London: Saudi utilities and corporates are emerging as major drivers of Islamic finance transactions with a spate of high-powered and, in some instances, pioneering structures coming to the market over the last few months.
According to various market players this augurs well for the Islamic finance sector, especially in Gulf Cooperation Council (GCC) countries, where governments are now actively participating in establishing Islamic financial institutions (IFIs) in an effort to take greater control of the sector which has been growing phenomenally over the last few years at an estimated 20 percent growth rate per annum.
Islamic bankers in fact expect the involvement of Saudi and GCC corporates and utilities in the Islamic financial markets to increase substantially over the coming years. The reasons are manifold and include a definitive trend in the migration of capital into the Islamic finance sector; the use of "cheaper" Islamic finance by corporates to refinance existing more expensive conventional debt; the use of Islamic finance as part of a policy to diversify source of funding especially by the likes of Saudi Aramco; SABIC (Saudi Basic Industries Corp.), TABREED (National Gas Cooling Company) in the UAE and Emirates Airlines; the use of Islamic finance to fund ambitious expansion program and acquisitions; and the use of Islamic finance for general corporate purposes to finance balance sheet activities.
Mutlaq Al-Morished, chief financial officer and senior vice president corporate finance at SABIC confirms that the world's largest chemicals company with a market capitalization of $112 billion (based on a share price of SR140), wants to help develop the Islamic debt and capital markets in the Kingdom and the region; and is keen to continue promoting the use of Islamic finance as a diversification tool for SABIC's source of funding requirements for its massive operational and global acquisition plans.
According to Al-Morished, SABIC raised some $6.155 billion of Islamic financing in the midst of the global credit crunch which started in August 2007. Shariah-compliant debt at end 2007 accounted for 23 percent of SABIC's total debt of $21 billion. He believes that an increasing component of project, corporate and asset financing in the GCC countries will be done under a Shariah-compliant basis over the next few years.
The interesting thing about the rapid growth of Islamic finance in the GCC is that it is led by both private-sector and government-owned entities, with the latter playing an ever-increasing role especially in the establishment recently of Alinma Bank in Saudi Arabia, Masraf Al-Rayan in Qatar; Al-Hilal Bank in Abu Dhabi; Ajman bank in Ajman and Noor Islamic Bank in Dubai.
In a recent report, Moody's Investors Service, the international credit rating agency, stressed that GCC governments may get more involved in the sector because it is as if these "governments do not want to see the Islamic banking industry over-dominated by the private sector, in order to keep the whole thing under control. If governments have an increasing share of ownership in IFIs, the risk of consumers perceiving an IFI as insufficiently compliant with Shariah is somewhat mitigated."
GCC governments are concerned that the rapid growth of the sector, estimated to be worth $2 trillion but with a potential of over $4 trillion, could lead to various lapses in corporate governance and Shariah compliance, especially in a region which is notoriously under-regulated especially through lack of adequate enforcement of policies and a litany of conflicts of interest including instances where ministers are allowed to serve on the board of IFIs.
There is however no doubt that Saudi Arabia is by far the biggest player in the Islamic finance market simply because of the fact that the Kingdom boasts the largest pool of funds in the sector. Bahrain may have several IFIs incorporated there but most of the shareholders' equity comes from Saudi HNWIs (high net worth individuals) and institutions.
The expansion of Islamic finance is largely centered on retail and consumer finance especially housing finance and current accounts and savings products; infrastructure and project finance; acquisition finance; and real estate development finance.
In the latter three areas especially there has been serious activity during 2008 so far. Following on from the recent facilities arranged for the likes of Saudi Aramco; SABIC, Dar Al-Arkan Real Estate Development Company, Mobily, Arabian Centers, Mobile Telecommunications Company, King Abdulaziz International Airport and others, Saudi Electricity Company (SEC) is the latest utility to go to the market in early August 2008 to raise SR6 billion ($1.6 billion) through a two-tranche Murabaha facility.
The proceeds of both facilities, according to SEC, will be used to refinance existing debt and for general balance sheet and capital expenditure purposes. The first tranche of SR1.5 billion is provided by Al-Rajhi Bank, the largest and oldest Islamic bank in the Kingdom, which is taking the entire risk on its books.
The second tranche of SR4.5 billion is provided by a syndication of banks comprising Banque Saudi Fransi, National Commercial Bank, Samba Financial Group, SABB (The Saudi British Bank) and Saudi Hollandi Bank.
According to Mohammed Al-Sheikh, senior partner of the Law Office of Muhammed Al-Sheikh, and legal partner of international law firm White & Case, who acted for SEC in the transaction, "this is the latest in a series of sophisticated and high profile Islamic finance deals in the market. Demand for electricity in the Kingdom is ever-increasing, fueled by population growth and industrial development. We expect to see an influx of investment into this sector over the next few years."
SEC is the incumbent vertically integrated electricity utility in the Kingdom. In August 2008, Fitch, the international credit rating agency, affirmed SEC's long-term issuer default (IDR) and senior unsecured ratings at "AA-" (AA minus) with a stable outlook. The ratings are effectively aligned with Fitch's sovereign Saudi Arabian rating to reflect the government's strong tangible and intangible support for the electricity utility.
In another transaction in June 2008, Al-Rajhi Bank, Samba, NCB and Saudi Investment Bank arranged a SR4.3 billion ($1.1 billion) Murabaha syndication facility for Arabian Centers, a member of the Riyadh-based Fawaz Al-Hokair Group. The facility once again comprised two tranches, of which the proceeds of one will be used to finance the construction of retail projects; and the other will be used to repay Arabian Centers, the company which manages the shopping mall network of the Fawaz Al-Hokair Group.
The latter is the largest owner of shopping malls in the Kingdom with 11 such malls. Another 12 malls are scheduled to open over the next 5 years. White & Case in association with The Law Office of Mohammed Al-Sheikh advised Arabian Centers on the deal. The law firms also advised Saudi mobile telecoms service provider Mobily earlier this year in its SR1.5 billion acquisition of local data service provider Bayanat Al-Oula; advised on the $205 million financing facility for the renovation of the Haj Terminal at King Abdul Aziz International Airport in Jeddah; advised on $5 billion Islamic guarantee facility and $2.5 billion Murabaha facility for the purchase of the third mobile telecoms license in the Kingdom, Mada Leletisalat LLC, a consortium owned by Mobile Telecoms Company KSC and individual Saudi investors; and a $2.875 billion syndicated Islamic finance facility based on airtime for Mobily.
