The Saudi sukuk market will continue to grow over the next 12-18 months, a credit positive for Saudi banks, following a new record SR25.2 billion ($6.7 billion) issuance of riyal-denominated sukuk in 2012, said Moody's Investors Service in its report "Saudi Sukuk: Market Growth is Credit-Positive for Saudi Banks" published Monday. Strong sukuk issuance has continued in 2013, with SR11.6 billion already issued during Q1, leading the rating agency to expect that 2013 sukuk issuance will surpass 2012 levels.
Moody's said the record issuance is being driven by (1) strong investor demand, with a marked preference for Islamic financings in the Kingdom; (2) increased financing opportunities to fund the country's large-scale infrastructure projects; and (3) a developing yield curve following the sovereign-guaranteed benchmark sukuk issuance by the General Authority of Civil Aviation in early 2012.
"We believe that the growing Sukuk market will be credit positive for Saudi Banks because it will provide a deeper pool of Shariah-compliant securities to facilitate liquidity management and support profitability at Islamic financial institutions (IFIs)," said Khalid Howladar, VP – Senior Credit Officer and co-author of the report. "We also believe that growth will support more term funding for all banks and ultimately encourage the reduction of persistent asset-liability mismatches, whilst facilitating further loan growth given regulatory constraints on loan-to-deposit ratios."
With limited investment options available, IFIs tend to maintain higher levels of very low-yielding cash and Islamic interbank placements on their balance sheet, thus partly sacrificing profitability to sustain their liquidity positions. A larger sukuk market would facilitate liquidity management through a pool of higher-yielding Shariah-compliant securities and offer a profitability boost to local IFIs. Deeper sukuk market in Saudi Arabia also provides a competitively priced longer-term funding option in domestic currency, which will allow conventional and Islamic banks to diversify and lengthen their funding profiles and ultimately help reduce contractual mismatches.
The Saudi Gazette