In principle, sukuk are designed to be fundamentally different from conventional bonds. Because Islamic finance prohibits the paying of interest, sukuk link investor returns to real economic activity: investors buy a share in a tangible asset (or business venture or service) and, as a result, hold real ownership rights and share in the risks and rewards of how that asset performs.
In practice, the market has evolved in a more pragmatic direction. While the underlying assets of modern sukuk comply with Shariah requirements, investors usually do not take on the performance risk but rely mainly on the issuer’s credit strength and promise to pay. This means that, economically, many sukuk behave much like conventional fixed-income bonds.
If sukuk become fully asset-backed, they may become harder to classify, price and trade
This practical compromise helped sukuk grow into a major global asset class. It gave Islamic investors a Shariah-compliant product while offering international fixed-income managers something familiar and easy to price. But that compromise is now facing a significant challenge.
Delicate debate
At the centre of the debate is Shariah Standard No. 62 (SS62), a sukuk standard being developed by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). SS62 has been in development for several years but as of June 2026, it has not been finalised and AAOIFI describes it as ‘still in the draft stage’.
But even in draft form, SS62 has forced the market to revisit the basic structure of sukuk, pushing them closer to genuinely asset-backed structures.
The debate is delicate. The industry values the current structure because it offers stability, predictability and administrative ease, while AAOIFI’s proposal is trying to bring sukuk closer to the Shariah principle of real asset ownership.
‘Critical bridge’
Market participants do not expect a sudden transformation. Khurram Hilal, CEO for Islamic Banking at Standard Chartered, says sukuk’s ‘bond-like’ predictability has been ‘a critical bridge’ that made the product investable at global scale.
Legal ownership of assets would not, by itself, ensure better recoveries
The current model became dominant, he adds, because it answered several needs at once: Shariah compliance for Islamic investors, efficient funding for issuers and a familiar risk profile for international fixed-income investors.
If sukuk become fully asset-backed, they may become harder to classify, price and trade. Many global investors buy sukuk because they fit into fixed-income allocations. If the risk starts to depend more directly on the performance of assets, some investors may need to reassess whether the instrument still belongs in those portfolios.
Performance risk exposure
If a final version of SS62 pushes sukuk towards asset-backed structures, the risk profile for investors would fundamentally change, says Abdulla Al Hammadi, AVP, Financial Institutions Group at Moody’s Ratings. Investors would be exposed more directly to the performance risk of the underlying assets, rather than mainly to the credit strength of the issuer.
That could improve recovery prospects in some cases. A true sale of assets would transfer effective ownership to sukuk holders, adds Al Hammadi, meaning the originator’s creditors would not be able to compete with sukuk holders for those encumbered assets. But the trade-off is that recovery would depend on the quality and performance of the specific asset.
If investors have real ownership of assets, they should, in theory, be better protected. But ownership is only valuable if it can be enforced, and even strong documentation is only truly tested during default.
But Bashar Al Natoor, global head of Islamic finance at Fitch Ratings, points out that legal ownership of assets would not, by itself, ensure better recoveries. Distressed resolution remains largely untested in practice across major sukuk-issuing jurisdictions, so outcomes are likely to vary widely by transaction.
Sovereign situation
The debate becomes even more complicated for governments and state-linked issuers, who may be unwilling or unable to transfer true legal ownership of strategic public assets such as airports, utilities or ports. Even where this is legally possible, it can create political, constitutional and execution challenges.
True-sale asset-backed sukuk are legally achievable in practice, argues Hilal. But market preference continues to favour asset-based structures because they align more closely with funding objectives, execution efficiency and investor expectations.
If sukuk become too complex, too expensive or too uncertain, some issuers may look for other funding tools.
The accounting gap
SS62 also opens up an accounting question with no settled answer. AAOIFI’s own accounting standards on sukuk, FAS 33 and FAS 34, predate SS62 by several years and were built for today’s asset-based structures – not the ‘true ownership’ model SS62 proposes.
Until a matching standard is issued, basic questions – should the originator derecognise the assets, and is the instrument debt or equity-like – are left for institutions to interpret for themselves.
SS62 opens up an accounting question with no settled answer
The gap is wider still for banks that don’t follow AAOIFI’s standards at all – including conventional banks with Islamic windows, and Islamic banks reporting under IFRS at group level.
For them, the relevant tests are IFRS 9, Financial Instruments, and IAS 32, Financial Instruments: Presentation, and neither gives a clean answer: genuinely asset-backed sukuk are likely to fail IFRS 9’s test for amortised-cost treatment, pushing them toward fair-value accounting and new earnings volatility for the holder, while IFRS 10, Consolidated Financial Statements, could still consolidate the issuing special purpose vehicle back onto the originator’s balance sheet if it retains control – even where SS62 treats the structure as genuinely off-balance-sheet.
The practical risk is divergence: two banks issuing economically similar SS62-compliant sukuk could land on different accounting treatments purely depending on whether they report under AAOIFI or IFRS – a comparability problem that AAOIFI cannot resolve alone.
The middle path
The most realistic outcome is a compromise. SS62 is likely to push the industry towards clearer documentation, stronger Shariah governance and more attention to economic substance. But a full-scale shift to purely asset-backed sukuk could disrupt the investor base and execution model that took decades to build.
The demand for sukuk remains strong. But the next test is whether the industry can refine the product without weakening the confidence that supports it – and the accounting framework will need to keep pace with the standard that emerges.
