Sukuk Issuance in Saudi Arabia

282 Pages·2014·1.41 MB·English

Durham E-Theses
(cid:16)Sukuk Issuance in Saudi Arabia: Recent Trends and
Positive Expectations(cid:17)
ALSAEED, KHALID,SULAIMAN
How to cite:
ALSAEED, KHALID,SULAIMAN (2012) (cid:16)Sukuk Issuance in Saudi Arabia: Recent Trends and Positive
Expectations(cid:17) , Durham theses, Durham University. Available at Durham E-Theses Online:
http://etheses.dur.ac.uk/3502/
Use policy
Thefull-textmaybeusedand/orreproduced,andgiventothirdpartiesinanyformatormedium,withoutpriorpermissionor
charge,forpersonalresearchorstudy,educational,ornot-for-pro(cid:28)tpurposesprovidedthat:
• afullbibliographicreferenceismadetotheoriginalsource
• alinkismadetothemetadatarecordinDurhamE-Theses
• thefull-textisnotchangedinanyway
Thefull-textmustnotbesoldinanyformatormediumwithouttheformalpermissionofthecopyrightholders.
PleaseconsultthefullDurhamE-Thesespolicyforfurtherdetails.
AcademicSupportO(cid:30)ce,DurhamUniversity,UniversityO(cid:30)ce,OldElvet,DurhamDH13HP
e-mail: [email protected]: [phone]
http://etheses.dur.ac.uk
2
Durham University
Durham, United Kingdom

School of Government and International Affairs

Ph.D Dissertation submitted by Khalid Sulaiman Al-Saeed

Student #527812

January 2012

“Sukuk Issuance in Saudi Arabia:
Recent Trends and Positive Expectations”

Supervised by

Prof. Rodney J A Wilson, BSc, Ph.D
and Dr Mehmet Asutay, Ph.D

1
Abstract

The objective of this research is to assess the potential for corporate sukuk in Saudi
Arabia by examining issuance so far and seeking opinions from market makers as to how
this type of financing can be taken forward. The research considers the appropriateness of
Sukuk as long-term Shari‟a-compliant financing instruments. One objective is to
investigate how Sukuk issuers can tap liquid funds and harness them to contribute to the
funding of infrastructure and industrial projects.

The thesis investigates the recent Sukuk issuance trends and positive expectations
relating to Sukuk issuance in Saudi Arabia, and concludes that the outlook for Sukuk
origination in the Kingdom is positive. As the largest oil exporter in the world, Saudi
Arabia has a substantial capital market. It has been benefiting from steady high oil
income during the last few years and this, in turn, has increased the Saudi market
liquidity to unprecedented volumes.

An important part of the study is the analysis of corporate Sukuk issuances in the
Kingdom between 2004 and 2010. Detailed case studies are presented illustrating the
range of Sukuk structures used. Furthermore, the research also involves semi-structured
interviews and focus group discussions with key individuals from Sukuk issuing entities
in Saudi Arabia using a homogenized survey mechanism.

The semi-structured interviews and focus group discussions sought to discover the Sukuk
issuers' insights into the prime barriers to business growth, the comparative significance
of the numerous constraints to increase corporate Sukuk issuance, and the effects of
Saudi Arabia's investment environment on its competitiveness.

The major implication of the findings is that Sukuk, as securitized liquid financing
instruments due to their tradability, are useful long-term financing solutions for
companies in Saudi Arabia. Sukuk are becoming important financing instruments
complementing the dominant bank loans and IPOs. The research also highlights the long-
term outlook and the probable future challenges facing the Sukuk market in the Kingdom.
2
Acknowledgements

This thesis explores the potential for corporate Sukuk in Saudi Arabia. In collating my
research I have worked with academics, industry professionals and industry experts.
Therefore, I am grateful for their invaluable contribution which has added value to my
thesis.

I would like to thank my mother and father for their guidance, for my education and their
unwavering love. No words can express my appreciation for their unconditional support.

My special gratitude also goes to my wife Samar and my children, Maya and Nawaf for
their love, support and strength at all times. Their dedication, patience and confidence in
me, is a major catalyst in my life to pursue my aspirations.

I would also like to acknowledge the advice, guidance and support of my brother-in-law,
HE Dr. Mohammed Al-Jasser, Governor of the Saudi Arabian Monetary Agency
(SAMA), who taught me the value of education. I will always be deeply indebted him,
and my sister, Fawziyah, for her love and encouragement.

This thesis would not have been possible with the support and persistence of my principal
supervisor, Professor Rodney Wilson. I would like to acknowledge his professional
supervision, counselling and guidance he has given me from the start and drawing on his
expert knowledge of Islamic capital markets. I would like to thank Dr Mehmet Asutay for
his supervision and advice, and the valuable references he has given to me.

Finally, I gratefully thank others for their constructive review, comments and proof-
reading of this thesis. Their crucial contribution due to their unique background in the
Islamic finance field has added value to my thesis.

3
Contents

Abstract……………………………………………………………………………… ...2
Acknowledgements………………………………………………………………… ….3
List of Figures and Tables........................................................................................... ..7

Chapter One
Research Rational and Motivation - Introduction…..……………….……………… .….9
Research Objectives………………...............…………………………….………… …13
Research Questions .......................………………………………………………… ….15
Research Rationale and Motivation…………………………………………………….15
Research Methods………………………………………………………………........…19
Research Content and Structure …………………………………………………….. .22

Chapter Two
Evolution of Sukuk Structures and Mechanism - Introduction…….....……………. ….26
Sukuk Structure …………………………………………….…………………….… 28
Literature Review......................................................................................................... ...30
Types of Sukuk & their Structure and Mechanism….…………………………….… 40
Dynamics of Sukuk Pricing……………………………………………………………..58
Dynamics of Sukuk Tenor………………………………………………………………60
Sukuk Assets…………………………………………………………………………….60
Importance of Rating Sukuk………………………………………………………….....62

Chapter Three
Financial Market in Saudi Arabia – Introduction .………..……….…………..…….…65
Saudi Arabian Money Market…………………………………………….…………… 67
Saudi Arabian Money Market Repurchase Agreements……………………….……….68
Saudi Arabian Government Debt Securities…………………………….……………...73
Saudi Arabian Government Development Bonds……………………………….……...73
Treasury Bills…………………………………………………………………………...75
Floating Rate Notes ………………...…………………………………………………. 76
Saudi Arabian Stock Market ………………………………………………………… 78
Saudi Arabian Fund Management Issues…………………………………………….…84
Legal & Regulatory Framework for SAMA, CMA, DIFC & Central Bank of Bahrain..89
Conclusion……………………………………………………………………………....99

Chapter Four
Corporate Finance in Saudi Arabia - Introduction…………………..………………..101
Bank Loans…………………………………………….……………………………....103
Overdraft Facilities………………………………………………...………...………...107
Structured Term Loans……………………………………………………..………….110
Finance against Receivable Trade Finance…………………………………………….114
Informal Finance……………………………………………………………………….117
Family Finance (Loans or Equity)…………………………………..…………………117
Partnership Finance……….…….…………….………………………………………..118
4
Equity Finance…………………………….………………….………………….…. …119
Private Equity…………………………………………………………………………. 120
Public Issuance…………………………………………………………………………122
Syndicated Finance for Mega Projects………………………………………………... 123
Conclusion ......................................................................................................................124

Chapter Five
New Sukuk Structure - Introduction……………………………………………………126
Identifying Suitable Sukuk Structures..…………………………………………..…….128
Sukuk as Substitutes for Corporate Bonds and Floating Rate Notes……….………… .131
Companies Desire Corporate Sukuk or Bonds over Equity Finance to Avoid Suppressing
Share Price by Issuing More Shares………………………………………………...….134
The Choice between Corporate Sukuk or Bonds………….……………………...……136
Conclusion.......................................................................................................................139

Chapter Six
Research Methods - Introduction…………………………….………………… …153
Research Design…………………….………………………….……………………….155
Data & Methods..................................................................................................... ..158
Data…………………………………………………………….……………………….158
Data Collection……........................................................................................................159
Data Analysis………………………………………………………………………….. 160
Methods............................................................................................................... .....163
Research Methods................................................................................................. ...164
Research Difficulties & Limitations……………..…………….……………………….166
Conclusion.......................................................................................................................173

Chapter Seven
Case Studies - Introduction……………………………………….…….………………175
HANCO Sukuk Performance Evaluation........................................................................176
SABIC Sukuk Performance Evaluation...........................................................................184
Saudi Hollandi Bank Sukuk Performance Evaluation.....................................................189
SEC Sukuk Performance Evaluation...............................................................................194
Dar Al-Arkan Real Estate Development Company Sukuk Performance Evaluation......199
Conclusion.......................................................................................................................204

Chapter Eight
Semi-structured Interviews with 13 People - Introduction………………………….....207
Definition of Semi-structured Interviews........................................................................207
Interviewees‟ Perspective on Sukuk……………………..…….……………………….208
Importance of the Sukuk Pricing…….............................................................................209
Importance of the Sukuk Structure & the Underlying Assets for Investors in Case of
Default………………………………………………………………………………….211
Importance of Risk of the Sukuk Underlying Assets……………..................................213
Importance of the Purchase Undertaking……................................................................215
Importance of Sukuk Denominated Currency………………………………………….216
5
Potential Future Contribution of Sukuk to Corporate Finance in Saudi Arabia............219
What is the outlook for Sukuk in Saudi Arabia? What factors are likely to encourage
further issuances? Should Sukuk be traded on the Tadawul? ........................................221
How significant is the rating of Sukuk in determining whether to invest? ....................224
Have actual and potential Sukuk defaults in other GCC countries been detrimental to
Sukuk issuance in Saudi Arabia? .................……..........................................................225
Conclusion.......................................................................................................................227

Chapter Nine
Corporate Perspectives on Sukuk Issuance: Findings from a Focus Group Comprising
Saudi Finance Directors – Introduction …………………..……………………………228
The Potential for Sukuk in the following industries: Infrastructure, Construction,
Transport, New Economic Cities, Real Estate and Mortgage Market and Telecom
........................................................................................................................................230
Insights of Leading Saudi Corporate Finance Directors through the Focus Group
Discussion ………………………………………………………………………….......237
Conclusion.......................................................................................................................242

Chapter Ten
Conclusion - Introduction……………............................................................................244
The Long-Term Outlook for the Sukuk Market in Saudi Arabia …..………………….250
Challenges Facing the Sukuk Market in Saudi Arabia…................................................253
Conclusion.......................................................................................................................255

Appendix I.......................................................................................................................258
Bibliography....................................................................................................................259
6
List of Figures and Tables

Description Page

Figure 2.1 Standard Sukuk Structure……………………………………………….34

Figure 2.2 Mudaraba Sukuk Structure……………………………………………...36

Figure 2.3 Musharaka Sukuk Structure…………………………………………….39

Figure 2.4 Ijara Sukuk Structure……………………………………………………42

Figure 2.5 Murabaha Sukuk Structure……………………………………………...46

Figure 2.6 Salam Sukuk Structure………………………………………………….47

Figure 2.7 Istisna‟ Sukuk Structure………………………………………..……….50

Figure 2.8 Hybrid Sukuk Structure of the IDB….………………………………….53

Figure 3.1 Average SR Money Market based on daily bid rates…………………...63

Figure 3.2 Inter-relationship of various interest rates …………………………….66

Figure 3.3 Repo and Reverse Repo by SAMA……….…………………………….66

Figure 3.4 Commercial Banks‟ investments in government securities …………….72

Figure 3.5 Changes in Commercial Banks‟ investments in government security….72

Figure 3.6 Tadawul All-share Index ……………………………………………….75

Figure 3.7 Market Cap size by sectors Nov 2008…………….…………………….78

Figure 3.8 Percentage share of Arab Capital markets by Market Cap 2006….…….79

Figure 3.9 Assets of investment funds at domestic banks…….……………………81

Figure 4.0 SAMA Organisational Chart…………….……………..……………….87

Figure 3.10 New Saudi Capital Market Regulatory Skeleton .………….………….90

Figure 4.1 Loans Market Share……………………………….…………………….96

Figure 4.3 Sukuk issued by domestic banks…………….…………………………105

Figure 5.1 Standard Sukuk structure…………….…………………………..…….121

Figure 5.2 Saudi Hollandi Bank Sukuk Structure…………….………………… 122

Figure 5.3 Saudi Sabic Sukuk Structure…………….………………..………… 124

Figure 5.4 Saudi SEC Sukuk Structure…………….…………………………… 126

7
Figure 5.5 Dar Al-Arkan Real Estate Sukuk Structure……….………………… 128

Figure 5.6 Saudi Hollandi Bank Sukuk Structure…………….………………… 130

Figure 7.1 Saudi HANCO (Caravan I) Sukuk Structure…….……………..…… 155

Figure 7.3 Saudi Sabic Sukuk Structure…………………..….………………… 161

Figure 7.4 Saudi Hollandi Bank Sukuk Structure…………….………………… 166

Figure 7.5 Saudi SEC Sukuk Structure…………….…………………………… 171

Figure 7.6 Dar Al-Arkan Real Estate Sukuk Structure……….………………… 176

Tables Page

Table 3.1 SAMA current securities offerings…………………………………… .71

Table 3.2 Commercial Banks‟ investments in government securities..…………….71

Table 3.3 Market Cap and Tadawul All Share Index (TASI) 1995/2007……….….75

Table 3.4 Saudi Arabian Specialised Credit Institutions & their Performance in…..77

Table 3.6 Assets of Investment Funds managed by domestic investment funds…...80

Table 3.5 Most important indicators of investment funds of domestic banks ….….82

Table 3.7 SAMA‟s Monetary Policy instruments – comparative analysis……… .84

Table 4.1 Commercial Banks Reserves (millions riyals)……………….…….…….94

Table 4.2 Bank Claims on Private and Public Sector (millions riyals)…….……….97

Table 4.3 Consumer and Credit Card Loans (millions riyals)………….………. ….98

Table 4.4 Activity of specialised credit institutions (millions riyals)…………… …98

Table 4.5 Classification of bank credit by maturity (billion riyals) ……….……..104

Table 4.6 Private sector exports financed by commercial banks……………..……107

Table 4.7 Number of existing Saudi companies by capital type………………… 111

Table 5.1 Public listed Sukuk on Tadawul Exchange………………………....……138

Table 5.2 Announced Saudi Sukuk for 2009………………………….……………139

Table 9.1 Long-term debt of listed companies………………………………...… 207

Table 10.1 Bank loan rates compared to Sukuk coupon rates in Saudi Arabia…….226

Appendix Page

Appendix 1 Semi-structured interviews with major Sukuk investors‟ companies…253

8