Saudi Islamic banks to benefit from sukuk program

Saudi Arabia’s issuance of its first domestic sukuk this year is credit positive for banks because their profitability will benefit from the transfer of their large, low-yielding reserves of cash and placements with the Saudi Arabian Monetary Authority (SAMA) and banks to higher-yielding government Islamic bonds, global ratings agency Moody’s said on Friday.

“Additionally, the issuance will help address a shortage of shariah-compliant liquidity management instruments for Islamic banks and support the development of a domestic sukuk market by establishing a yield curve,” the agency said.

The Kingdom raised SAR 17 billion ($4.5 billion) from its first domestic sukuk sale this year as it seeks to plug up its budget deficit amid low oil prices, the Saudi finance ministry said on Tuesday.

“The sukuk program comes at a time when Saudi Arabia faces large funding requirements to finance a budget deficit that we forecast will equal 10.7 percent of GDP in 2017, and follows the country’s inaugural international sukuk of $9 billion in April 2017,” Moody’s said.

Moody’s also expects Saudi banks to be better positioned to absorb domestic sukuk issuance over the next 12-18 months because their liquidity has improved and credit growth has slowed.

The ratings agency expects this sukuk issuance to be eligible for repo with SAMA for banks to access cash liquidity.