1. You need to have an exit on the recursive:

=LAMBDA(XML,Pos,
LET(
Cls,{"&","&amp;";"<","&lt;";">","&gt;";"'","&apos;";"""","&quot;"},
Row,IF(ISOMITTED(Pos),ROWS(Cls),Pos),
Crf,INDEX(Cls,Row,1),
Crr,INDEX(Cls,Row,2),
Sub,SUBSTITUTE(XML,Crf,Crr),
IF(Row>1,ENCODEXML(Sub,Row-1),Sub)
))

2. You need to add the , in the call:

=ENCODEXML("sl < dk & jf",)

Or as @Filcuk discovered(and I learned just now) if it is optional it needs to be declared using []

ie:

=LAMBDA(XML,[Pos],
LET(
Cls,{"&","&amp;";"<","&lt;";">","&gt;";"'","&apos;";"""","&quot;"},
Row,IF(ISOMITTED(Pos),ROWS(Cls),Pos),
Crf,INDEX(Cls,Row,1),
Crr,INDEX(Cls,Row,2),
Sub,SUBSTITUTE(XML,Crf,Crr),
IF(Row>1,ENCODEXML(Sub,Row-1),Sub)
))

Then the , is not needed:

=ENCODEXML("sl < dk & jf")

Just to complement the answer above by Scott; using a recursive lambda through the name manager seems to be obsolete (if one doesn't explicitly need a named function for later use). Since REDUCE() is a recursive function on it's own. Therefor, one can apply the following structure:

=LET(X,<LookupTable>,REDUCE(<InputValue>,INDEX(X,0,1),LAMBDA(a,b,SUBSTITUTE(a,b,VLOOKUP(b,X,<ReturnCol>,0)))))

Where:

• <LookupTable> - Refers to a matrix where the leftmost column holds the lookup values. This is particularly true for VLOOKUP() however, with different structures one can start using XLOOKUP() (to make the solution more applicable);
• <InputValue> - A reference to the input string you need to apply the substitution to;
• <ReturnCol> - In addition to the 1st point: when one uses VLOOKUP() an index refering to the column with the replacement values need to be given;

In the case given by OP this would translate to:

=LET(X,{"&","&amp;";"<","&lt;";">","&gt;";"'","&apos;";"""","&quot;"},REDUCE("sl < dk & jf",INDEX(X,0,1),LAMBDA(a,b,SUBSTITUTE(a,b,VLOOKUP(b,X,2,0)))))