Rising Demand for USD-Denominated AT-1 Sukuk in the Gulf: Strategic Opportunities for Impact Investors

The global Islamic finance industry has emerged as a cornerstone of modern capital markets, with USD-denominated AT-1 Sukuk in the Gulf region capturing significant attention from impact investors. These instruments, which blend Shariah-compliant structures with capital adequacy needs, are reshaping how institutions in the Gulf Cooperation Council (GCC) access funding while aligning with evolving ESG (Environmental, Social, and Governance) priorities. For global investors, the rise of these sukuk represents a unique intersection of ethical investing, financial innovation, and geopolitical diversification.

Capital Adequacy and the Strategic Role of AT-1 Sukuk

AT-1 (Additional Tier 1) Sukuk, a hybrid debt-instrument designed to bolster capital reserves, has become a critical tool for Gulf banks and financial institutions. In 2024, the GCC saw a 29% year-on-year increase in foreign currency sukuk issuance, reaching $72.7 billion, with USD-denominated instruments dominating the market [2]. This growth is driven by the need to meet Basel III capital adequacy requirements while adhering to Islamic finance principles, which prohibit interest-based transactions. For example, Al Rajhi Bank’s $1 billion AT-1 sukuk issuance in 2024 not only strengthened its capital position but also funded sustainability-linked projects such as renewable energy and affordable housing [3]. Such structures allow institutions to maintain regulatory compliance while addressing long-term funding gaps.

ESG Synergy and Investor Appeal

The alignment of Islamic finance with ESG principles has further amplified the appeal of sukuk. In the first half of 2025 alone, sustainable sukuk issuance grew by 27%, with green sukuk and social sukuk attracting both regional and international investors [2]. This trend is supported by the GCC’s strategic focus on diversifying away from oil-dependent economies, with sukuk increasingly financing infrastructure, clean energy, and social welfare projects. For instance, Saudi Arabia’s leadership in the market—contributing over 50% of GCC sukuk issuance in 2024 [4]—has been bolstered by its Vision 2030 agenda, which emphasizes ESG-driven development.

Market Resilience and Future Projections

Despite a 7.1% decline in sukuk issuance in Q1 2025 compared to Q1 2024, the market remains robust. Total sukuk issuance in the GCC reached $17.8 billion in Q1 2025, with Fitch Ratings noting that sukuk rated by the agency exceeded $210 billion in the first half of 2025—a 16% increase year-on-year [1]. Looking ahead, the sukuk market is projected to grow from $1.08 trillion in 2024 to $1.29 trillion in 2025, with USD-denominated instruments expected to account for a significant share [4]. By 2029, the market could surpass $2.55 trillion, driven by innovation in structures like smart sukuk and blockchain-based platforms [5].

Digitalization and Geopolitical Positioning

Digitalization is another catalyst. Institutions such as Abu Dhabi Islamic Bank and Bahrain’s INABLR have pioneered blockchain-based sukuk platforms, enhancing transparency and reducing transaction costs [5]. These advancements not only attract tech-savvy investors but also position the Gulf as a global hub for ethical finance. Furthermore, sukuk issuance allows emerging markets to diversify capital sources, reducing reliance on Western financial systems amid geopolitical tensions [5].

Strategic Opportunities for Impact Investors

For impact investors, USD AT-1 Sukuk in the Gulf offer a dual benefit: competitive yields and alignment with global sustainability goals. With Islamic finance assets projected to reach $1.5 trillion by 2028 [3], the market’s scalability is evident. Investors should prioritize sukuk linked to renewable energy, affordable housing, and infrastructure projects, which are both Shariah-compliant and ESG-aligned. Additionally, the growing participation of international institutional investors in sukuk—evidenced by Al Rajhi Bank’s 2024 issuance—signals a maturing market with strong liquidity prospects [3].

In conclusion, the rising demand for USD AT-1 Sukuk in the Gulf reflects a broader shift toward ethical, ESG-driven capital structures. As Islamic finance continues to innovate and expand, these instruments will play a pivotal role in bridging the gap between traditional ethical investing and global capital markets.

Source:
[1] The Middle East DCM Playbook 2025 [https://www.euromoney.com/reports/the-middle-east-dcm-playbook-2025/]
[2] Sukuk demand surges as GCC drives market past $1 trillion [https://www.agbi.com/banking-finance/2025/08/sukuk-demand-surges-as-gcc-drives-market-past-1-trillion/]
[3] Standard Chartered strengthens role as Sukuk market adviser amid sector growth [https://thedigitalbanker.com/standard-chartered-strengthens-role-as-sukuk-market-adviser-amid-sector-growth/]
[4] Sukuk Market Report 2025 [https://www.researchandmarkets.com/reports/5792770/sukuk-market-report?srsltid=AfmBOoq5eVXNDvWs2DwF2qrvQskgEi4xLS65eaE4LI2TnPo6-rAA2efV]
[5] Sukuk market's evolution between Islamic finance's rise and geopolitical tensions [https://iari.site/2025/08/11/sukuk-markets-evolution-between-islamic-finances-rise-and-geopolitical-tensions/]