Sukuk and fixed income market

Central Date Market near the Prophet’s Mosque in Madinah

By : Khalil Hanware

Over the past two years, issuance of sukuk in Saudi Arabia has ballooned because of increased liquidity, comparatively low borrowing costs and firms’ desire to diversify their funding sources beyond bank loans.

It is fair to say that the fixed income market, having less than a decade ago been dismissed by many as a theoretical possibility, has become an integral element of the Kingdom’s financial sector.

This development has involved a degree of convergence with the typical financial market structure in mature economies where the bond markets are often just as important as banks and play a particularly important role as an alternative source of capital, especially when bank lending is scarce.

The development of the Saudi fixed income market has been, above all, due to the growth, diversification, and increased standardization of Shariah-compliant sukuk structures.

The vast majority of Saudi issuance is sukuk and recent years have seen a gradual increase in the range of issuers but also in the types of structures and tenors available in the market.

Sukuk have become an important element of funding, especially infrastructure-related funding, whether by large utilities and industrial companies or even by government-related entities.

For instance, the airport sukuk by GACA (General Authority of Civil Aviation) have relieved pressure on the government budget. Tadawul has played its role in developing the market by creating a secondary trading platform. Liquidity is still an issue but things are doubtless evolving in the right direction.

Though the sukuk market is becoming a viable alternative financing vehicle for local businesses, global sukuk issuances dropped 15.1 percent to $118.2 billion during 2013.

The Asian market continues to hold the top spot for Islamic financing with a total number of 637 issues last year worth $80.9 billion. Saudi Arabia firmly came in second position.

Sukuk issuance in Saudi Arabia rose to the equivalent of $15.2 billion through 20 deals last year, compared to $11.2 billion through 18 deals in 2012, according to data from Zawya, a Thomson Reuters company. Year-to-date, there have been nine sukuk issued worth $8.5 billion.

Some Islamic banks have themselves issued sukuk. This month, Saudi Investment Bank completed a SR2 billion ($533 million) capital-boosting sukuk issue, while Banque Saudi Fransi did a similar deal. National Commercial Bank sold a SR5 billion sukuk in February.

The investment banking arm of Al-Rajhi Bank has received regulatory approval for its first mutual fund that will invest in sukuk.

These developments are important in making sukuk a more standard part of the investment universe and also for retail investors.

For many savers, sukuk are an attractive asset type given the relative security of principal and the high predictability of returns.

However, issuance terms often make it difficult for ‘ordinary’ issuers to take part in primary issues.

Funds play an important role in bridging the gap. This will also make it easier for retail investors to diversify their portfolios and develop more long-term investment horizons.

:: Disclaimer: Views expressed by writers in the Column section are their own and do not reflect RiyadhVision’s point-of-view.

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