Islamic Banking and Finance in Saudi Arabia
About Saudi Arabia as a Muslim country, the main centre of Islam, everybody remains interested that how far they have structured their financial institutions in accordance with Islamic principles.
Though the trend in the Saudi Arabian banking market exist to convert to full-fledged Islamic Banks but only four among the 12 local licensed banks are considered to be pure Islamic banks: They are Al-Rajhi Bank Saudi Arabia, Al Jazeera Bank, Al-Bilad Bank, Alinma Bank.
According to scholar of international finance, Ibrahim Warde, the two largest Islamic banking groups, Dar al-Maal al-Islami and al-Baraka Bank, have not been able to obtain licenses to operate commercial banks in Saudi Arabia, despite the fact that they are both owned by prominent Saudis. In 1985, the al-Rajhi Banking and Investment Company was authorized to engage in interest-free banking, but on the condition that it did not use the word “Islamic” in its name. Market and Bank regulators in the Kingdom do not undertake Shariah-related duties. Each institution is free to recognize its Shariah criteria, Shariah board and acceptable established practices. All this allows for maximum innovation, peer review and development of Shariah-compliant products.
Saudi Arabia does not officially recognize the concept of Islamic banking. The logic is that if one bank is recognized as an Islamic institution then all others, by implication, would be un-Islamic. The official line was that all banks operating in Saudi Arabia were by definition Islamic.
Now in 2019 after suffering a historic recession in 2017 (-0.7% GDP growth) amid declining oil prices, Saudi Arabia has simply raised production to boost revenues back toward their accustomed level. Along with sustained non-oil-sector growth and improved consumer spending, the adjustment is expected to push GDP growth above 2% in 2018-19; and recent indicators show that the economy is already recovering. Meanwhile, Saudi Arabia announced an all-time high budget of $295 billion, raising public spending by 7% compared to last year.
Riyadh remains committed to its Vision 2030, adopted in 2016, which focuses on developing new economic sectors and boosting private investment
Saudi Arabia is one of the most active and influential markets in Islamic finance and the biggest of the Gulf Cooperation Council (GCC) countries. With landmark steps including the opening of the Tadawul stock exchange to foreign investors, the potential for access to the Saudi Islamic debt market (sukuk) and booming asset classes including initial public offerings, real estate and project finance, a growing number of issuers are coming to the market, and the overall investment scene is growing dramatically.
Last October, the Saudi Arabian Monetary Authority (SAMA) joined an international standard- setting body for Islamic finance, a move that could help standardize industry practices and ease cross-border transactions in the Kingdom. However the criteria in recognizing a person as a qualified Shariah scholar are still not standardized, and the Experts agree that Fatwa issuers must possess general economic knowledge and good understanding of finance before issuing their Fatwa’s, due to the significant impact of these Fatwa’s on the industry.
The Saudi government has also taken steps to tap into Islamic finance, issuing debt bonds earlier this year denominated in both riyals and dollars. Moreover, the Jeddah-based Islamic Research and Training Institute said it had signed an agreement to develop block chain technology in the Islamic finance sector.
The Islamic banking industry, in the Kingdom of Saudi Arabia (KSA) is set to achieve US$683b of Sharia-compliant assets by 2019, according to EY’s World Islamic Banking Competitiveness report.
KSA has been a key market for growth in the Islamic banking industry. The first Islamic bank with equity in excess of US$10b is headquartered in KSA. A strong demand from customers, both retail and corporate, has led to significant growth in Islamic banking in KSA resulting in 54% of all financing being Sharia-compliant in 2013. Overall, the size of Islamic banking assets in KSA has nearly doubled from 2009-2013.
Challenges to Meezan Bank
Meezan Bank Limited has won the 3rd Pakistan Banking Awards in the category of the Best Bank for 2018. But it’s Administrative and other expenses have grown by 15% in June2018 from June 2017, while it’s net Islamic financing and related assets have grown by 3% with total assets as 6% and Deposits by 5% during the same period.
This confirms Dr Ishrat Husain observation that banks in the country are not mobilizing their deposits like those of the neighboring countries, which resulted in poor savings. A low-saving rate is the main hindrance in the way of higher investment that brings growth to the economy. Giving a comparative analysis, he shares statistics related to India, Bangladesh and Sri Lanka and Pakistan. He says the figures show that Pakistani banks were far from the successes these countries had achieved in the banking sector.
Though Meezan Bank has been considered best bank but comparatively if we look in to other banks doing Islamic banking, Dubai Islamic Bank Private Limited (DIBPL) can be listed as No. 1 in car financing. Others are FAYSAL BANK LIMITED, BANK ALFALAH, ASKARI BANK LIMITED, and BANK OF PUNJAB as best car financing banks in Pakistan with lowest markup rates.
Meezan Bank is the largest Islamic Bank in Pakistan hence its responsibilities towards product development, creating liquidity management tools and financing to the neglected areas of economy become manifold.
Islamic Financings and related assets of the bank grew by 5% from December 2017 and closed at Rs 411 billion and the Advance to Deposit ratio stood at 62%. The Bank maintained its financing exposure in all sectors and continued to actively pursue growth in Small and Medium Enterprise (SME) / Commercial and Consumer segment with very little exposure in agriculture. With a well-diversified product base, the Bank could have been well positioned to cater to all financing needs of customers in a Shariah compliant manner but in totality bank lag behind in some prominent areas.
As its staff is concerned they mostly complain that location of the head-office is too far away, Bureaucracy, psychotic and controlling behavior of seniors by using abusive language exist in its offices everywhere. They ask to ensure that professionalism should be maintained. They comment that there exist a Gap between management and employer and branch level staff. Appraisals are well-defined by bosses if you are coordinating with him so you need to say YES boss no matter what he is doing legal or even illegal. They mostly demand to hire well qualified with No office Politics and transparent screening irrespective of post or position. Further there are complaints that its treasury some time does its liquidity management by using conventional transactions.
Last year Noor Financial Investment Company – KPSC engaged in the investment and financial activities in Kuwait, the Middle East, Asia, and internationally has divested 0.85% of its shareholding from Meezan Bank. Earlier on, Noor Financial had divested 2.49%, 0.28% and 3.4% stake in Meezan Bank in May and June 2018 respectively.
Meezan bank with a retail banking network of more than 600 branches in more than 150 cities of the country operates through four segments, namely, investments, real estate, IT services, and hotel operations.
Some time back, Meezan Bank CEO Irfan Siddiqui sought government’s attention towards development of Islamic banking at par with the conventional banking by introducing Shariah-based financial instruments. He said bankers are reluctant to extend loans in the Sind province. But just pointing out toward an issue is not enough. As largest Islamic Bank they should have find solutions for each problem.
Among the central bank’s actions were the introduction of the Sharia Governance Framework for Islamic Banking last year, which clarifies the roles and responsibilities of various units of Islamic banking institutions. It also launched a centre of excellence to groom the highly skilled staff the Islamic finance industry needs. Pakistan’s Ministry of Finance in July announced a 2 per cent income tax cut for all Sharia-compliant listed manufacturing companies, hoping more would switch their business accounts from conventional banks and that their employees and associates would turn to Islamic banking as well. The Securities and Exchange Commission of Pakistan, which supervises all Islamic finance service providers other than banks, for its part set up the Islamic Finance Department, which regulates and oversees this Islamic capital market sector. The department’s support in product development and promotion of market awareness have helped reorganize the Islamic capital market and has been a boost for Sharia-compliant finance service providers, Islamic finance products and market instruments. On a larger scale, the government has been stepping up its use of Sharia-compliant financing to fund infrastructure deals, mainly in energy and transport. Last year banks arranged a ten-year sukuk worth $955 million for a hydropower plant, the largest energy deal using Islamic financing in the country. The country wants to make Islamic finance its “first choice” for infrastructure and long-term financing needs and shift up to 40 per cent of its debt financing to Islamic sources from conventional ones. This includes infrastructure projects worth $45 billion planned by the government in partnership with China to establish the China-Pakistan Economic Corridor, the largest infrastructure program for Pakistan to date.
So ample opportunities exist for Islamic banking to grow in Pakistan but for what Meezan Bank and other Islamic Banks are waiting for. People are waiting to help them in their business activities with simple products so as to dent poverty in Pakistan but for that the high ups of these banks have to come out from their air conditioned offices and 5 star hotels where they just attend seminars in collaboration with IBA or some other business groups to mint money. By doing so they are just using the name of Islam without going for its actual objectives.
Islamic Bond (SUKUK) a viable place to Invest
The global ṣukūk market has rebounded considerably in 2017-18, with primary market issuances increasing by nearly 23% on the back of strong sovereign and multilateral issuances in key Islamic finance markets. Correspondingly, and amid partial benefits from improved exchange rates in some emerging markets, the global ṣukūk outstanding has also surged by over 25% – its strongest increase since 2012 – to close in at a record USD 400 billion as of end-2017-18. This increase is duly supported by an expansion in the ṣukūk tranches outstanding which number 2,645 across 27 jurisdictions as at end-2017 [2016: 2,569 ṣukūk tranches across 28 jurisdictions]. Malaysia has once again sustained its historical position as the jurisdiction with the largest volume of ṣukūk outstanding accounting in 2017-18 for a slightly improved 46.9% share of the total market [2016: 46.4%]. Notably, gradual appreciation in the country’s exchange rate with the US Dollar has enabled it to improve on outstanding values in US Dollar terms. However, key improvements in the share of total ṣukūk outstanding were witnessed in Saudi Arabia and Indonesia.
The debut of Saudi Arabia in the sovereign ṣukūk market has pushed its ṣukūk outstanding share upwards to 19.6% [2016: 17.4%] with over USD 30 billion of primary issuances added into this volume in 2017-18. Since 2009, the active Indonesian sovereign and public-sector ṣukūk issuances with expanding volumes of funds raised have also enabled the jurisdiction to expand and position itself as the third-largest ṣukūk outstanding market, with a 10.2% market share in 2017 [2016: 7.8%]. The market share improvements in Malaysia, Saudi Arabia and Indonesia have, in turn, reduced the share of others in 2017-18, with the UAE at 8% [2016: 10.5%] and Qatar at 4.5% [2016: 5.9%]. Overall, the top five jurisdictions now account for a further increased 89.3% [2016: 88%] of the global ṣukūk outstanding, while the remaining 10.7%, or USD43 billion, is dispersed between 22 other jurisdictions.
Consistent with earlier years, Hong Kong is the only non-OIC member state that features in the top 10 global ṣukūk outstanding jurisdictions on the back of its three USD 1 billion each sovereign ṣukūk issuances in 2014, 2015 and 2017.
Altogether, there are now seven non-OIC member states with ṣukūk outstanding, including three from the European Union (Germany, Luxembourg and the United Kingdom); two in Asia (Singapore and Hong Kong); and one each in Africa (South Africa) and North America (the United States). Collectively, the seven non-OIC jurisdictions account for 1.5% of the global ṣukūk outstanding as at end-2017.The demand for new ṣukūk issued in the primary market, as measured by times oversubscription, has remained moderate. Most international ṣukūk issued in 2017 were oversubscribed; however, the levels were well below those seen in 2015 and earlier years. The Additional Tier 1 regulatory capital ṣukūk were the most oversubscribed in 2017 (e.g. Kuwait’s Warba Bank Tier 1 ṣukūk [USD 250 million] was oversubscribed by 5.2 times, and Bahrain’s Al-Baraka Banking Group Tier 1 ṣukūk [USD 400 million] was oversubscribed by 4 times); this contrasts with the more than 13 times oversubscription recorded for Dubai Investments Park ṣukūk (USD 300 million) in 2014 and 7.2 times oversubscription for Sharjah Islamic Bank ṣukūk (USD 500 million) in 2015. However, in terms of the volume of order book generated, the combined USD 9 billion 5-year and 10-year Saudi sovereign ṣukūk tranches generated an order book of over USD 33 billion (3.67 times oversubscription), the largest in ṣukūk market history.
In terms of distribution of new ṣukūk issued by investor types, based on readily available information), banks/private banks 196 and fund managers were the key buyers – with the former actively holding ṣukūk for regulatory capital and liquidity management purposes as well as for returns generation; while the fund managers investing in ṣukūk to support their Sharīʻah-compliant funds offered, as well as to diversify their investments for their general funds. Combined, these two types of investors accounted for 85% or more of the ṣukūk subscriptions based on the sample analyzed. Meanwhile, central banks and sovereign wealth funds, in line with their organizational mandates and risk appetites, only bought sovereign ṣukūk and were absent from subscriptions in the corporate issuances. Ṣukūk defaults have also occurred in 2017 with three tranches by two issuers failing to make scheduled payments to investors. In the UAE, a gas-producing obligor has defaulted on its two outstanding ṣukūk instruments, although allegedly not due to solvency issues but rather as a declaration by the obligor itself that its two outstanding ṣukūk were “no longer considered Sharīʻah-compliant” under the country’s prevailing law. Meanwhile, a marine services provider in Malaysia has defaulted on its scheduled ṣukūk principal repayment to investors and the obligor has engaged in negotiations to restructure the repayment terms and conditions of all its existing loans/financing facilities and ṣukūk program. Overall, the defaults have not seriously shifted the resilience of the industry; since the recorded inception of the global ṣukūk market, out of almost USD 1.3 trillion raised by ṣukūk, only USD 2.9 billion, or 0.22%, of the total issuances volume has defaulted as at end-2017. In terms of the number of ṣukūk tranches issued to date, 13,261, 1 in every 100 has defaulted
However, a particular risk is the “reputation implications” that followed the action by the obligor in the UAE to declare its own ṣukūk as Sharīʻah non-compliant, despite its having been approved by a reputable Sharīʻah board. On a favorable note, the traditional practice of premium pricing of new ṣukūk in contrast to conventional bonds (which are comparable from a financial risk perspective), while still prevalent, has seen a squeeze in the spread between the two in 2017. Based on an analysis of a sample of domestically issued sovereign ṣukūk and bonds across jurisdictions in diverse regions the pricing spread between the financial risk-identical ṣukūk and bonds has seen a reduction, with most countries having a spread of 0.1 percentage points or less. Within this, Qatar’s ṣukūk and bond instruments have been consistently priced identically across various different tenors, while in the case of Pakistan, due to excess demand by Islamic financial institutions, ṣukūk have been priced at lower rates of return compared to bonds.
Government of Pakistan has procured $7.3 billion from external sector through Sukuk and Rs 384 billion for domestic market as of 2019. The government plans to raise Rs200 to Rs300 billion via 10-year privately placed sukuk bonds to fund staggering circular debt in the power sector in 2019. The sukuk issue is expected to be through a private placement process and marketed primarily to qualified investors such as Islamic financial institutions and mutual fund. Dubai Islamic Bank Pakistan Limited (DIBPL) has just announced the successful issuance of fully paid up, rated, perpetual, unsecured, subordinated, non-cumulative and contingent convertible and privately placed Mudarabah Sukuk Certificates of Rs3 billion.