How Sukuk Became Central to the UAE’s Debt Market
Sukuk, or Islamic bonds, are no longer a small part of the UAE’s financial system. In 2025, for the first time, sukuk made up about half of all US-dollar debt raised in the country. This marked a major shift in how the UAE raises money. What was once an alternative option has now become a core funding tool.
This change shows a deeper transformation in the UAE’s debt strategy. Sukuk are helping attract new investors, expand funding sources, and strengthen the UAE’s position as a global hub for Islamic finance.
A sharp rise in sukuk issuance
Data from Fitch Ratings highlights how fast this shift is happening. In 2025, US-dollar sukuk issuance in the UAE jumped by more than 130%. At the same time, issuance of traditional US-dollar bonds fell by 36%.
Because of this trend, sukuk are now driving debt growth in the country. Total UAE debt reached about $325 billion by the end of 2025 and is expected to rise above $350 billion in 2026. Many issuers are choosing sukuk over conventional bonds as investor demand changes and market conditions evolve.
This move also reflects a broader global trend. Sukuk were once seen as a niche product limited to Islamic finance. Today, they are becoming a mainstream funding tool around the world.
From niche product to global funding tool
According to an October report by Abu Dhabi Commercial Bank (ADCB), global sukuk outstanding are expected to exceed $1 trillion. This growth is being driven by government borrowing needs, infrastructure projects, sustainability-linked funding, and long-term economic diversification plans in the Gulf and Southeast Asia.
Sukuk are no longer just an “alternative” to conventional bonds. They are now a strategic financing option used by governments and companies alike.
Changing the structure of the UAE debt market
This shift is important because it is changing how the UAE’s debt market works. In the past, issuers mainly relied on traditional global bond investors. Today, they are tapping into two investor groups at the same time: conventional fixed-income investors and dedicated Islamic investors from the Gulf, Southeast Asia, and parts of Europe.
Bashar Al Natoor, Global Head of Islamic Finance at Fitch Ratings, explains that issuers can now access a wider and more diverse pool of investors. This can lead to better liquidity and easier access to funding.
A broader investor base
The investor base for sukuk is also structurally different. Mohamed Damak, Managing Director and Global Head of Islamic Finance for the Middle East and Africa at S&P Global, notes that sukuk attract a wider range of investors than conventional bonds.
This is because Islamic banks and funds are not allowed to invest in interest-bearing instruments. Sukuk give them an option that follows Shariah rules. Islamic finance has always been part of the UAE market, but it is now playing a much more central role in funding structures.
Importantly, investor appetite still depends mainly on the credit quality of the issuer. Over the past two years, even companies with lower credit ratings have been able to raise money through sukuk. This shows that Islamic capital is no longer limited to top-tier governments or government-linked entities.
Deeper and more diverse markets
At a broader level, the move toward sukuk is strengthening the UAE’s capital markets. Growth is no longer focused only on government issuers or Islamic banks.
In 2025, sukuk issuance expanded across government-related entities, private companies, and financial institutions. Fitch Ratings also noted a rise in first-time sukuk issuers, showing growing confidence in the market.
This reflects a wider global evolution. Since their introduction in the 1990s, sukuk have become an important funding tool in the Gulf, Malaysia, and Indonesia. Governments use them to diversify funding sources, support large infrastructure projects, and raise capital in line with Shariah rules, which prohibit interest and certain types of business activity.
Al Natoor adds that continued growth in sukuk could improve pricing benchmarks and yield curves. Over time, this could help lower funding costs, especially for infrastructure projects and long-term government-related issuers.
Supporting economic diversification
From a policy point of view, sukuk fit well with the UAE’s economic goals. With oil prices under pressure and expectations of interest-rate cuts in the US, Islamic finance offers a way to keep capital flowing while reducing dependence on volatile global debt markets.
The UAE is effectively building a dual system, issuing both sukuk and conventional bonds. This helps attract a wider range of investors and makes the financial system more resilient.
Liquidity challenges remain
Despite the growth, challenges remain. Damak points out that many sukuk are still bought and held until maturity. This is partly because supply is limited in both local and foreign currencies.
Conventional bonds usually trade more actively in secondary markets, while sukuk tend to stay on institutional balance sheets for longer periods. However, this is starting to change.
Total sukuk issuance in the UAE reached $22.1 billion by the end of 2025, up from just $6 billion in 2021. Most of the growth came from foreign-currency issuances. This steady expansion shows that market depth is improving.
Who benefits — and who faces challenges
UAE issuers are among the biggest winners. Sukuk allow them to diversify funding sources at a time when global bond markets are becoming more selective.
More than 85% of Fitch-rated UAE sukuk are investment grade, and no defaults have been recorded so far. This shows that sukuk carry credit risks similar to conventional bonds, while often attracting strong demand from regional investors.
Islamic banks and asset managers also benefit. A larger sukuk market helps with portfolio diversification, liquidity management, and regulatory capital planning.
For global investors, sukuk offer exposure to emerging markets with relatively stable credit quality, especially in a low-yield environment.
However, there are also challenges. Sukuk structures can vary widely, especially between asset-backed and asset-based formats. This lack of standardization makes legal documentation and investor analysis more complex.
Al Natoor notes that international investors may still be cautious due to differences in structure, documentation, and Shariah interpretation. These factors slow down the pace at which sukuk can fully replace conventional bonds.
The UAE’s growing global role
Among emerging markets outside China, the UAE is the fifth-largest issuer of US-dollar debt, accounting for about 7% of total issuance. Sukuk now make up around 12% of all emerging-market dollar issuance globally.
Damak estimates that the UAE accounts for roughly 18.4% of all foreign-currency sukuk issued worldwide, reinforcing its role as a key global Islamic finance hub.
Stronger Shariah governance
A major change is happening behind the scenes. The UAE’s Higher Sharia Authority is working to centralize Shariah governance and create clearer, more consistent rules for Islamic finance.
This is important because sukuk markets have long suffered from fragmented interpretations across countries. While challenges remain, centralized governance is expected to boost confidence and improve consistency over time.
Linking Islamic finance and sustainability
Sukuk are also becoming more closely linked with sustainable finance. Their ethical framework aligns naturally with environmental, social, and governance (ESG) principles.
In 2025, the UAE became the second-largest global issuer of US-dollar sukuk and the third-largest issuer of ESG-linked sukuk. This has helped attract conventional investors looking for responsible and impact-driven investments.
Digital sukuk and the future
The transformation is not only about size, but also innovation. The UAE is becoming a testing ground for digital sukuk, retail sukuk, and fractional issuance.
In 2024, the government launched retail sukuk sold directly to individual investors through banks. While still small, this segment is expected to grow as digital access and financial literacy improve.
Banks such as First Abu Dhabi Bank and Qatar National Bank have also issued digital sukuk using blockchain technology. However, full digital standardization is still limited due to legal and technical hurdles.
If these challenges are overcome, the UAE could become one of the first markets where Islamic finance, fintech, and tokenization come together at scale — strengthening its position not just as a major issuer, but as a global innovator.
Published: 6th February 2026
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