Saudi leadership in Islamic finance set to continue into 2021: expert

LONDON: Saudi leadership in the Islamic finance economy looks set to continue into 2021, according to a senior industry expert, who explained that the end of the GCC rift and growing emphasis on green finance both boost the Kingdom’s credentials.

“The region, and specifically I would say Saudi Arabia, is leading the Islamic finance market globally,” Fitch Ratings’ Global Head of Islamic Finance Bashar Al-Natoor told Arab News.

“Although Islamic finance is small globally, it is significant in the Middle East, and it is very significant in Saudi Arabia.”

Across the five key sectors of Islamic finance — Islamic banks, Sukuk, Takaful, fund management and Sharia-compliant corporate sectors — Saudi Arabia was historically known only to lead in countries where there was dual Islamic and conventional financing.

However, Al-Natoor said, this is now changing.

The Kingdom has started to lead the Sukuk market: “The Kingdom has previously carried out the largest ever Sukuk offering internationally — we expect this trend to continue.”

Saudi Arabia is also chasing the top spot in the fund management sector, where, alongside Malaysia, it has the most fund managers dedicated to Islamic finance.

Across Sukuk, fund management, Takaful, and the wider Islamic finance world, Al-Natoor said “you find that Saudi Arabia is leading.”

One development that has contributed to Saudi Arabia’s pre-eminence in Islamic finance is the end of the GCC-Qatar rift.

The normalization of ties between the GCC bloc and Qatar, Al-Natoor explained, not only increased investors’ confidence in the region and eliminated a political risk, but also provided a material boost to the Sukuk market.

“With the end of the GCC-Qatar rift, we expect Qatari sovereign entities to slowly re-enter the wider Sukuk market,” Al-Natoor said.

He said the relatively shallow investor pool for Sukuks, compared with traditional bonds, means that, for Qatari entities, the importance of accessing the Saudi Arabian and Emirati markets are even more significant.

In addition to the favorable political conditions that have cemented Saudi leadership in Islamic finance, their experience in sustainable, green finance will also be instrumental in the future. 

Saudi Arabia, Al-Natoor said, issued its first ever green Sukuk last year when the Saudi Electric Company issued over $1.3 billion in Shariah-compliant bonds to assist in the company’s green transition.

This pattern of markets shifting towards green Sukuk, Al-Natoor said, is one he expects to continue.

“What we saw in 2020 is a trend that we expect to continue: Issuers coming with Sukuk and prioritising being sustainable.”

Green financing, whether conventional or Islamic, is still at an early stage of adoption globally, Al-Natoor explained, but green Sukuks represent a smart way for issuers to attract more investors.

“Because issuers are trying to widen their investment bases, we have seen the mix of green and Islamic coming to the forefront. Whether in Saudi Arabia, the UAE, or multilateral organizations like the Islamic Development Bank, we expect this trend to continue.”

Fitch Ratings released their Global Sukuk Outlook Dashboard earlier this month. Their report warned that some Sukuk issuers in the Middle East had taken a hit to their credit ratings due to the pandemic’s economic conditions and the drop in oil prices.

The report said: “In 2021, we expect global sukuk supply to accelerate, as issuers seek to refinance maturing debt, fund large budget needs, and as GCC investment restrictions ease following the normalisation of relations between Qatar and its neighbors.”