Analysts predict Saudi Arabia’s banking sector will post 9% profit growth in Q2

RIYADH: Global sukuk issuances reached $91.9 billion in the first half of 2024, up a modest 0.87 per cent year-on-year, driven by issuers from Saudi Arabia and the United Arab Emirates.

According to the latest report by S&P Global, foreign currency issuance reached $32.7 billion in the first half of 2024, which means an increase of 23.8% compared to the same period of the previous year.

The rating agency stressed that improved visibility of the medium-term trajectory of interest rates has driven the increase in issuance of sukuk denominated in foreign currencies.

Sukuk is an Islamic financial certificate that proves ownership of an asset and is Sharia-compliant, which distinguishes it from conventional bonds.

Saudi Arabia has strategically increased its sukuk issuance to diversify its financing sources and promote Islamic finance in its economy, supporting infrastructure and economic development while attracting global investors seeking Shariah-compliant opportunities.

“High financing demand in major Islamic finance countries, stable interest rates and greater clarity on the future path of interest rate cuts explain the continued growth in foreign currency-denominated issuance,” S&P Global said.

These results are in line with a recent report by the Saudi Arabian Capital Market Authority indicating significant growth in the Saudi sukuk and debt capital market since 2019, exceeding 30 billion riyals and achieving an annual growth rate of 7.9 percent.

In addition, Saudi Arabia’s National Debt Management Center announced the completion of the issuance of rial-denominated Islamic bonds for June, worth a total of SR4.4 billion. The kingdom issued sukuk worth SR3.23 billion in May, SR7.39 billion in April and SR4.4 billion in March.

Global forecast

Meanwhile, S&P Global has maintained its forecast for global sukuk issuance at around $160-170 billion, supported by strong market performance in the first half of 2024.

The US-based firm stressed that the steady growth of the Islamic bond market will be driven by economic diversification initiatives in countries such as Saudi Arabia, as well as the rapid expansion of non-oil sectors in the United Arab Emirates.

The report also highlighted that countries such as Oman, Malaysia and Kuwait contributed to the growth of the sukuk market.

He added that geopolitical risks are not expected to have a negative impact on the issuance of Sharia-compliant debt products globally.

“Geopolitical risks have not yet affected emissions but could pose some downside risks, although we do not expect significant disruptions in our base case,” the agency said.

S&P noted that the adoption of Shariah Standard 62 of the Accounting and Auditing Organisation for Islamic Financial Institutions could reduce issuance volume in the medium term if it significantly changes the nature and risk profile of sukuk instruments.

In late 2023, AAOIFI published a working draft of Shariah Standard No. 62 on sukuk, which delayed the industry submission deadline twice. The final extension was set for 31 July 2024, rather than 31 March 2024.

According to the rating agency, the proposed project has the potential to change the nature of the sukuk market and lead to greater fragmentation.

The guidelines cover Sharia requirements for issuance, asset security and transfer of ownership. They also cover investment structures, financing mechanisms and trading and settlement procedures.

“A key requirement of the standard is to transfer ownership and risk of the underlying assets to the sukuk holders. As a result, the market will shift from structures in which the contractual obligations of the sukuk sponsors are the basis for repayment to structures in which the underlying assets play a more significant role,” S&P Global said.

The report further noted that adoption of the proposed standards could make Islamic bonds more expensive than conventional issues.

He added: “However, it is difficult to predict the appetite for such instruments from both investors and issuers, as well as the legality of transferring assets from their balance sheets, given the current market structure. This could lead to further market fragmentation or, worse, issuance could be halted until sukuk structures find an intermediate solution.”

The report added, however, that the adoption of AAOIFI Standard 62 guidelines is unlikely to disrupt the functioning of sukuk because any changes to contractual obligations require the consent of investors.

Local editions

Despite the increase in foreign issuance, domestic currency-denominated issuance fell by 8.8 percent in the first half of this year compared to the same period in 2023.

S&P Global noted that the decline was due to a decline in local currency issuance in countries such as Turkey, the UAE and Pakistan.

“The largest decline in local currency issuance occurred in Turkey, where monetary tightening combined with better fiscal policy coordination continues to help balance the economy,” the report reads.

It added: “In the UAE, the decline could be explained by lower local currency-denominated issuance by the federal government and other bodies. In the case of Pakistan, the issue could be related to the lack of emissions data for the first half of 2024.”

A positive aspect of the report is that it highlights the increase in local currency issuance by Saudi Arabia.

“We have seen Saudi local currency issuance resume its upward trend. The government has tapped the market with jumbo issuance and has also started issuing retail sukuk,” S&P Global added.

On the other hand, financing needs in major Islamic finance countries, stable interest rates and greater clarity on the future path of interest rate cuts contributed to a further increase in foreign currency-denominated issuance.

“We saw strong issuance volume in Saudi Arabia, where the government and banks continue to use the market to fund various projects related to the economic transformation plan. We currently expect the Saudi banking system to move to a moderate net debt position over the next few months,” the report said.

S&P Global added that the first half of this year saw an increase in foreign currency-denominated issues in countries such as the UAE, Malaysia, Kuwait and Qatar.

Sustainable sukuk

According to the analysis, the total issuance value of sustainable sukuk reached $5.2 billion in the first half of 2024, compared with $5.7 billion in the same period last year.

The rating agency forecasts that the volume of these green bonds will be around $10-12 billion unless there is a significant acceleration in the implementation of net-zero emission policies by key Islamic finance countries or regulatory action is taken.

Sustainable sukuk is a Shariah-compliant financial instrument where issuers use the proceeds solely to fund investments in renewable energy or other environmentally friendly assets.

The report also highlighted that 80% of sustainable bond issuance in the first half of 2024 came from banks in the Gulf Cooperation Council region, which have just started implementing their climate transition strategy.

In May, another analysis by Fitch Ratings forecast that the global market for ESG-linked sukuk would exceed $50 billion in the next two years.

The rating agency noted that the projected market growth is driven by new ESG requirements, regulatory frameworks and government initiatives for sustainable development.

Fitch also reported that the value of sukuk bonds on the GCC capital market has reached USD 940 billion and is systematically approaching USD 1 trillion.