Malaysia is forecast to lead global ESG sukuk supply in the second half of 2026 despite broader market headwinds, according to Fitch Ratings. The rating agency expects the global ESG sukuk market to soften in 2026 as Middle East tensions weigh on issuance, with Gulf Corp Council issuance moderating. However, Malaysia is positioned to outperform with tax incentives, strong investor demand and a deep domestic market, albeit largely in ringgit. This leadership comes as ESG sukuk accounted for only 14% of US dollar-denominated ESG debt issuance in emerging markets in the first half of 2026, down sharply from 41% a year earlier.
Malaysia has announced a dual-tranche U.S. dollar Islamic bond offering for the first time in over three years, marking a significant return to the international dollar market. According to a term sheet seen by Reuters, the offering comprises 5-3/4-year and 10-year tranches, with the transaction scheduled for settlement on July 30. The offering is issued through Malaysia Sovereign Sukuk Berhad with the Government of Malaysia as obligor.
The proceeds from this Islamic bond are earmarked for government-approved projects and programmes, including infrastructure development initiatives. As reported by Reuters, this represents a sukuk, which is an Islamic financial instrument structured to comply with Islamic law (Shariah), prohibiting payment and receipt of interest. Malaysia last tapped the international U.S. dollar market in April 2021, when it raised $1.3 billion through a dual-tranche sustainability sukuk.
CIMB, HSBC, J.P. Morgan and Standard Chartered are acting as joint bookrunners and joint lead managers on the deal. According to Reuters, this launch comes amid broader market conditions, with Indian government bonds experiencing a decline for the fourth consecutive session on Wednesday, with benchmark bond yields rising to their highest level since late June. The Indian rupee also weakened to a two-month low against the dollar amid rising oil prices and supply fears.
Despite global challenges, Malaysia outperformed the broader ESG sukuk market with local issuers accounting for 67% of total global ESG sukuk issuance in the first half of 2026. However, the global ESG sukuk market faced significant headwinds, with total issuance across all currencies falling 32% year-on-year to $4.9 billion amid volatility from the Iran war and rising bond yields. Fitch noted that ESG sukuk issuance worldwide lost momentum, with US dollar-denominated ESG sukuk issuance falling 74% year-on-year in contrast to an 11.5% increase in conventional ESG bond issuance.
