Islamic bond issuance, known as sukuk, slumped sharply in the first half of 2026, and credit ratings agency Fitch says the market's recovery hinges on the fragile US-Iran ceasefire holding. Sales across key markets fell 36% to $125 billion compared with the same period last year, and Fitch expects full-year 2026 to be weaker than 2025.
What is sukuk and why does it matter?
Sukuk are Islamic financial certificates that function similarly to conventional bonds but comply with Sharia law, which prohibits interest payments. Instead of paying interest, sukuk give investors a share of the income generated by an underlying asset. They are a key source of funding for governments and corporations in the Middle East, Southeast Asia and other Muslim-majority markets.
The drop in issuance reflects broader uncertainty in the region. Geopolitical tensions, particularly the risk of a renewed conflict between the US and Iran, have made investors cautious. A collapse of the ceasefire could disrupt oil supplies, hurt regional economies and push up borrowing costs.
Why the ceasefire matters for sukuk
Fitch's warning ties the outlook for sukuk directly to the US-Iran ceasefire. If the ceasefire holds, investor confidence could return, encouraging more issuers to tap the market. If it collapses, the opposite is likely: issuance could fall further as risk premiums rise and capital becomes more expensive.
The link is not just about sentiment. Iran's influence extends across the Middle East, and any escalation could destabilise major sukuk-issuing countries such as Saudi Arabia, the United Arab Emirates and Qatar. A broader conflict would also likely push oil prices higher, as seen in the recent surge that sent South Korea's Kospi into a bear market.
What it means for investors
For everyday investors, the slump in sukuk issuance is a reminder that geopolitical risk can directly affect fixed-income markets. Sukuk are often seen as a relatively stable, income-generating asset, but they are not immune to regional shocks.
If you hold sukuk funds or ETFs, the key question is how much exposure they have to issuers in the Gulf or other geopolitically sensitive areas. A prolonged period of weak issuance could also mean fewer new opportunities to invest in sukuk at attractive yields.
On the positive side, if the ceasefire holds and issuance recovers, sukuk could offer higher yields than comparable conventional bonds, reflecting the risk premium investors demand. Fitch's assessment suggests that the market is pricing in a significant chance of disruption, so any improvement in the geopolitical outlook could boost prices.
Broader market context
The sukuk market is not the only area feeling the pinch from geopolitical uncertainty. Elsewhere, Chinese tech firms have raised $17.5 billion in Hong Kong listings and share sales this year, showing that some markets remain active. But the contrast highlights how regional risks can divert capital flows.
Meanwhile, other parts of the fixed-income world are also adjusting. SBI raised $1.5 billion from overseas Indians as the Reserve Bank of India covered hedging costs, a sign that even in stable markets, issuers are getting creative to attract capital.
What to watch next
Investors should keep an eye on diplomatic developments between the US and Iran. Any signs of progress or breakdown will likely move sukuk prices and issuance plans. Also watch for central bank policy in key sukuk markets, as interest rate decisions affect the attractiveness of fixed-income assets.
Fitch's report is a clear signal that the sukuk market is in a wait-and-see mode. For now, the ceasefire is the single most important factor determining whether issuance rebounds or sinks further.
