RIYADH, 28 June 2006 — The Saudi Basic Industries Corporation (SABIC) will float within a fortnight its first Islamic bond (sukuk) to raise SR1 billion from the domestic market for its expansion program.
Addressing a press conference yesterday, Timothy Gray, chief executive of HSBC Saudi Arabia Ltd., said the reliance on Islamic finance by SABIC is a major initiative for opening up the non-equity segment of the capital market. It was announced that 25-33 percent of the Shariah-compatible funds in the GCC states are raised through Islamic finance. The market was growing in view of the volatility of the conventional stock market. To capitalize on the burgeoning market for Islamic finance, HSBC has set up a full-fledged office staffed by 230 employees, including experts in Islamic banking. It has a 28 percent share of all portfolio funds floated on the Kingdom’s capital market.
Gray said HSBC, which will act as the bookmaker and initial lead arranger of the Islamic tranche, will target institutional investors, insurance companies, banks and government funds, such as the Public Investment Fund, Pension Fund and the General Organization for Social Insurance (GOSI), for tapping their investment in sukuk, since they have a higher level of awareness than the general public.
He said HSBC’s Islamic portfolio has been expanding steadily, with some petrochemical companies like Sahara Petrochemicals resorting to the Islamic financing tools for funding their projects. Unlike the equities, funds raised through bonds are used mainly for developmental projects.
More recently, SABIC used the Shariah-compatible tool for financing its largest ever Greenfield project forming part of its $5 billion subsidiary, Yanbu National Petrochemicals Company (YANSAB). YANSAB and its advisers sought to maximize the use of Islamic loans, raising close to $850 million.
Rajiv Shukla, director, Investment Banking Finance, and Ihsan A. Bafakih, head, Business Development, explained that one of the advantages of the Islamic bonds is that they are a low-risk, low-return product as against the high-risk, high-return equities portfolio.
