Bank profitability will be bolstered by the sale of government local-currency Islamic bonds

Saudi Arabia's Islamic banks will benefit from the launch of a programme for selling Saudi riyal-denominated Islamic bonds or sukuk, Moody's says. Faisal Al Nasser/Reuters

Saudi Arabia’s Islamic banks will benefit from increased profitability after the ministry of finance launched a Saudi riyal-dominated programme for the issuance of Islamic bonds, or sukuk, the rating agency Moody’s said on Friday.
The kingdom’s ministry of finance announced on Monday it had sold 17 billion Saudi riyals of sukuk under its newly-launched programme, which is aimed at plugging the budget shortfall caused by lower revenue from oil.

“The issuance is credit positive for Saudi banks because their profitability will benefit from the transfer of their large, low-yielding reserves of cash and placements with the Saudi Arabian Monetary Authority (SAMA) and banks to higher-yielding government Islamic bonds,” said Moody’s. “Additionally, the issuance will help address a shortage of sharia-compliant liquidity management instruments for Islamic banks and support the development of a domestic sukuk market by establishing a yield curve.

The ministry revealed earlier this month the names of 13 local banks that have qualified to take part in the sukuk programme.
In April, Saudi Arabia sold US$9bn worth of international sukuk, its first foreign sale of Islamic bonds.
The Saudi government put on hold in October last year the sale of domestic conventional bonds after it sold a $17.5bn international bond, the biggest by an emerging market nation.

The local bond sales had tightened bank liquidity, which has languished amid the economic slowdown.
“We expect that Saudi banks will be in better position to absorb domestic sukuk issuance over the next 12-18 months because their liquidity has improved and credit growth has slowed,” Moody’s said.

Prior to the international sale, the government was selling 20bn riyals of bonds to banks each month since mid-2015 to help finance its budget deficit.
The government is forecasting a budget deficit of 198bn riyals for 2017, compared with an actual deficit of 300bn riyals last year.

“In addition to boosting profitability, a new sukuk programme will provide a deeper pool of sharia-compliant securities to facilitate liquidity management for domestic Islamic banks,” Moody’s said. “Facing a shortage of sharia-compliant investments that they can hold for liquidity purposes, Islamic banks tend to maintain higher levels of low-yielding cash and Islamic interbank placements on their balance sheet than their conventional peers, which curbs their profitability.”

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