Sukuk, a steady ship

ONCE dominated by infrastructure and government-linked issuers, the sukuk market is now attracting a broader range of corporates.

Local listed companies have been increasingly turning to sukuk or Islamic corporate bonds to refinance debt, support expansion and diversify funding sources.

The latest example is MR DIY Group (M) Bhd. The home improvement retailer plans to establish a sukuk wakalah programme of up to RM5bil with the proceeds likely to be used for working capital, capital expenditure, acquisitions and refinancing existing borrowings.

Speaking to StarBiz 7, RAM Ratings’ deputy chief executive officer (CEO) and chief rating officer Siew Suet Ming says sukuk issuance hit a record RM174.4bil in 2025.

According to her, the growing corporate participation reflects Malaysia’s “active and attractive” sukuk market, underpinned by its mature Islamic capital framework.

“The sukuk market accounted for nearly three-quarters of private debt issuance in the past three years. In the quasi-government debt space, the share is even higher at 87%.”

While Malaysia remains one of the world’s largest sukuk markets, a banker notes that issuance momentum has been slightly more measured in 2026 as corporates and investors assess the interest-rate outlook.

“Earlier expectations were for Bank Negara Malaysia to keep the overnight policy rate (OPR) at 2.75% this year. However, with the evolving Middle East conflict potentially weighing on global growth, economists may begin reassessing that view, raising the possibility of a rate cut if economic conditions soften,” the banker says.

Interest rate trends have a direct impact on the cost of issuing sukuk and bonds.

When rates are cut, it becomes more cost-effective to issue sukuk due to lower financing costs, and vice-versa.

In its second Monetary Policy Meeting meeting this year, the central bank maintained the OPR at 2.75%, the fourth consecutive pause.

RAM expects gross issuance to moderate to RM130bil to RM140bil in 2026 – a level Siew considers strong and above the eight-year average of RM120bil.

“We are observing the evolving events in the Gulf. That said, domestic fundamentals remain supportive of stable corporate credit quality conditions,” she adds.

Siew notes that the rated corporate credits in the market are concentrated in the very high-grade rating categories.

“More than 80% of RAM’s portfolio carry ratings of AA3 or higher, and we expect overall portfolio credit quality to remain resilient.”

The concentration of highly rated issuers means much of the corporate sukuk market remains anchored by stronger credit profiles, while speculative-grade borrowers tend to be more vulnerable to economic shocks.

Experts say the risk of defaults is usually linked to company-specific issues or sectoral challenges, as seen during the 2008 Global Financial Crisis, when sukuk defaults were caused by corporate distress rather than flaws in the sukuk structures themselves.

What matters is the strength of the issuer’s cash flows and how the payment obligations are structured – just like with conventional bonds, says Siew.

What, then, will drive the market?

Touching on recent issuance patterns, FSG Advisory founder and CEO Anthony Dass says companies are tapping the market for refinancing and balance sheet management rather than ambitious growth.

“Many corporates still need to refinance maturing borrowings, manage liquidity and optimise their funding costs. This will help keep the market fairly steady, while corporate leverage remains in check,” says Dass.

He adds that refinancing needs often drive issuance decisions, meaning companies cannot always wait for interest rates to fall before tapping the market.

“The sukuk market provides companies with access to a large and stable pool of institutional liquidity, particularly from pension funds, takaful operators and Islamic asset managers that maintain syariah-compliant investment mandates.

“In many cases, pricing is broadly comparable to conventional instruments, making sukuk an attractive and efficient funding alternative. In some instances, sukuk may even achieve slightly tighter pricing due to strong demand from syariah-focused investors.”

According to him, Malaysia’s Islamic investor base also often faces limited supply of high-quality sukuk assets, which can create a modest scarcity premium.

As a result, the cost difference between sukuk and conventional bonds is typically minimal for these issuers.

In other words, companies issuing well-rated sukuk can often secure funding at rates comparable to conventional bonds, while also tapping into a dedicated pool of long-term, syariah-compliant investors who are looking for stable, predictable returns, Dass adds.

Well-rated issuers often see strong subscription levels during primary issuances. Secondary market liquidity tends to be moderate rather than deep, largely because a significant portion of sukuk is held by institutional investors who follow a long-term buy-and-hold strategy.

Despite expectations of gradual interest rate easing, Dass says yields remain “reasonably attractive” for institutional investors.

“For long-term investors such as pension funds and insurance institutions, sukuk continue to offer stable income streams and duration matching for their liabilities. Even if benchmark rates trend lower, the spread over government sukuk still provides sufficient return for investors seeking predictable and syariah-compliant fixed income instruments.”

Areca Capita’s CEO Danny Wong says that following geopolitical tensions, investors are turning to high-quality bonds, including sukuk, which are viewed as safe-haven assets.

He believes investors’ confidence and strong demand for high-quality sukuk are expected to absorb supply from both corporate and government-related issuers.

This broad demand, he adds, will help support market stability and provide a ready pool of buyers for issuers seeking to refinance maturing debt.

“The sukuk market is expected to remain a key funding channel for corporates,” says Wong.