The Saudi Arabia Sukuk: Bond Market

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Sukuk is ordinarily taken to mean a “shariah compliant bond”. It is symbolic of a claim to the ownership of an asset. The fact that the claim to a sukuk is more of ownership that to cash flow helps to draw a line between on the one hand, conventional bonds and on the other hand, a sukuk. In the case of conventional bonds, these entail interest tied to securities, while sukuks are symbolic of certificates of investment made up of a claim to ownership to assets that have been pooled together (Association of Islamic Banking Institutions Malaysia 4). During the Middle Ages, Muslims extensively used Sukuk to symbolize financial commitments having rots in trade, along with additional commercial activities. Nonetheless, sukuk, as we know them today, vary from the original ones. The sukuk of today resembles the conventional securitization concept. This is a process that is characterized by transfer of ownership to underlying assets to numerous investors via the issuance of certificates that symbolize a balanced value of the assets in question.

Recent trends in Sukuk and bond issuance

In recent years, the Islamic finance sector has been experiencing significant innovations in the form of securities and bonds. Accordingly, Islamic securities, also known as Sukuk, have gained immense popularity. Government have found in Sukuks a means to raise the much-needed finance via sovereign issues. In addition, companies are now relying on corporate Sukuks as a means of funding. The issuing of Sukuk started in 2000, when three Sukuks were issued, all valued at $336 million (Karam par. 3). By 2006, the number of Sukuks issued had increased 77, and their combined valued was at the time estimated to have been over US$ 27 billion. At the international level, the capital markets have also embraced Sukuks to assist them raise the necessary finances for their expansion. By adopting islamically acceptable structures, the capital markets have realized that Sukuks are in fact a vital mechanism for raising finances. Moreover, sovereign bodies, multinational corporations, financial institutions and state corporations are now increasingly issuing international sukuk to substitute syndicated financing.

The Kingdom of Saudi Arabia introduced sukuks for the first time in 2006, but their real impact was fully felt in 2008. Since then, the sukuks have greatly boosted the Islamic capital market in Saudi Arabia, in addition to enhancing economic and industrial development. Up to this point, commodity and consumer finance have been the main concern of Saudi Arabia’s Islamic finance industry. Other projects that have also characterized Islamic fiancé in the kingdom include the power project in Shuaba East. However, the petrochemicals, gas, oil, real estate and manufacturing sectors are now the beneficiaries of Islamic fiancé in Saudi Arabia. Various forms of finances are used to provide fiancés to these sectors, and they include sukuk, equity financing and trade finance, amongst others. The emergence of sukuk has resulted in a massive growth of the bond market in Saudi Arabia. Estimates are that sukuks now comprise 81 percent of entire bonds that Saudi Arabia issues.

Differences between Sukuk and bond

The market for Bonds and Sukuk in Saudi Arabia enables issuers and investors alike to trade in these investment securities that are characterized by reduced risk and periodic returns, in comparison with equity investment. Governments, institutions and companies all consider Bonds and Sukuk valuable channels to acquire the required liquidity to help them finance their existing projects. Moreover, it is anticipated that the Bonds and Sukuk market shall allows investments diversification, as well as affording investors protection over portfolios. There are several similar features between Bond and Sukuk (Saudi Stock Exchange par. 3). In terms of the issuer, this could be an organization affiliated to the government. Alternatively, it could also be a private entity. In terms of the type of bond, the prospectus normally issued by the issuer clearly provides their specifications. It is important to note that various bonds may be customized in a bid t suit the issuer’s specific needs; for instance, Sukuk, Murabaha, amortizing bond, straight bond, and convertible bond, amongst others. Both Sukuk and Bond are characterized by low risk. In addition, they get the first priority when it comes to paying principle. Their maturity date is also specified. Although thre re several types of Sukuk on offer at the Saudi Stock market, nonetheless, the most popular is the Sabic Sukuk. The table below depicts the Bond and Sukuk that are tradable at the Saudi Stock Exchange.

Table 1: Tradable Sukuk and Bond in Tadawul (Source: Saudi Stock

Sakk/Bond Issue Size (m) Par value (SR) Maturity Date Coupon (Annual return)
SABIC Sukuk I 3,000 50,000 26-7-2026 The basic rate of commission (SIBOR) in addition to 0.40%
SCECO Sukuk 5,000 500,000 15-7-2027 The basic rate of commission (SIBOR) in addition to 0.45%
SABIC Sukuk II 8,000 10,000 15-7-2027 The basic rate of commission (SIBOR) in addition to 0.38%
SABIC Sukuk III 5,000 10,000 15-5-2028 The basic rate of commission (SIBOR) in addition to 0.48%
SCECO Sukuk II 7,000 100,000 06-7-2029 The basic rate of commission (SIBOR) in addition to 1.60%

Sukuk vs. Eurobonds

Sukuk bear a lot of resemblance to conventional Eurobonds. Fro example, like Eurobonds, sukuk either assume the form of a security tool capable of giving the holder a level of return that is predictable, in this case, floating or fixed (Cakir and Raei 3). However, one distinguishing feature between sukuk and Eurobonds is that the levels of trading of the former (sukuk) are less, in comparison with those of the latter (Eurobonds). On the other hand, both Eurobonds and sukuk are rated and assessed by rating agencies that are recognized globally.

The role of Sukuk and bond market in Saudi Arabia economy

Many industry players in the economy of Saudi Arabia have by now recognized the potential and significance of Islamic financing, specifically the issuing of sukuk. In light of this, it has been projected that in a few years time, an increasingly number of organizations in the kingdom shall have embraced sukuk as a solution to their working capital, expansion plans, and refinancing pf existing debts. Saudi Arabia has so far witnesses a few landmark and major deals, thanks to Islamic financing. A notable financing transaction is the one that was issued in July 2009 by SABIC, at a market value of SR 3 billion. This particular sukuk issue was special in that it was the very first sukuk to have ever been issued publicly, in Saudi Arabia. Furthermore, it was the first one under the newly established Capital Markets Law (Mushtak par. 6). In 2009, SABIC, an organization involved in Islamic financing, managed to access Islamic fiancé valued at SR 7.5 billion by way of issuing such sukuk facilities as murabaha and istisna. It is a pointer to the potential that the market for Islamic finance holds not just in Saudi Arabia, but also globally. In 2006, the Kingdom Installation Company, in conjunction with the Bahrain-based Unicorn Investment Bank, helped issue a sukuk that was valued at $ 23 million. By today’s standard, this might look like a sukuk of modest value, but nonetheless, it help in setting a fertile ground for the issuance of sukuk of significant value, in later years. In addition, the sukuk also helped attract foreign investors, who are now able to directly access assets in the real estate market, in Saudi Arabia. Although the prospects for Saudi’s industrialization are glowing, moving on to the future, nevertheless, there is a need for Islamic banks in the kingdom to looks become increasingly practical while educating and marketing their and products to organizations regarding their viability, efficacy, structures, and profitability.

Pricing and valuation of Sukuk and bond

The global economic crisis has also affected the sukuk issuing in Saudi Arabia. Just like in other countries, there ahs been a marked diminishing of investors’ appetite, in as far as financial assets and risk are concerned. On the other hand, the fact that initial public offerings (IPOs) are now less attractive, in addition to banks having to tighten their policies on lending, means that companies have no choice but to seek out for other funding options. This is how sukuk comes in. consequently, a number of companies have thus far realized funds by issuing sukuk since September 2008, when the global financial crisis intensified (Nisar 2). The new sukuk is characterized by a pricing strategy that signifies the prevailing high rate of aversion to risk within the bond market. In June 2009, the SEC (Saudi Electricity Company) issued sukuk and the expectation was that it would realize 160 basis points above the existing inter-bank rates in Saudi Arabia. This is in comparison with a mere 45 basis points realized by the sukuk that was issued at a similar period in July 2007. The premiums for sukuk were quite high from late 2008 to earlier this year (2009). As a result, such corporate as Saudi’s Holland Bank were the beneficiaries of these high premiums. Even then, the observable trend amongst sukuk buyers is an inclination towards corporations that enjoys large government ownership, due to the ensuing reassuring of the investors about their investment.

Challenges and hurdles for launching Sukuk and bond in Saudi Arabia Market

Various hurdles and challenges characterize the launching of sukuk and bond in Saudi Arabia. To start with, there is the issue of a lack of breadth. At the moment, only SEC and Sabic are sukuk listed. The two issuers are characterized by massive state ownership. The assumption therefore is that the support from the government could translate into trading at low spreads. The Saudi sukuk market also lacks liquidity. As a result, market participants cannot transact with ease and efficiency. A majority of the investors needs a premium at time when they decide to invest in instruments regarded as illiquid (Association of Islamic Banking Institutions Malaysia 5). Sadly, the returns that the two listed sukuk provide are not able to reimburse this form of illiquidity. The human resource in the sukuk market also lacks in experience. Sukuk issuing calls for financial, legal as well as religious knowledge. At the moment, individuals with such a combination of knowledge are very few in Saudi Arabia. Moreover, not many would-be investors are familiar with the sukuk product. This is because the sukuk market in Saudi Arabia is quite new and underdeveloped. Therefore, for the average investor in Saudi Arabia, understanding of the instruments of fixed income and sukuk are alien subjects. For this reason many Saudi have opted to invest in sukuk with a lot of caution. Furthermore, the minimum order size that an investor can trade in is worth SR 10,000, and this too has played a role in discouraging the small investors that are willing but lacks in finances.


The sukuk market in Saudi Arabia is approaching its maturity stage, thanks to the interest shown by both investors and issuers. This is a confirmation that sukuk are viable choice for companies to mobilize long to medium-term investments and savings. Nonetheless, there are various challenges that face the sukuk and bond market in Saudi Arabia. Seeing that only two companies are sukuk listed in Saudi Arabia, this has resulted in a lack of breath in the Sukuk market. Accordingly, it is important to seek for diversification in the form of various sukuk regarding sector representation and risk profile. In addition, the nature of the sukuk market demands for individuals who have a wide knowledge in law and finances, amongst other fields. As a result, it is important to offer adequate training to such individuals to increase their capability to handle the issuance of sukuk market.

Work cited

Association of Islamic Banking Institutions Malaysia. (2009). Saudi urged to develop sukuk market. Web.

Cakir, Selim, and Raei, Faezeh (2007). Sukuk vs. Eurobonds: is there a difference in value-at-risk? Web.

Karam, Souhail. (2009). Saudi Arabia plans sukuk, bonds market – regulator. Arabian News, Web.

Mushtak, Parker. Role of Islamic Finance in Saudi Industry. (2006). Arab News. Web. 

Nisar, Shariq. Islamic bonds (sukuk): its introduction and application. Web.

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