Riyadh, Asharq Al-Awsat- In the first statement made by Dr. Mohamed Al-Jasser, the new Governor of the Saudi Arabian Monetary Agency [SAMA], he spoke about long-term financing projects in Saudi Arabia, saying that in the past the burden of this type of financing fell upon governmental funds, and not commercial banks. Dr. Al Jasser revealed that there is a good opportunity for Saudi Arabia to secure long-term financing via other alternatives that have yet to be explored, such as through the issuance of bonds and Sukuk [Islamic bonds].
This is an area that we have not extensively explored, even though it is a broad and substantial area of financing, especially with regards to large projects that do not receive full funding from banks. Bonds and Sukuk are an important means to lending, as well as being a suitable structure for savings; cooperation and coordination will take place between SAMA, the Supreme Economic Council, the Capital Market Authority, and the Saudi Chambers of Commerce in order to set into motion the development of this promising market.
Dr. Al-Jasser’s statement caught my attention, especially when he said that Sukuk are an alternative financial tool that will secure long-term financing of eligible projects, but he gave his assurances that SAMA in coordination with other relevant agencies would develop this market, which he described as promising. And so SAMA is offering – and for the first time ever – Sukuk as an alternative financing service, which is something that we have been calling for, and which I personally called for in a number of my previous articles.
There can be no doubt that this statement sends a positive message to the future of Islamic Banking in Saudi Arabia with regards to the possibility of change and development to this industry, providing it with support and assistance, as well as the development of the rules and regulations that govern it, in order for Saudi Arabia to take its rightful place at the head of the list of financial centers that seek to embrace Islamic Banking.
Saudi Arabia, whose Islamic Banking sector amounts to $92 billion, and is one of the most prominent countries with regards to this industry, according to a report by the Financial Information Service Division in London, is currently not where it should be on the list of financial centers in this field. Saudi Arabia is preceded by a number of smaller and less influential countries in this field, such as Bahrain, Dubai, Malaysia, and Britain, due to the presence of infrastructure and appropriate legislation in these countries. And also because these countries sought, and are seeking, in a persistent manner, to attain a portion of this rapidly-growing industry.
In 2007, Islamic Banking achieved international growth of 27% according to a report by Moody’s Investors Service; while its assets today are estimated at between $650 billion and $800 billion, and are expected to reach one trillion dollars in 2 – 4 years. Sukuk is one of the fastest growing services in Islamic banking, in 2005 achieving growth of 49 percent, achieving growth of 153 percent in 2006, and 79 percent in 2007. This fell sharply in 2008 when the number of Sukuk bonds issued decreased by 50 percent as a result of the financial crisis that the world is currently facing as number of financial institutions and companies went back on issuing Sukuk bonds in fear that investors would not be able to cover them.
And so financial institutes have become more cautious in granting financing due to the doubt and uncertainty surrounding the financial situation of many companies and governments as a result of this crisis. However Sukuk is likely to make a strong return in the second half of the year due to the clarification in the financial position of many companies and financial institutions, and many international institutes will issue Sukuk bonds in order to secure the necessary funding for their projects.
There is no doubt that the winds of change have swept across SAMA [due to the appointment of its new Governor] however further change must be swift and effective in order to bear fruit. SAMA must develop the necessary infrastructure for the Islamic Banking industry by enacting laws, developing rules and regulations that are specifically suited to this industry, as well as developing systems to measure risk, and systems for accounting and monitoring, in order to achieve a uniform standard for this industry inside Saudi Arabia. By doing so SAMA will be able to put Riyadh at the top of the Islamic Banking list.