Saudi banks ramp up sukuk issuances to meet financing needs: Experts

Several Saudi banks, including Al Rajhi Bank, Banque Saudi Fransi (BSF), Bank AlJazira, and Arab National Bank (ANB), have recently announced new sukuk issuances.

Saudi banks have been issuing sukuk for years, with an increased pace lately. These sukuk include conventional issuances as well as Tier 1 and Tier 2 additional capital sukuk.

Sukuk are Shariah-compliant financial certificates, allowing investors to own part of the issuer's assets until maturity. Holders receive a profit share from the underlying assets, being calculated as a percentage of the nominal value, paid annually or semi-annually.

Sukuk are deemed among investment instruments that generate a regular fixed income.

Some experts told Argaam that the rise in sukuk issuances in Saudi Arabia was due to two key factors: increased financing needs as deposit growth slowed compared to loans, driven by Vision 2030, alongside favorable market conditions, including monetary easing, making sukuk attractive for banks and investors.

Sukuk Issuances Doubled in 2024

Saudi sukuk issuances witnessed a noticeable uptick in 2024, reaching $10 billion, double the $5 billion recorded in 2023, according to Mohamed Damak, Managing Director, Global Head of Islamic Finance Middle East and Africa at S&P Global Ratings.

Mohamed Damak, Managing Director, Global Head of Islamic Finance - Middle East & Africa at S&P Global Ratings

This increase was attributed to two main reasons: strong growth of Saudi banks thanks to the Saudi Vision 2030, which boosted refinancing needs, paired with the improved market conditions amid monetary easing, according to Damak.

Elsewhere, Hassan Fawaz, Chairman of GivTrade Group, said the rise in sukuk issuances was due to lower yields following a 50-basis-point (bp) cut in US and Saudi interest rates, making sukuk more attractive. He added that Saudi Arabia’s Vision 2030 projects require significant financing, especially with the loan-to-deposit ratio exceeding 100%.

Hassan Fawaz, Chairman of GivTrade Group

Fawaz mentioned that banks and corporates are increasingly using authorized platforms by the Capital Market Authority (CMA) to issue debt instruments, expanding operations and maximizing assets in a supportive investment environment.

Types of Sukuk and Their Regulatory Impact

Damak explained that Tier 1 and Tier 2 sukuk are designed to absorb losses or conserve liquidity under certain conditions. Tier 1 sukuk support “going concern,” allowing banks to suspend periodic distributions before non-viability.

Meanwhile, Tier 2 sukuk are used after a bank reaches non-viability. Regular sukuk do not entail loss-absorption provisions.

Fawaz further clarified that Tier 1 sukuk are perpetual, forming part of a bank’s core capital, with deferred distributions. Tier 2 sukuk require a fixed maturity period of five to 10 years and serve as supplementary capital with higher risks.

Regular sukuk represent ownership in specific assets or projects and are Shariah-compliant, backed by tangible assets, making them ideal for financing projects and investment activities.

Capital Requirements Under Basel III

Damak highlighted that Basel III regulations require banks to maintain a minimum common equity ratio of 7% and a total capital ratio of 10.5%. This is besides additional requirements from the Saudi Central Bank (SAMA) such as the countercyclical buffer and requirements for domestic systemically important banks (D-SIBs).

Further, Fawaz explained that banks must maintain at least 8% capital against risk-weighted assets, with Tier 1 capital making up 6%, including CET1 at 4.5% and AT1 at 1.5%. Tier 2 capital should account for 2%. An additional 2.5% capital protection reserve raises the total capital minimum to 10.5%.

He clarified that all Saudi banks must comply with these requirements. However, heavyweight banks such as Saudi National Bank (SNB) and Al Rajhi Bank face more stringent stress-tests to enhance their ability to absorb shocks.

Loan-to-Deposit Ratios: Growth Indicators

By November 2024, the loan-to-deposit ratio in Saudi Arabia exceeded 104%. Meanwhile, the adjusted ratio came in at 82%, still below the 90% recommended by SAMA.

Damak expects Saudi Arabia’s loan-to-deposit ratio to remain on the rise due to Vision 2030-driven financing needs, with banks ramping up deposits and exploring alternative funding, including external financing and potentially a mortgages-backed securities market.

Fawaz noted that these indicators reflect a shift in Saudi banks' financing structure, supported by strong growth in banking finance for Vision 2030 projects.

Banks are relying more on sukuk and international debt, while maintaining strong capital adequacy ratios of 19.2%. Regulatory oversight by SAMA boosts banks' risk management and stability, he added.

SAMA began implementing Basel III reforms for local banks as of Jan. 1, 2023, in a bid to improve capital requirement sensitivity based on transactions and activities. Saudi banks' capital adequacy ratios are among the highest globally, surpassing Basel III and SAMA’s 8% minimum.

2025 Outlook for Sukuk Issuances

Global sukuk issuances reached $193.4 billion in 2024, with S&P Global projecting this value to range from $190 billion to $200 billion in 2025, including $70 billion to $80 billion in foreign currency sukuk. This shall be driven by continued monetary easing and supportive economic conditions in key Islamic finance countries.

Saudi Arabia’s sukuk issuances reached $26.1 billion in 2024, with similar performance expected in 2025.

Fawaz predicts a sharp increase in sukuk issuances in 2025, particularly after a 239.88% month-on-month (MoM) rise in December 2024.