In its latest outlook for the Islamic finance sector, S&P Global Ratings said the ongoing Middle East conflict could lead to total and partial loss events for a small number of rated sukuk, particularly where they have underlying assets targeted by military events. The agency already examined top-rated sukuks to identify high-risk areas in the current geopolitical environment. According to its findings, sukuk backed by industrial or commercial real estate are the most vulnerable.
“We expect the war will affect the volume of sukuk issuance in 2026, with the extent of the decline dependent on the duration of hostilities and their impact on the GCC region’s real economy,” S&P said.
Detailing further, Mohamad Damak, S&P Global Ratings’ analyst, remarked, “Sukuk backed by industrial or commercial real estate, which represents 3% of the sukuk we rate, are most vulnerable. Should their assets be damaged in an attack, it could test the robustness of sukuk legal provisions for risk coverage.”
“We currently rate more than USD 180 billion in sukuk (programs and stand-alone issuances), with over 50% located in the GCC region,” he noted.
However, the top ratings agency did not see wider sukuk market issuance being significantly affected by the volatile Middle East situation. Total issuance reached USD 62.4 billion in Q1 2026, compared with USD 52.6 billion in the same period in 2025. The spike also included an uptick in foreign currency-denominated sukuk, which reached almost 20% over the same period.
In GCC countries, S&P Global Ratings observed a slight increase in overall issuances, though there was a decline in those denominated in foreign currency.
“We expect this slowdown to continue until the war concludes and its implications for GCC economies and sukuk issues become clearer. The war may also bring some risks unique to sukuk, relating to their underlying assets,” mentioned Damak, while interacting with TradeArabia.
“The new S&P report identified the potential for total loss events (TLE) and partial loss events (PLE), specifically physical destruction of or damage to assets, and the sponsor’s ability to meet contractual obligations,” he added.
Rated sukuk issued by financial institutions typically exclude TLE/PLE risk, as these get embedded at the level of the underlying asset, with their materialisation typically disqualifying the assets from the eligible pool.
Stating that an increased probability of TLE/PLE coupled with uncertainty regarding sponsor payments could lead to negative rating actions, Damak concluded, “S&P Global Ratings will continue to monitor the risks of physical destruction of assets and the credit impact on a case-by-case basis.”