Saudi Arabia to foster sukuk market as stocks open to foreigners

[DUBAI/RIYADH] Opening its US$568 billion 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 US$6.7 billion 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 LLP 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 US$122 billion and are the world's biggest after Iran, 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 Wednesday. 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 US$130 billion spending plan to diversify its economy away from oil. Even with its underdeveloped sukuk market, Saudi borrowers raised US$7.9 billion 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 US$10 billion loan in March, including a 7.5 billion riyal (US$2 billion) Shariah-compliant tranche priced at 11 basis points over the three-month Saudi Riyal Interbank Offered Rate rate, or about 0.88 percent.

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 per cent since falling to the lowest in more than three years on March 23. That compares with 1.64 per cent for midswaps on Friday.

One of the reasons Malaysia's sukuk market is among the world's most mature is that the regulator has clear guidelines for Islamic bond sales, AAOIFI's Mr Merah said. Issuers "don't have to waste any time or effort in figuring things out," he said.

BLOOMBERG