Dollar Sukuk: Saudi Banks' Strategy to Attract Foreign Investors

16/09/2025 07:33 AST

Saudi banks are witnessing an unprecedented surge in sukuk issuances this year, with volumes soaring 98 percent compared to the same period in 2024. From January through last Wednesday, issuances reached $10.5 billion, nearly doubling last year's $5.3 billion. Analysts predict total issuances could exceed $30 billion by year-end, marking a record-breaking pace.

Experts attribute this sharp rise to a combination of economic, structural, and regulatory factors. Financial analysts told Asharq Al-Awsat that the momentum is largely expected, particularly as the US Federal Reserve moves toward interest rate cuts later this year and into 2026. With loan growth consistently outpacing deposit inflows, sukuk are emerging as the optimal tool for banks to bridge liquidity gaps.

According to Mohamed Hamdi Omar, CEO of G-World for Economic Studies, several forces are driving this trend.

"The continued growth in lending demand, outstripping deposit growth, has created a liquidity shortfall, pushing banks to seek alternative funding sources. Sukuk are the best-fit solution," he explained.

He also pointed to compliance with international standards such as Basel III, which require capital instruments that bolster regulatory capital without compromising liquidity efficiency. Added to this are the massive financing needs of Saudi Arabia's Vision 2030 projects - including infrastructure, housing, and preparations for global events such as Expo Riyadh 2030 and the FIFA World Cup 2034 - requiring flexible and large-scale funding inflows.

Beyond liquidity, sukuk are proving highly attractive to investors. Offering returns of 6 to 6.5 percent this year, they present a stable and appealing choice in a volatile financial landscape. Expanding into dollar-denominated sukuk also broadens Saudi banks' access to international markets, deepening the local debt market and diversifying funding sources.

Addressing concerns of a liquidity crisis, Omar stressed that "banks are not in distress; they are managing challenges proactively."

With loan-to-deposit ratios now exceeding 100 percent, financing pressures are evident. Yet, Saudi banks' robust solvency provides a strong cushion. Sukuk also enhance profitability in the short term: banks posted solid Q1 earnings, with returns on assets climbing to 2.3 percent. Compared with traditional bonds, sukuk offer greater flexibility in funding operations.

Nonetheless, Omar cautioned that an overreliance on debt instruments carries risks if issuance levels compromise capital quality or increase costs, particularly if investor appetite shifts or global interest rates rise abruptly. The rapid expansion, he noted, underscores banks' adaptability but also necessitates prudent management of liquidity and capital risks amid Saudi Arabia's ambitious growth drive.

Analysts agree that the surge in sukuk issuance is a pre-emptive move by Saudi banks in anticipation of Fed decisions. Financial analyst Tareq Al-Ateeq explained that banks are preparing for potential deposit withdrawals once US rates are lowered, compensating for the outflow through sukuk. He noted that Saudi banks' loan portfolios, totaling around SAR 3.36 trillion, already outstrip deposits of SAR 2.86 trillion, with the gap covered by a mix of long-term debt instruments, chiefly sukuk.

Looking ahead, Al-Ateeq expects issuances of dollar-denominated sukuk to accelerate in the final quarter of the year, targeting rising demand from foreign investors, especially global funds and institutions. This strategy, he said, also supports banks' international commitments such as trade finance and credit facilities, areas where deposits remain insufficient to match funding demand.

Asharq Al Awsat