Saudi Leads Sukuk Market

While previously inactive in the Islamic bond, or sukuk, market, Saudi Arabia came up from behind and has dominated the sukuk market this year.

Following the global fiscal crisis, interest in Islamic bonds decreased due to a lack of funds and the absence of sukuk that were strictly shari’ah compliant. However, according to a Dealogic study, sukuk sales hit a record high of $32.6 billion in 2011 and have already hit $14 billion in the first five months of 2012.

Sukuk have become especially popular as governments issue the bonds to fund infrastructure projects. This has increased interest and ensured investment in the government-backed instruments, particularly in rich countries such as Saudi Arabia, Qatar, and the UAE.

While Malaysia previously dominated the Islamic finance market, Saudi Arabia became popular after several large and well-publicized deals. The fact that it is the religious center for Islam as a religion has not hurt its cause.

Managing director of Islamic global markets at HSBC Amanah, Mohammed Dawood, said, “It’s a big vote of confidence in the sukuk market. Saudi Arabia is the biggest economy in the Middle East and the fact that the government itself is now issuing sukuk is an important signal for other companies and the wider region.”

The prevalence of Saudi sukuk began with the $1 billion Saudi Aramco Total Refining and Petrochemical Co. offering in October, which will contribute to a refinery in Jubail. The most expansive deal was the issuance of domestic, government-backed 10 year 10-year SR 15 billion ($4 billion) sukuk sold by the General Authority of Civil Aviation (GACA) in January, to facilitate expansions to the King Abdulaziz Airport in Jeddah.

The newest Saudi sukuk was announced earlier this week by Saudi Arabia’s fifth-largest bank by market cap, Banque Saudi Fransi, as a $750 million 2.947 percent trust certificate due 2017. The certificates will be listed on the London Stock Exchange. This is noteworthy not only for its size, but as the first sukuk issued by a Saudi bank and listed on the London Stock Exchange – sukuk in the GCC region tend to be issued domestically. Additionally, it is a dollar-denominated bond, an extraordinarily popular form of sukuk in the country.

Islamic debts are restricted by religious constraints such as the prohibition against interest and the requirement of tangible assets to underlie transactions. Many Islamic scholars frown upon the methods bankers use to circumvent the religious requirements, the most popular one being the creation of structures that are not backed by assets but rather based on them.

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