Yassin El Cordov
New Member
The Saudi sukuk market has grown considerably over the last few years and has the potential of becoming a major vehicle for raising finance for local corporates and utilities and an investment portfolio diversification for both local and foreign investors.
While a report published in August by Jadwa Investment confirms the above, Islamic investment bankers and investors abroad are much more cautious about investing abroad including the Kingdom because of prevailing bond market conditions and the general global economic and financial slowdown.
Similarly, the introduction in June by the Saudi securities regulator, the Capital Market Authority (CMA), of an automated order-driven secondary exchange for the trading of conventional bonds and of Islamic securities (sukuk on the Saudi stock exchange (Tadawul) is an important symbolic move; but according to market players it wont transform the Saudi sukuk market on its own.
A CMA source confirmed that trading has been modest since the exchange was launched. As the Jadwa report stresses, this is just one step in a long process to improve the debt capital market and its depth in the Kingdom. The Saudi regulatory authorities are keen for local banks and corporates to tap the Saudi capital market to raise funds for their expansion, working capital, balance sheet and refinancing purposes.
However, bankers believe that the following drivers would stimulate the sukuk market through supply from issuers and demand from investors, including institutional and quasi-sovereign ones such as GOSI (General Organization for Social Insurance), The Saudi Public Investment Fund and the Saudi Pension Fund. The role of the latter three which are liquidity-rich, would increasingly be crucial to giving depth to the Saudi market.
The drivers include predictability and portfolio diversification, with sukuk investments much more predictable than say equities; problems raising finance from traditional conventional banking sources either through loans or even IPOs (initial public offerings); balance sheet mismatches between long-term lending and short-term cash flows which could lead to an asset-liability mismatch, where once again long-term Sukuk would ease the problem; and a healthy deal pipeline for sukuk both sovereign, quasi-sovereign and corporate issuances.
The Saudi sukuk market, say compared to the Malaysian one, is also starting from a low base, with only five publicly-listed sukuk issued by two companies, Saudi Basic Industries Corp (SABIC) and Saudi Electricity Co. (SEC). In addition there have been private issuances by Dar Al-Arkan Real Estate Development Company (DAAR) which closed its third sukuk in July 2009; Saudi Hollandi Bank and the Bin Laden group. The lack of depth of the market, lack of transparency and the lack of historical trade information meant that sukuk were very thinly traded. For the whole of 2008, there were only 85 trades executed with a value of SR1.3 billion, stressed the Jadwa report.
While market and corporate governance issues remain a main challenge for the Kingdom, an encouraging sign is the quality of sukuk transaction pipeline scheduled for 2009. This includes the $750 million-$1 billion Sukuk Al-Ijara by the Islamic Development Bank (IDB); the SR3 billion Sukuk Al-Ijara planned by Al-Oula Development; the planned SR725 million Mudaraba sukuk by Saudi Hollandi Bank and a further series of smaller issues by the IDB.
More importantly, the challenges for the Saudi sukuk market are real although the benefits are potentially huge. The challenges include creating breadth and depth in the market with more issuers and types of issuances; the lack of liquidity, although this could be mitigated as the Tadawul exchange starts functioning more widely and efficiently; a lack of skilled human resources potentially the most entrenched problem, although the Kingdom has a training exchange program with Malaysian Islamic finance educational and training institutes such as INCEIF (the International Islamic Centre for the Education of Islamic Finance); a lack of market familiarity with Islamic capital markets product including sukuk; and a lack of Shariah standardization, although technically not a problem in the Kingdom, it can have a market impact if the Shariah Committees of AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) or even the Islamic Fiqh Academy (IFA) put a statement that has the potential to be misinterpreted or to cause confusion as has been the case earlier this year with the AAOIFI statement on Musharaka and Mudaraba sukuk and the IFA statement on Tawarruq.
Source: Arab News
While a report published in August by Jadwa Investment confirms the above, Islamic investment bankers and investors abroad are much more cautious about investing abroad including the Kingdom because of prevailing bond market conditions and the general global economic and financial slowdown.
Similarly, the introduction in June by the Saudi securities regulator, the Capital Market Authority (CMA), of an automated order-driven secondary exchange for the trading of conventional bonds and of Islamic securities (sukuk on the Saudi stock exchange (Tadawul) is an important symbolic move; but according to market players it wont transform the Saudi sukuk market on its own.
A CMA source confirmed that trading has been modest since the exchange was launched. As the Jadwa report stresses, this is just one step in a long process to improve the debt capital market and its depth in the Kingdom. The Saudi regulatory authorities are keen for local banks and corporates to tap the Saudi capital market to raise funds for their expansion, working capital, balance sheet and refinancing purposes.
However, bankers believe that the following drivers would stimulate the sukuk market through supply from issuers and demand from investors, including institutional and quasi-sovereign ones such as GOSI (General Organization for Social Insurance), The Saudi Public Investment Fund and the Saudi Pension Fund. The role of the latter three which are liquidity-rich, would increasingly be crucial to giving depth to the Saudi market.
The drivers include predictability and portfolio diversification, with sukuk investments much more predictable than say equities; problems raising finance from traditional conventional banking sources either through loans or even IPOs (initial public offerings); balance sheet mismatches between long-term lending and short-term cash flows which could lead to an asset-liability mismatch, where once again long-term Sukuk would ease the problem; and a healthy deal pipeline for sukuk both sovereign, quasi-sovereign and corporate issuances.
The Saudi sukuk market, say compared to the Malaysian one, is also starting from a low base, with only five publicly-listed sukuk issued by two companies, Saudi Basic Industries Corp (SABIC) and Saudi Electricity Co. (SEC). In addition there have been private issuances by Dar Al-Arkan Real Estate Development Company (DAAR) which closed its third sukuk in July 2009; Saudi Hollandi Bank and the Bin Laden group. The lack of depth of the market, lack of transparency and the lack of historical trade information meant that sukuk were very thinly traded. For the whole of 2008, there were only 85 trades executed with a value of SR1.3 billion, stressed the Jadwa report.
While market and corporate governance issues remain a main challenge for the Kingdom, an encouraging sign is the quality of sukuk transaction pipeline scheduled for 2009. This includes the $750 million-$1 billion Sukuk Al-Ijara by the Islamic Development Bank (IDB); the SR3 billion Sukuk Al-Ijara planned by Al-Oula Development; the planned SR725 million Mudaraba sukuk by Saudi Hollandi Bank and a further series of smaller issues by the IDB.
More importantly, the challenges for the Saudi sukuk market are real although the benefits are potentially huge. The challenges include creating breadth and depth in the market with more issuers and types of issuances; the lack of liquidity, although this could be mitigated as the Tadawul exchange starts functioning more widely and efficiently; a lack of skilled human resources potentially the most entrenched problem, although the Kingdom has a training exchange program with Malaysian Islamic finance educational and training institutes such as INCEIF (the International Islamic Centre for the Education of Islamic Finance); a lack of market familiarity with Islamic capital markets product including sukuk; and a lack of Shariah standardization, although technically not a problem in the Kingdom, it can have a market impact if the Shariah Committees of AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions) or even the Islamic Fiqh Academy (IFA) put a statement that has the potential to be misinterpreted or to cause confusion as has been the case earlier this year with the AAOIFI statement on Musharaka and Mudaraba sukuk and the IFA statement on Tawarruq.
Source: Arab News