(MENAFN - Arab News) The Saudi stock market has responded favorably to Sukuk, which has become a strategic choice for companies. Dar Al-Arkan Real Estate Development Company recently announced the closing of its third Islamic Sukuk issuance, amounting to SR750 million. The Sukuk is said to mature on April 15, 2014.
The market also reacted favorably to the Sukuk issues of other companies, especially Saudi Basic Industries Corp.(SABIC) which had three issues of Sukuk. The SABIC Sukuk demonstrates the petrochemical giant's endeavor to diversify the sources of finance for its investment projects.
Dar Al-Arkan's fresh Sukuk issue aims at financing new real estate projects such as Al-Qasr in Riyadh (which is estimated to cost SR3 billion), Talal project in Madinah (SR1 billion), Shams Al-Riyadh project (SR6 billion) and Qasr Khozam in Jeddah. Its previous Sukuk issues mobilized SR6 billion.
Economists consider Islamic Sukuk the most suitable financial tool for the real estate sector. Despite the difficulties suffered last year as a result of the global crisis, Sukuk is considered the ideal strategic choice at a time when banks have reduced their lending services.
Nasser bin Saeed bin Kadsa, CEO of a consultancy company, described the Saudi real estate as a promising market as a result of a growing demand for homes. He said the issuance of Sukuk would ensure the supply of suitable finance for the sector with the absence of a mortgage system.
"The issuance of Sukuk at this time will give the capital market depth and diversity it requires, and help tap the liquidity available outside the banking sector," he said.
Financial experts have estimated total assets of Islamic finance across the world at around 725 billion. The Sukuk market has the potential to grow in the long run, especially in the Gulf Cooperation Council (GCC) states.
The GCC markets have so far witnessed the issuance of more than 100 Sukuk to mobilize more than 38 billion but the issuance of some of these Sukuk were delayed due to the global financial crisis.
Ihsan Bu-Hulaigah, CEO of Watan Investment & Securities, said Sukuk could finance operations that banks were unable to do while it incurs less cost on the lender compared to other bank loans.
"Islamic Sukuk have strengthened the economies of certain countries like Malaysia during strong financial crises. During the Asian crisis in the last decade, Malaysia resorted to Sukuk to finance several projects. It helped that country to become a world center for Islamic Sukuk," he added.
Bu-Hulaigah stressed the need to develop a new financing culture by adopting products that comply with Shariah. He said the Saudi real estate market witnessed a slowdown recently as a result of the global crisis and lack of finance.
Economists said the Saudi capital market's acceptance of Sukuk and its accommodation of Sukuk issue of a private company shows that the local market is seeking more such issuance. Real estate in the Kingdom is a real demand market and not based on speculation as existing projects are not enough to meet the growing demand for housing across the country.
By Adnan Jaber