Fitch Ratings counted $221 billion of hard-currency sukuk outstanding under its coverage at the end of June, 13 percent more than a year earlier, and put Saudi issuers behind nearly 60 percent of the sukuk listed on the London Stock Exchange, the format’s main international venue. The report, published Sunday, reads like a market survey. From Riyadh it reads like a balance sheet: the Kingdom is the largest borrower in Islamic finance, and the market’s benchmarks, listing venues and issuance calendar have organized themselves around Saudi paper.
The composition matters as much as the size. Fitch rates 82 percent of the listed hard-currency sukuk it covers as investment grade, recorded no defaults in the first half, and notes that sukuk supplied 9.3 percent of emerging-market dollar debt issuance outside China. An asset class that is four-fifths investment grade is one that mainstream fixed-income portfolios can hold without an Islamic mandate. That is the quiet shift of the past few years: the marginal buyer of a Saudi sukuk is no longer necessarily an Islamic bank, which widens the funding pool exactly as the Kingdom’s financing program grows into it.
The first half tested the format’s place in the funding stack. Gulf issuers sold $102.69 billion of bonds and sukuk in the six months, according to Kuwait Financial Centre Markaz, with Saudi entities accounting for $49.34 billion across 58 issuances, 48 percent of the regional total. But the format split moved sharply: sukuk issuance across the Gulf fell 29.5 percent while conventional issuance rose by a third. Treasurers, in other words, chose whichever window priced cheaper, and for much of the half that was conventional. That the outstanding stock of sukuk still grew 13 percent through such a half is the more telling fact, and much of the explanation sits in Riyadh, where the National Debt Management Center’s riyal program runs monthly regardless of the dollar window; the August round alone raised SR9.5 billion ($2.54 billion), and riyal issuance reached $7.46 billion in the first half by Markaz’s count.
The incentives behind that steadiness are domestic. Saudi banks hold government sukuk to meet liquidity requirements, giving the sovereign a deep bid in its own currency and its own format. A monthly calendar builds a full riyal curve, and a full curve is infrastructure: corporate issuers from mining houses to mortgage refinancers price off it. The retail Sah program, which sells one-year savings sukuk to citizens at fixed returns, extends the same architecture to households. None of this requires the Islamic format to be cheaper in any given month. It requires the format to be liquid, benchmarked and continuously supplied, which is what an anchor issuer provides.
Anchoring cuts both ways, and the trade-off is worth stating plainly. A market organized around a handful of sovereign programs grows when their financing needs grow and slows when they slow. Fitch’s numbers describe a format whose depth now rests on the borrowing calendars of Riyadh and a few peers rather than on a broad issuer base. For the Kingdom that concentration is leverage; pricing power accrues to the issuer the market cannot ignore. For the market it is dependence, and the two read identically on a screen.
The second half will show which way the format split swings. Saudi budget financing needs will set the pace of issuance, a friendlier rate environment would reopen the dollar sukuk window that conventional paper won in the first half, and the spread between Saudi sukuk and conventional Saudi debt will show what premium, if any, the format still commands. The $221 billion stock is the headline number. The monthly riyal calendar behind it is the machine, and it does not take Augusts off.