Leading Saudi’s Economic Transformation

The Kingdom of Saudi Arabia has been witnessing robust economic growth in recent years, due to its abundant natural resources, and the able guidance of the country's leadership, along with key economic and structural reforms implemented to boost the economic diversification under ‘Saudi Vision 2030’.

The reforms were introduced in 2016 with the aim of transforming the nonoil sectors, improving living standards, and creating a sustainable and diverse economy. The ‘Financial Sector Development Program’ sits at the core of ‘Vision 2030’, thus focusing on the financial sector, advancement of the capital market, and attracting foreign investors.

The Kingdom has the world’s largest Islamic banking and insurance sector, which has helped it to become the global leader in Islamic finance. Saudi also has the largest jurisdiction for Islamic finance based on assets. The Kingdom’s Sukuk market has been a major source of financing for the country's growth journey over the past decade.

The growth of the Saudi Sukuk market is a testament to the Kingdom's efforts to create a diversified and sustainable economy. By using Islamic finance to fund infrastructure projects, the government has been able to attract a wide range of investors. As the Sukuk market continues to expand, it will play an increasingly important role in realizing the ‘Vision 2030’ program.

There are several factors that have contributed to the success of the Sukuk market in Saudi Arabia. Apart from the investors’ strong demand for Islamic finance, the Kingdom’s regulatory environment has also been supportive towards the Sukuk market with a clear set of rules established by the CMA.

While the UAE led the Sukuk market in the Gulf Cooperation Council (GCC) region in 2007 and 2008, by 2014 Saudi Arabia had emerged as the second largest issuer of Sukuk in the world, followed by Malaysia. Saudi’s rise was driven by a total of 15 issuances with a combined value of $12.1 billion, thus cementing the country's position as a major player in the global Sukuk market.

The growth of the Saudi Sukuk market has maintained an upward trajectory, with four issuances totalling $3 billion in 2023 alone. The Islamic bond has become a crucial element for many businesses in the Kingdom, including Saudi Real Estate Refinance Company (SRC). The Saudi Sukuk market will keep on expanding as more companies recognize the benefits of this innovative financial instrument.

SRC plays a vital role in contributing to the ‘Financial Sector Development Program’ and ‘Vision 2030’. It is offering alternative financial solutions to primary mortgage originators, apart from attracting investment to the real estate sector, thus helping to diversify financing sources and drive economic growth. Through its refinancing activities for lenders, SRC also helps to develop a vibrant secondary home financing market in the Kingdom, thereby supporting the efficiency and stability of the primary housing market. The funding raised through these efforts allows SRC to strengthen its relationships with home financiers, who, in turn, will benefit from working with the company in managing their risk, capital, and liquidity, thus advancing towards the target of achieving 70% home ownership among Saudi nationals by 2030.

Focusing its business model on Saudi’s secondary mortgage market, SRC ensures that the refinancing provided by it is enabling originators to offer home buyers an extensive range of affordable financing solutions, fixed and variable with tenors of up to 30 years. SRC raises capital by constantly issuing Sukuk both locally and internationally.

In a significant milestone for Islamic banking, SRC has spearheaded with reputable scholars to launch a Shariahcompliant potential Residential Mortgage-Backed Securitisation (RMBS) tool called ‘Murabaha’, which will enter the testing phase soon.

SRC announced in October 2022 about doubling its Saudi-Riyaldenominated Sukuk program from SAR 10 billion (launched in 2018) to SAR 20 billion. This move follows the highly successful completion of the company's SAR 10 billion issuances since 2021, which were oversubscribed and offered in a fixed profit rate format across a tenor of up to 10 years.

SRC also completed a further tranche of SAR 3 billion Sukuk issuance, which was issued in September 2022 at a competitive fixed profit rate of 4.02% to Saudi institutional investors. The positive market response to this recent issuance tranche demonstrates the company’s ongoing momentum with its first domestic Sukuk program, completed in a record timeframe.

Positive investor confidence in the Saudi housing market has been reflected in the success of SRC's Sukuk issuances. In 2020, SRC received ‘A’ (stable) rating from Fitch and ‘A2’ (stable) from Moody’s owing to its robust business model and key role in the Kingdom’s property market.

The success stories of SRC and Saudi’s Sukuk market are further evidence of the Kingdom’s commitment to the Shariah principles, apart from its strong leadership in the Islamic finance sector. With its strong demand, supportive regulatory environment, and further growth potential, the Sukuk market is poised to play a key role in Saudi's economy.

The crude petroleum and natural gas activities contributed 32.7% to the Saudi economy