Saudi Sukuk Market Case Study Solution
Advantages of Sukuk
“Sukuk, as securitized liquid financing instruments due to their tradability, are useful long-term financing solutions for the companies in Saudi Arabia.” Alsaeed (2012). Sukuk offers many advantages,firstly because of underlying asset they are more secure, and are considered as real assets while its counterpart in conventional financing bond is just considered as a debt instrument. Second, the most prominent advantage is that they are highly liquid, with a limited supply only by the GCC and Asian countries the demand is very high for these securities. There is a huge potential for increase in Islamic compliant investors by creating awareness, as many of them are still unaware of the true model of Islamic financing instruments. The increase in investors will bring in more capital to further enhance the development progress, and move the economy in the right direction. Another great advantage is the profit rate that each Sukuk instrument offers in comparison to the conventional financing instruments. Fixed deposits earnings of conventional banking fall behind approximately 3% to 3.5% to an average return of Sukuk securities.
Recent Trends and Development in the Market of Sukuk
The year 2017 was a great year for the overall Sukuk industry, as the growth rate reached new heights with the industry reaching $97.9bn in value. Malaysia remained ahead of everyone through its proper structuring of Sukuk securities. With the ongoing debate to redefine the profit – sharing of these instruments continues.Other factors like an expected rise in the interest rates by the US Federal Reserves will impact the Sukuk market in the upcoming year. Mounting geopolitical issues, and standardization of the Sukuk securities will affect the last year’s growth numbers further.
A positive trend is the increase in demand of newly introduced sovereign, and quasi – sovereign Sukuk is encouraging, and interest from new countries to enter this Islamic Financial market is looking promising for the overall industry’s growth.
Conclusion and Recommendation
It is safe to say that Saudi Arabia’s potential for growth in the Sukuk market is tremendous, and with its recent take over from U.A.E. as the second country with most Sukuk issuances has increased the potentials for Saudi Arabia even more. But for matching Malaysia who is the industry leader; presenting an enormous challenge to face which; Saudi Arabia will require serious structuring and development in the country to make the environment feasible for the Sukuk market. Transparent risk & return structure should be implemented along with standardization of the Sukook, and introduction of new securities to cater different segments.Investment in the general infrastructure of the country, oil and gas infrastructure, real estate development, electricity and water projects are the steps in the right direction, which will bring more investors in the country, and the development of the country will introduce new job opportunities for the people, and the whole economy of Saudi Arabia, which is almost completely reliant on the Oil sector; will have more means to flourish.
- An active trading secondary market should be the first priority for the country, as evident from the success of Malaysia.
- Train and develop more people in the field of Islamic finance as, currently there is a lack in the availability of the experts.
- The awareness programs should be launched through interactive sessions & seminars to attract more people.
- For standardization; a separate regulatory body for Sukuk should be established in order to smoothen the process.
- Investment in the mortgage industry will reap fruitful rewards as the majority of the population is aged less than 35.
- Development of the infrastructure will bring more tourism in the country, which will result in the increase in foreign exchange reserves.
Introducing different types of Sukuk, with different maturities and profit sharing ratio will attract more investors..........
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