Can the Saudi Arabian Sukuk Market Replicate the Malaysian Model?

Saudi Arabia’s Sukuk market is exposed to certain structural challenges that need to be addressed before the success of the Malaysian Sukuk market can be replicated.

The following measures could help Saudi Arabia realize its true Sukuk market potential and establish itself on the global Sukuk map:

Robust Regulatory Framework

The establishment of a separate and robust regulatory framework for Sukuk would ensure standardization and minimize the difference of opinion among Shariah scholars. For this, coordinated efforts need to be taken by key regulatory bodies such as SAMA, the Finance Ministry and CMA. For instance, Malaysia established the Malaysia International Islamic Financial Centre (MIFC) in August 2006 through collaborative efforts between financial regulatory agencies, including the Central Bank of Malaysia (Bank Negara Malaysia), the Securities Commission (SC), Bursa Malaysia (Kuala Lumpur Stock Exchange) and the Labuan Offshore Financial Services Agency (the regulator for the international center of Labuan), and participation from the Islamic financial industry in Malaysia.

MIFC lays down guidelines relating to Sukuk issuance and provides various incentives to international issuers, including granting licenses and tax incentives. Furthermore, the SC has established a centralized Shariah Advisory Council (SAC) to advice on issues related to Sukuk and other Islamic capital market products. This, in turn, ensures that Sukuk issuances comply with Islamic principles. SAC also provides guidance to investors, the government and industry.

Active Secondary Trading Market

One of the key components of the success of Sukuk market in Malaysia is the presence of an active secondary market. To encourage secondary trading of Sukuk, KSA needs to encourage the issuance of Sukuk with varied maturities, credit qualities, currencies and risk profiles.

This would provide investors various options in the Sukuk market, and encourage retail participation. For instance, the current Sukuk framework in Malaysia allows issuance of both ringgit and non-ringgit Sukuk. Market makers and brokers should also assume greater role in the secondary market for Sukuk. Intermediaries such as brokers, investment bankers, and fund managers could facilitate secondary trading by underwriting and advising on complex Sukuk transactions.

Besides, secondary trading in KSA Sukuk market can be enhanced further by upgrading the technological infrastructure similar to Bursa Malaysia. Tadawul’s current electronic Sukuk trading platform should be equipped to handle central order booking, trade reporting and negotiation. The electronic trading platform should ensure the comprehensive dissemination of price, yield and trade.

A Leading Islamic Finance Centre

The establishment of an Islamic centre of excellence to impart knowledge in the domain of Islamic finance would increase the number of local qualified Shariah experts. Malaysia, for instance, established several academic institutions under the MIFC umbrella to develop Islamic finance talent. These include the Islamic Banking and Finance Institute Malaysia (IBFIM), the International Center for Leadership in Finance (ICLIF), and the Securities Industry Development Corporation (SIDC).

Aljazira Capital.