Saudi Arabia's massive industrialisation drive will increasingly rely on Islamic financing, said the treasurer of the country's national oil company, as international banks are constrained from investing in projects in the region.
Saudi Aramco - the world's largest oil company - has taken on many of the petrochemical and refining projects intended to diversify the national economy away from oil and provide jobs for Saudis.
Satorp, a Saudi Aramco petrochemical joint venture with France's Total, in 2011 launched a Sharia-compliant bond to fund the construction of a refinery.
"We expect the successful launch of the kingdom's first Greenfield project sukuk will provide a new financing alternative and open the doors for a whole new class of investors," said Jamal Al Rammah, Saudi Aramco's treasurer, at a Meed conference in Dubai yesterday. "This is of great significance, particularly as international bank lending is still tight."
International banks are hamstrung by a lack of liquidity after the global financial crisis and Europe's sovereign debt crisis. Their lending is further constrained by strict regulation that came into force after the credit crunch.
By contrast, the Saudi financial sector is flush with cash. As project financing works over a long time frame, and the loans issued by regional banks tend to be relatively short-term, the long-dated sukuks are well suited to tap the domestic finance base.
At the same time, bonds are attractive to institutional investors from outside the region, such as pension funds or insurers.
"If we are going to hit the capital market, we may as well structure an instrument that allows for a large catchment of investors. The sukuk attracts both sets of investors, conventional and Islamic," said Mr Al Rammah.
At present, the scarcity of Sharia-compliant bonds ensured that the new issuance would receive strong investor interest, he added.
Saudi Aramco is currently working to close the financing for its Sadara joint venture with the American company Dow Chemical. With borrowing estimated at US$20 billion (Dh73.46bn), Sadara will be the biggest project finance deal to date.
Mr Al Rammah said the deal was on track to be completed this year.
It was not clear whether sukuks would be issued to provide financing for the project.
The $1bn Satorp sukuk was oversubscribed, but Mr Al Rammah said he believed the market needed to grow to be a viable source of funding for megaprojects.
"The lack of liquidity remains a key issue for sukuks, including the lack of secondary trading," he said. "There is therefore a need to develop a robust secondary market for sukuks that enhance its appeal, especially to active investors such as fund managers."