The rapid development of Islamic financial institutions and markets have enabled the penetration of mainstream finance and gaining relevance to global economic and financial flows, the National Commercial Bank said in its Saudi Economic Review for the month of January 2015.
On the Islamic equity front, the S&P 500 Shariah index ended 2014 standing at a record 1801.9, thus surging by 11.2% on a YTD basis. The USD 3-month murabahah deposit rate, the equivalent of an interbank offered rate, stood unchanged at 0.65% in 2014 compared to the 3-month LIBOR which averaged 0.23% on USD deposits in the same year.
According to Standard and Poor’s, around USD1.8 trillion worth of assets are managed in accordance to Islamic investment principles. Sukuk is one of the fastest growing instruments in the Islamic finance sector, and the resemblance it holds to conventional bonds aided its inclusion in many bond benchmark indices recently, notably Barclays.
Recognizing the great potential the sukuk securities hold for investors, regulatory bodies such as the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) are established, and performance-monitoring indices such as the Thomson Reuters Sukuk Index and the Dow Jones Sukuk Index were created. In 2014, a total of 806 sukuk were issued, reaching the value of USD114.1 billion, surpassed only by 2012. On a Y/Y basis, the growth rate of sukuk issues reached 4.8%, decelerating from the 2011 peak of 66%. The Dow Jones Sukuk Index rose by 2.6% compared to the previous year to 103.1, whereas the Thomson Reuters All Sukuk Index recorded an all-time-high of 117.3, an upturn of 6.9% Y/Y.
Around 62.7% of the global issuances were sovereign, leaving corporate and quasi-sovereign at a respective 21.9% and 15.4%. Malaysia is still the dominant issuing country of sukuk with 510 issues made in 2014, valued at USD75.2 billion. Saudi Arabia came as the second largest issuer by total size, reaching USD12.1 billion, followed by the UAE at USD5.7 billion. On June 2014, the UK became the first non-Muslim sovereign to issue sukuk which were estimated around USD339 million, maturing on July 22nd, 2019. Furthermore, on September, Hong Kong inaugurated its first sukuk issuance, raising USD1 billion, followed by South Africa’s debut of USD500 million offering. Given that the largest issuers of sukuk are sovereigns, 62.3% of issues pertained to government institutions. On the other hand, 19.1% were related to financial services, and around 5.5% related to power and utilities.
The Murabaha sukuk constituted around 47.6% of global sukuk issues, amounting to USD54.4 billion while Ijrarah made 18.3% at USD20.8 billion, followed by Wakala sukuk at around 10% or USD11.4 billion. The breakdown by currency reveals that 61.2% of the 2014 sukuk were issued in Malaysian ringgit, followed by a 23.4% that were issued in USD. As of January 2015, outstanding sukuk amount to SAR300.5 billion, 56.5% of which are issued by Malaysia. Respectively, Saudi Arabia, UAE and Indonesia account for 15.6%, 9.2%, and 5.7% of outstanding issues.
Taking notes on the great strides the sukuk market made in 2014, we expect continued record issuances of over USD100 billion in 2015; supported by a recovering global economy and more sovereigns tapping into the USD 200 billion market. While the secondary market development is still lagging behind, we expect the primary market to house a greater diversity in currency denominations, cross-border listings, and an enhanced compliance with Basel III.
The loan market in Saudi Arabia continues to grow driven by a favorable business cycle, sound credit worthiness and high liquidity. Despite plunging oil prices and geopolitical turmoil in many of the MENA region countries, the investment prospect is growing strong, marking a 17.4% Y/Y upturn in the second quarter 2014, the highest since 2Q2012. The lower benchmark risk and interest rate environment significantly lowers borrowing costs, increasing its attractiveness for businesses and individuals who make up over 60% of the Saudi credit market.
In November, the annual growth in private sector credit rose by 12.6%, around the year’s average, reaching SAR1.2 trillion. This brings total fresh credit extended to the private sector up until November to SAR132.5 billion. Excluding treasuries and bonds, the public sector credit climbed by 12.6% up to SAR319.9 billion. On the other hand, SAMA’s treasury bills and the Saudi government bonds grew by 32.7% Y/Y and 11% Y/Y, respectively, totaling SAR277 billion. SAMA’s open market operations act as a liquidity management tool ensuring price stability as inflation stood at 2.5% in November.
On the liability side, high liquidity, manifested in growth of deposits, facilitates local banks’ willingness to lend as deposits surged by an average of 12.9% in the last 12 months in November to SAR1.5 trillion. Demand deposits still retain the lion’s share in the composition of deposit accounts by almost 62% of total deposits, amounting to SAR955.2 billion. However, the rapid acceleration in time and savings deposits which annually surged by a On the liability side, high liquidity, manifested in growth of deposits, facilitates local banks’ willingness to lend as deposits surged by an average of 12.9% in the last 12 months in November to SAR1.5 trillion. Demand deposits still retain the lion’s share in the composition of deposit accounts by almost 62% of total deposits, amounting to SAR955.2 billion.
However, the rapid acceleration in time and savings deposits which annually surged by a 18.7% contributed to primarily by government entities, allowed local banks to find niche opportunities in longer maturity loans. As it stands, over 50% of the SAR1.25 trillion cumulative bank loans are with medium and longterm maturities. Medium-term loans make up 17.9%, while long-term loans account for 32.4% of total bank loans.
The double-digit acceleration in loans of longer tenors is predicated by the premise that a moderation in infrastructure capex will leave some short-run liquidity unutilized. Nevertheless, the loans-to-deposit ratio (L/D) in November was 81.2%, indicating a healthy level of capacity utilization.
Although recurrent US jobs market data have become largely positive, the low inflation specter, and worries about persistent global qualms continue to keep the interest rate landscape unchanged. The peg with the US dollar will typically form a positive correlation between the SAIBOR and LIBOR. Eventually, rising interest rates in the US will prompt SAIBOR to rise accordingly, keeping interest rate differentials between the SAR and USD deposits at comparable levels of around 70 basis points. In November, SAIBOR inched downwards by 3 basis points to 0.89 as interbank lending moderates towards year end. Moving further into 2015, we expect to see benchmark interest rates moving up by 25 basis points as the Fed decides to normalize its monetary policy.