Opening its $568bn stock exchange to foreigners for the first time may be the push Saudi Arabia needs to boost its sukuk market.
The Riyadh-based Capital Market Authority plans to make the process of structuring bonds that comply with Islam’s ban on interest easier, according to Adel al-Ghamdi, chief executive officer of the Saudi Stock Market Tadawul. The kingdom’s debt capital market needs improvement, he said at the Euromoney Saudi Arabia Conference last week.
Saudi Arabia, the birthplace of Islam and home to two of the religion’s holiest sites, has a relatively undeveloped debt market as banks flush with cash offer competitive lending rates. While Saudi companies have borrowed $6.7bn in Shariah-compliant loans so far this year, none have sold sukuk. Islamic loans have outpaced sukuk sales for four of the past five years.
“To grow and deepen the Saudi debt capital markets, it is important to streamline process and regulations to facilitate listing of sukuk,” Rizwan Kanji, a partner at law firm King & Spalding who helps structure Islamic deals in Saudi Arabia, said by phone from Dubai on May 6. “This will create incentives for a wider pool of investors and improve appetite for trading of sukuk over the exchange.”
Saudi Arabia’s Islamic banking assets total about $122bn and are the world’s biggest after Iran’s $482bn, according to Dubai government data. There will be a push to improve the nation’s debt capital market this year, the CMA’s Chairman Mohammed al-Jadaan said last week in Riyadh.
“Saudi Arabia is one of the world’s most important markets when it comes to Islamic financing,” Hamed Hassan Merah, secretary general of the Accounting and Auditing Organization for Islamic Financial Institutions, a Bahrain-based group that drafts standards for the industry, said in an interview in Riyadh on May 6. The regulator should set out clear guidelines if it wants to emulate Malaysia, the world’s biggest sukuk market, he said.
The kingdom is pursuing a $130bn spending plan to diversify its economy away from oil, and has vowed to invest in major projects including railroads, power stations, desalination plants and universities. Even with its underdeveloped sukuk market, Saudi borrowers raised $7.9bn from the sale of Islamic bonds in 2014, the most in the world after Malaysia.
For now, pricing means many companies prefer the loan market. Saudi Arabian Oil Co, the world’s largest oil exporter, secured a $10bn loan in March, including a 7.5bn riyal ($2bn) Shariah-compliant tranche priced at 11 basis points over the three-month Saudi Riyal Interbank Offered Rate, or about 0.88%.
The three-month Saibor, used as a benchmark for some local- currency loans, is less than half the five-year midswap rate. It has risen less than one basis point to 0.774% since falling to the lowest in more than three years on March 23. That compares with 1.67% for midswaps at 11.24am in London on Monday.
(Gulf Times / 12 May 2015)
---Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com
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