Saudi urged to develop sukuk market

11/08/2009 00:00 AST

Saudi Arabia needs to develop a sukuk market to open up new business opportunities and ensure long-term funding for local investors amid tightening lending by banks, a Saudi investment company said yesterday.

The launching of the long-awaited bond market in the worlds oil powerhouse in mid-June is not enough to create an active sukuk market in the absence of direct government involvement in such activity, Jadwa Investment said in a study.

The need to develop an active bond and sukuk market in the kingdom will become more pressing after the issuance of the mortgage law that will trigger a wave of long-term lending by dealers, said the study.

Jadwa noted that the Saudi sukuk market is still "nascent" with only five publicly listed sukuk issued by two companies, Sabic and Saudi Electricity Company. In addition, Saudi Hollandi Bank, Dar Al Arkan and the Bin Laden Group have privately placed sukuk since the inauguration of the bond market on June 17.

Before the creation of that market, bonds and sukuk were traded over the counter, but activity was relatively small because of the lack of depth of the market, absence of transparency and unavailability of historic trade information, it added.

Jadwas figures showed that during 2008, there were only 85 sukuk transactions executed with a value of about SR1.3 billion (Dh1.27bn), compared to 52 million share transactions worth SR2 trillion over the same period.

"Debt markets are an integral part of the capital markets and their development provides significant benefits for companies, governments and investors. In the short-term, Saudi companies are likely to benefit the most from more sukuk, as raising finance from traditional sources (banks loans and the stock market) has become problematic with banks cautious about lending and IPOs subdued since the collapse of share prices last year," said the report. "In addition, unlike conventional bank loans, companies have the ability to choose the term over which they want to borrow in a sukuk issue and there is an urgent need for more long-term financing options in the kingdom."

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