Opening up the Saudi Arabian stock market to foreign investors will provide a strong Middle Eastern base for Sukuk listing and trading. It will have the potential to attract a broad investor base throughout the region and, due to its geographical location, to link the European and Asian markets. Opening the stock market will, however, in itself not impact the willingness of investors to sell, and hence is by itself insufficient to encourage secondary market trading. A key requirement to enhance secondary market trading is to ensure that market makers are available to act as counterparty to any trade and to provide a price. With the prohibition of short selling within Islam, this would only be possible if there are parties available who will hold a position available for sale. When this is in place, the secondary market is likely to start developing.
NATALIE SCHOON
Consultant, Formabb
Changes in oil prices have a major impact on investors’ perceptions of Saudi Arabia’s economy and market liberalization would make it more difficult to avoid capital flight during periods when oil prices weaken.
Saudi Arabia is likely to emerge as the largest market for Sukuk issuance in the long-term given the scale and number of projects requiring finance. Eventually it may overtake Malaysia.
Widening the investor base to include non-residents could reduce the cost of Sukuk financing, which would be very helpful for originators. It would also bring more liquidity into the market, thus facilitating secondary trading. The possibility of arbitrage activity between Riyadh, Dubai and Kuala Lumpur could also make pricing keener and reduce margins, again lowering the costs of finance.
Despite these potential gains, Saudi Arabia is likely to remain a segregated market in the short, and possibly the medium-term. In the long-term however, as Saudi Arabian banks get more involved in Sukuk arranging, they are likely to lobby the government for greater liberalization.
RODNEY WILSON
Emeritus Professor, Durham University, UK; Visiting Professor, INCEIF