Judging by the number of deals closed, funds launched and the presence of new institutions, 2010 is turning out to be a very active year for the Islamic finance market in Saudi Arabia.
The Kingdom, in terms of pool of funds, is the largest player in the global Islamic finance market, although its industry, like elsewhere, is subject to traditional bottlenecks, scarcity of human capital resources and underdeveloped market awareness.
There is no doubt that the Saudi market is underpinned by its economic fundamentals - that the Kingdom is the world's largest oil producer and exporter. In addition, while the official foreign reserves held by the Saudi Arabian Monetary Agency (SAMA) are just under half a trillion US dollars, private liquidity in the Kingdom is estimated at $1.2 trillion.
The Kingdom has also weathered the storm of the current global financial crisis, with 2009 real GDP growth estimated at 0.2 percent and expected to accelerate to 3.2 percent in 2010. According to Omar Al-Jaroudi, chief executive officer of SHUAA Capital Saudi Arabia, for instance, "The Saudi government's timely and appropriate fiscal and monetary policies have helped to support growth and the stability of the financial system. The key drivers behind our macro view are a sustained global recovery and the associated higher oil prices, continued expansionary fiscal policy and the resumption of local bank lending, easing financing constraints on the private sector. We forecast nominal GDP will reach SR1.5 trillion this year."
The room for optimism in the Islamic finance sector is underlined by a number of developments. Bank AlJazira, which has converted all its activities to Islamic banking, for instance, has recently received approval from the SAMA to set up a Takaful (Islamic insurance) company. The bank's Takaful Ta'awuni Division will be spinned off into a standalone Takaful joint venture with the UK's Prudential PLC, one of the world's largest insurance and asset management companies.
The Jeddah-based Islamic Development Bank (IDB), on the other hand, has recently approved its first financing facility - a $120 million co-financing as part of a larger Islamic financing facility for the strategic Jubail Refinery and Petrochemical Project (JRPP) in Saudi Arabia.
The project, which has a total capital cost of $12.8 billion and which is scheduled to be completed in four years, is owned by Saudi Aramco Total Refining and Petrochemical Company (SATORP), a joint venture between Saudi Aramco (62.5 percent) and Total of France (37.5 percent). Technip of Italy is acting as the technical and project coordinator. The facility marks a growing involvement of the IDB Group in financing Saudi utilities and corporates, especially in trade and project finance. The Kingdom is by far the largest equity subscriber to the IDB.
The timing of the project, stressed the IDB, "is strategically important, indicating that Saudi Arabia in particular and the region in general, have remained resilient to the economic crisis and back on track for growth".
Two other major developments include the recent launch of "the world's first Shariah-compliant portfolio based on the Fundamental Index(r) methodology" developed exclusively for Saudi Economic Development Company (SEDCO) Group in Saudi Arabia by Swedish based investment manager IPM Informed Portfolio Management (IPM).
SEDCO is the dedicated Islamic private investment firm of the Bin Mahfouz family, formerly the major shareholders in National Commercial Bank (NCB).
The IPM Global Shariah screened portfolio based on the FTSE RAFI (Research Affiliates Fundamental Index) Global Index weightings, according to SEDCO, will benefit those institutions seeking the additional returns that RAFI offers, but that were previously excluded from existing Fundamental Index platforms.
The Fundamental Index methodology, according to IPM, is "a unique approach to portfolio construction, in which index weights are determined by fundamental measures of company size (cash-flow, book value, dividend and sales), instead of being based on price and valuation."
In the housing finance sector, pursuant to the imminent adoption of a Saudi mortgage law, Deutsche Bank AG and a group of Saudi investors led by Fahad Abdullah Al-Rajhi, launched in April 2010 Deutsche Gulf Finance (DGF), a joint venture Shariah-compliant home financing company owned 40 percent by the Deutsche Bank's Riyadh Branch and 60 percent by a group of prominent Saudi-based investors.
Fahad Al-Rajhi, who is also the head of Al-Rajhi Bank, is confident that DGF, which is capitalized at $110 million, will benchmark itself against international best practices and looks forward to contributing to the growth of home ownership in Saudi Arabia initially and later in Bahrain, Qatar and Kuwait.
Doug Naidus, managing director and global head of residential mortgage backed securities lending and trading at Deutsche Bank, stressed that "Saudi Arabia is a key country in our emerging markets strategy. Islamic home finance continues to be an important part of Deutsche Bank's global mortgage platform. Deutsche Bank's global expertise coupled with the Al-Rajhi family's local prominence and experience makes this an ideal and complementary business relationship."
The launch of Deutsche Gulf Finance comes at a pivotal time for consumer finance in Saudi Arabia. According to Deutsche Bank Research, the total outstanding home finance provided by the private sector in Saudi Arabia aggregates to less than 1 percent of GDP compared with well over 50 percent in most developed countries, and approximately 6 percent in Kuwait and 7 percent in the UAE.
Deutsche Bank Research projects Saudi Arabia will need 1.2 million additional housing units by 2015. In addition, based on market assumptions, it estimates that when the new Saudi mortgage law is enacted it will contribute to incremental demand of approximately 55,000 additional units per year.
Other recent Islamic finance market developments include the $500 million (SR1.875 billion) ARC Real Estate Income Fund launched by Al-Rajhi Capital, the investment banking subsidiary of Saudi Arabia's Al-Rajhi Bank, and Arcapita Bank, the Islamic investment bank incorporated in Bahrain, is potentially an important development and indicator in the revival of the GCC Islamic real estate market.
The Kingdom's largest realty developer, Dar Al-Arkan Real Estate Development Company (DAAR) closed its fourth sukuk issuance - a $450 million issue - in February 2010. This latest sukuk was lead arranged by Unicorn Investment Bank, Deutsche Bank and Goldman Sachs.
The fund, which is registered with the Capital market Authority (CMA) in Saudi Arabia, brings together for the first time Al-Rajhi Bank, the largest Islamic bank in the world in terms of its balance sheet, and Arcapita Bank, the former First Islamic Investment Bank, which has pioneered Shariah-compliant real estate and private equity transactions especially in the US market, the UK, Germany and the GCC market. At its peak, Arcapita's real estate and private equity portfolio in the US market alone totaled over $3 billion.
In March 2010, SHUAA Capital Saudi Arabia closed its first land acquisition situated at the Jeddah Corniche on behalf of the SHUAA Saudi Hospitality Fund I, a SR2 billion Shariah-compliant private equity fund, which will be developed into a luxury hotel tower with affiliated serviced hotel apartments to be managed by Rotana Hotel Management Corporation, the leading hotel management company in the MENA region.