Saudi Arabia Can Play A Crucial Role In Developing Islamic Finance

Saudi Arabia can play a crucial role in developing Islamic finance since the largest Islamic banks are based in Gulf Cooperation Council countries, according to Ahmad Mohammed Al-Joghaiman, executive vice president and chief financial officer of Saudi Electricity Company.

Al-Joghaiman made his remarks yesterday at the first Islamic Finance News (IFN) forum.

He said that with a population of around 27 million, the Kingdom’s economy is the largest in the GCC with GDP of SR 1.7 trillion at the end of 2010.

He added the Saudi economy is strong despite major global economies suffering from the worst financial crisis in recent memory.

Islamic financing is conducted under Shariah, with a growing number of global financial institutions, including HSBC among many other banks, providing Shariah-compliant services. Islamic financing began growing in popularity in the financial sector in the 1970s and has exploded in the last decade. Islamic banking also has fared better than other financial institutions without Shariah-compliant regulations during the 2008 global recession.

The two-day Islamic financing forum was organized by a Malaysian-based REDmoney group.

IAl-Joghaiman suggested that to post the growth of the IF, each stakeholders of the economy should contribute from their end.

He said governments should create a clear legal and tax framework. In addition, universities should provide specialized courses in Islamic finance to teach the requisite technical knowledge and skills to students. Financial institutions should come up with innovative IF products and services while corporations should show interest in raising capital from these sources.

“With all such efforts from stakeholders one day, may be IF might come into main source of financing rather than as an alternative to conventional financing as currently viewed,” he said.

He noted the origins of Islamic financing can be traced back to many centuries, but the current form of Islamic finance has evolved with the establishment of institutions such as the Islamic Development Bank and Dubai Islamic Bank.

According to the UK Islamic Finance, by the end of 2011 the global market of Islamic finance had reached around $ 1.3 trillion. This could be roughly just over 1 percent of the global assets which means that there is a huge room for the growth of IF.

In the 1970s and 1980s Saudi Arabia’s role was underplayed, Al-Joghaiman said. “For instance, I can remember very well in 1981 — the first year of my career — there wasn’t any IF institution in the country.”

He said only one office was operated by Prince Mohammed Alfaisal who took investor’s money and sent them to Dar Alamal Alislami of Faisal Islamic Bank in Dubai.

Al-Joghaiman said the kingdom was able to protect its strong credit ratings Aa/AA-/AA while many developed countries lost their high ratings. This strong credit-worthiness may help in designing and testing innovative Islamic products, which may pave the way for others.

IFN will focus on Middle East Islamic issuers and investors. It will address key issues pertinent to Saudi Arabia and the Gulf’s current economic climate and follow up on the latest developments within the region’s Islamic financial market, including recent government efforts, issuer and investor interest, potential capital market issuance, as well as tax and regulatory updates.

Andrew Morgan, managing director of Redmoney Group, said Saudi Arabia’s growth in the Islamic capital markets had been extraordinary in 2011, with major issuance ranking among the largest in the world. Issuances included the General Authority of Civil Aviation’s (GACA) $ 4 billion Sukuk, and the GCC’s first ever project finance Sukuk by SATORP valued at $ 1 billion.

The Kingdom’s Sukuk market is now considered the third largest in the world and is expected to continue to climb up the issuance ladder moving forward.

The Kingdom is also home to the world’s most prominent IF players, including the Al Rajhi Bank and the Islamic Development Bank (IDB) with total Islamic financing assets estimated at $ 94 billion as of December 2011. This represents 26 percent of GCC’s total IF assets, and 8.2 percent of global IF assets.

The Saudi government’s move to pass the long-awaited mortgage law has also opened up new opportunities in the residential and housing sector, providing opportunities to banks and financial institutions looking to tap into the market.

The Kingdom is also expected to expand its project and infrastructure market with new developments under way and strong backing from the government, which had recently allocated a substantial portion of its 2013 budget toward financing new development projects.

It also recently announced that Saudi Arabia and Malaysia have renewed efforts to streamline industry regulations for Shariah scholars by addressing issues such as conflict of interest and accreditation in a bid to spur the industrial growth.

Ranked high on the list of best jurisdictions to do business, the Saudi market, despite its perceived insularity, is a magnet for foreign investors and issuers looking to capitalize on the high levels of liquidity in the Kingdom. And despite the current economic crisis, the Kingdom’s economy has not been showing signs of slowing down. On the contrary, it is expected to achieve a GDP growth of 6 percent in 2013, as forecast by the IMF.

Arab News