess the duration and economic impact of the conflict, particularly across Gulf Cooperation Council economies.
A separate January report by S&P Global Ratings projected that sukuk issuance is expected to continue expanding in 2026, supported by ongoing financing requirements across GCC economies, even as lower oil prices and fiscal pressures shape borrowing strategies.
The agency said it expects sukuk issuance to continue expanding in 2026, noting that sovereign and corporate issuers will increasingly rely on debt markets to meet budgetary and investment needs.
Fitch Ratings also projected in January that the GCC debt capital market will enter a new growth phase in 2026, with total outstanding expected to exceed $1.25 trillion as governments and corporates accelerate project funding and diversification initiatives.
The expansion — estimated at around 13.6 percent — is expected to be driven in large part by sukuk issuance, which remains a core funding instrument in the region.
