Preparing for Leadership

With objectives to diversify public debt via policy frameworks and an established issuance infrastructure, Saudi Arabia is gearing up its capital markets and moving toward a front running position in Islamic finance both at home and overseas

By Mushtak Parker

Saudi Arabia is increasing its involvement in and leadership of the Islamic finance industry both at home and abroad. The Kingdom’s Islamic finance policy has rapidly evolved over the last few years intertwined by several key funding drivers for the economy and financial system per se.

These include the demands of the ambitious Saudi Vision 2030 including the futuristic Neom Mega City Project and encompassing the Kingdom’s economic and social reform agenda, estimated at a total cost of SAR12 trillion (US$3.2 trillion); the MENA region’s US$1.6 trillion infrastructure project pipeline; the objectives of Riyadh’s Fiscal Balance Programme to bridge funding gaps in the Budget and Financial Sector Development Programme, one of Vision 2030’s realization programmes; push towards digitisation; a robust domestic investor base and the fact that foreign investors can now invest in local currency Sukuk through Tadawul (Saudi Stock Exchange), which also has an active secondary trading platform.

Riyadh cannot finance the above through revenues alone. It also looking towards raising US$55bn through a strategic privatisation programme, of which US$16.5bn will be in the form of public-private partnerships. At the “G20 Infrastructure Investors Dialogue: Financing Sustainable Infrastructure for the Recovery” in June, Saudi Minister of Finance Mohammed Al-Jadaan emphasized that “securing financing for sustainable development and quality infrastructure are ongoing concerns for the G20. The persistent infrastructure financing gap calls for swift actions in this area.”

The international impact of Riyadh’s Islamic finance policy is implicit. At the September 2021 Annual Meetings of the Islamic Development Bank (IsDB) Group in Tashkent, Saudi Arabia teamed up with the Uzbek Government and the IsDB to launch an US$100m Economic Empowerment Fund for Uzbekistan (EEFU), to which IsDB is contributing US$20m, Saudi Arabia US$45m and the Uzbek government US$35m.

Financing will include credit lines, Murabaha facilities and equity participation. The Saudi rationale is to support SMEs through this debut impact investment fund in Uzbekistan, but at the same time engage the participation of Saudi companies in export and investment as part of Riyadh’s policy to increase the contribution of the non-oil sector to GDP and reduce dependency on oil. According to Saudi Eximbank, non-oil exports increased by 52% year on year in Q2 2021 to SR65.66bn (US$17.51bn).

The aim, says Khalid Al-Falih, Saudi Minister of Investment, is to gradually increase the fund size to US$500m.

On the demand side, the record 3-tranche US$6bn debut international

Mudaraba/Tawarruq Sukuk offering in June of Saudi Aramco, the world’s largest integrated oil and gas company, attracted more than 100 new investors across the globe, thus co-opting a new cohort of investors into the Islamic debt finance universe. Khalid Al-Dabbagh, Aramco Senior VP Finance, confirmed that “our inaugural international Sukuk offering led to the largest order book ever recorded globally for a dollar-denominated Sukuk transaction, with orders exceeding US$60bn.”

Saudi Aramco and its various subsidiaries are regular users of Islamic finance and Islamic debt market instruments including Sukuk and syndicated Murabaha facilities.

Another Sukuk debutante, ACWA Power, in which Saudi sovereign wealth fund, Public Investment Fund has a 50% equity stake, similarly saw diverse investor uptake for its SAR2.8 billion (US$746.67 million) Sukuk in June.

“The success of this issuance, underpinned by favourable cost of funding and terms, marks a new phase in diversifying our company’s funding sources to cater for future growth, reinforcing our strong track record in delivering power and desalinated water reliably and responsibly to communities in the Kingdom and around the world,” stressed Kashif Rana, CFO of ACWA Power.

It is in the fixed-income sector that Riyadh is leading from the front as one of the most proactive issuers of sovereign Sukuk, albeit largely in Saudi riyal coupled with the annual foray into the international US dollar market.

Saudi sovereign and corporate Sukuk issuance volume are second only to Malaysia. But the upward growth trajectory suggests that it could be only a matter of time when the Kingdom overtakes Malaysia given the growing funding demands of its economy.

The National Debt Management Centre (NDMC) of the Saudi Ministry of Finance (MoF), for instance, issued its ninth consecutive monthly issuance of riyal-denominated sovereign Sukuk in September 2021 with a three-tranche SAR6.675 billion (US$1.78 billion) offering across 8, 12 and 15-year tenors.

This means that for the period January-September 202, the NDMC has raised the equivalent of a staggering SAR66,227.414 million (US$17,657.25 million) through nine domestic sovereign Sukuk issuances – the single largest volume by any sovereign in the world. This is way above the SAR50,393 million (US$13,433.13 million) volume for FY2020.

The NDMC’s Domestic Sukuk Issuance Calendar for 2021 commits to a consecutive monthly Sukuk issuance strategy from January to December 2021 all under the unlimited Saudi Arabian Government Saudi Riyal denominated Sukuk Issuance Programme. No other jurisdiction has committed to such a dedicated domestic Sukuk issuance regime in 2021.

Saudi Arabia is edging ahead because it has an established issuance infrastructure complete with government policy frameworks, whose objectives inter alia is to add to a diversified public debt fund raising strategy and to the development of the Saudi Sukuk and Islamic Capital Market.

“We believe government debt issuance can be instrumental in addressing the absence of a benchmark yield curve and contribute to the development of the Kingdom’s debt capital markets. We believe that continued issuance by the Saudi sovereign could attract more attention from investors given their search for higher-yielding investments in an era of low interest rates. The availability of a well-functioning domestic debt capital market can also help expand the Saudi banking system’s funding sources,” stressed S&P in its recent Sukuk report.

NDMC confirmed that this year’s issuance plan will continue to be “through diversified funding sources which include domestic and international Sukuk and bond issuances as well as new financing channels, including Government Alternative Financing, [and] Supply Chain Financing, in addition to unifying domestic Sukuk issuance programmes.”

Several government-linked entities are buying into this embracing Islamic finance initiative. In September, Saudi Eximbank signed two landmark Facultative Reinsurance Agreements with The Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), the ECA of the IsDB Group, whereby ICIEC would provide Shariah-compliant Credit Reinsurance Cover of up to 70% of Saudi Eximbank’s exposure under a Multi-risk Documentary Credit Insurance Policy Commercial and Political Risks issued to the Original Insured up to the agreed Credit Amount Limit. The aim of Saudi Eximbank is to help Saudi banks to provide more credit facilities to local corporates for the export of non-oil products.

“These agreements,” emphasized Oussama Kaissi, CEO of ICIEC, “consolidates our long-standing partnership with the Saudi Export Program and now the Saudi Eximbank in supporting export development and FDI in Saudi Arabia.”

SAMA like other regulators is also prioritising the launching of Digital Banks (DBs) in traditional Islamic finance markets, partly expedited by the vagaries and disruption caused by the COVID-19 pandemic.

In July, the Saudi Cabinet approved two digital banking licences to local promoters to establish STC Bank and Saudi Digital Bank. Digital banking, says SAMA, is in line with its role in keeping pace with the latest developments in the financial sector in a digital economy. To that end, 16 Saudi Fintech companies have to date been licensed by SAMA to provide payment services, consumer microfinance and digital insurance brokerage.

The Saudi Central Bank (SAMA) this year also introduced the Islamic Finance Research Translation Program aimed “at consolidating the Kingdom’s leading role in the field of Islamic Finance and at encouraging and advancing scientific research, in addition to leveraging its outcome inside and outside the Kingdom.”