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In a statement about extra expenditure of the Kingdom’s budget, Finance Minister Ibrahim Al-Assaf said Saudi Arabia will not use its funds reserves. However, these expenditures can be financed through the issuance of sukuk.
He used the expansion of King Abdul Aziz Airport as an example for projects that can be financed using sukuk.
The use of this financial instrument is a necessity at the current time.
Instead of draining the funds reserves, Saudi Arabia can keep growing it to allow diversification of the portfolio to achieve the highest returns, financially, economically and politically.
Moreover, the financing of large infrastructure projects planned by this instrument will help in absorbing the excess liquidity from the economy, which is heavily contributing to the alleviation of inflation.
According to the latest statistics of SAMA, the monetary base (M1) grew by 11 percent on Y/Y basis taking the total up to SR251 billion.
The currency in circulation outside banks grew at a higher rate of 27 percent, bringing its total to SR120 billion.
These funds, which are increasing year after year, add pressures on commodity prices.
Additionally, most of the excess liquidity is directed to non-productive sectors such as real estate.
Investors buy empty plots and keep them undeveloped aiming for capital gains.
This trend, in addition to the increment in population is driving real estate prices to an “unaffordable” levels. The main motive for this trend is the lack of safe investment tools and instruments that generates acceptable returns.
Therefore, the issuance of such sukuk would also help in converting this liquidity into a productive asset that adds to the economic output of Saudi Arabia.
The key thing in the process of issuing these instruments is its structure.
The Saudi bond and sukuk market currently is not attractive due to poor returns.
All listed sukuk are using murabaha or mudaraba structures, with the exception of Saudi Aramco’s sukuk that uses Ijara form partially.
As the lending rate between banks (SIBOR) is at a low level of 0.6 percent (which is the base that determines total return), the returns of most traded sukuk does not exceed 2.5 percent.
The murabaha and mudaraba deals are subject to Zakat, which in turn, wipes out all returns and when inflation is factored-in, these sukuk generate negative returns.
Ijara sukuk are different from other Islamic financing instruments as the contractual structure is built on the ownership of a leased project.
Thus, the Zakat is not obligatory at the leased project of this instrument and in turn the principle of the sukuk issued as the project is not used for trading purposes.
This structure can be adopted in all infrastructure projects.
It will turn the owners of this financial instrument into partners of the projects to be developed, and they will share the profits generated of the lease.
A tool like this with an acceptable return on investment and low risk is able to attract excess liquidity in the domestic economy and transform it into a productive capital.
He used the expansion of King Abdul Aziz Airport as an example for projects that can be financed using sukuk.
The use of this financial instrument is a necessity at the current time.
Instead of draining the funds reserves, Saudi Arabia can keep growing it to allow diversification of the portfolio to achieve the highest returns, financially, economically and politically.
Moreover, the financing of large infrastructure projects planned by this instrument will help in absorbing the excess liquidity from the economy, which is heavily contributing to the alleviation of inflation.
According to the latest statistics of SAMA, the monetary base (M1) grew by 11 percent on Y/Y basis taking the total up to SR251 billion.
The currency in circulation outside banks grew at a higher rate of 27 percent, bringing its total to SR120 billion.
These funds, which are increasing year after year, add pressures on commodity prices.
Additionally, most of the excess liquidity is directed to non-productive sectors such as real estate.
Investors buy empty plots and keep them undeveloped aiming for capital gains.
This trend, in addition to the increment in population is driving real estate prices to an “unaffordable” levels. The main motive for this trend is the lack of safe investment tools and instruments that generates acceptable returns.
Therefore, the issuance of such sukuk would also help in converting this liquidity into a productive asset that adds to the economic output of Saudi Arabia.
The key thing in the process of issuing these instruments is its structure.
The Saudi bond and sukuk market currently is not attractive due to poor returns.
All listed sukuk are using murabaha or mudaraba structures, with the exception of Saudi Aramco’s sukuk that uses Ijara form partially.
As the lending rate between banks (SIBOR) is at a low level of 0.6 percent (which is the base that determines total return), the returns of most traded sukuk does not exceed 2.5 percent.
The murabaha and mudaraba deals are subject to Zakat, which in turn, wipes out all returns and when inflation is factored-in, these sukuk generate negative returns.
Ijara sukuk are different from other Islamic financing instruments as the contractual structure is built on the ownership of a leased project.
Thus, the Zakat is not obligatory at the leased project of this instrument and in turn the principle of the sukuk issued as the project is not used for trading purposes.
This structure can be adopted in all infrastructure projects.
It will turn the owners of this financial instrument into partners of the projects to be developed, and they will share the profits generated of the lease.
A tool like this with an acceptable return on investment and low risk is able to attract excess liquidity in the domestic economy and transform it into a productive capital.
