CMA pursues strategic initiatives to advance sukuk, debt instruments market

Mohammad Abdulaziz AlFaadhel CMA Assistant Deputy of Financing

The Capital Market Authority (CMA) maintains its effort to develop the sukuk and corporate debt instruments market through a package of strategic initiatives, due to the market significant importance as a key driver for funding economic growth.

In an interview with Argaam, Mohammad Abdulaziz AlFaadhel, CMA Assistant Deputy of Financing, highlighted the CMA's endeavors in developing the sukuk and debt instruments market and the CMA’s strategic trends for the coming years.

Q: Can you provide an overview of the Sukuk and Debt Instruments Market Development Committee, specifically its purpose and objectives?

A: The Sukuk and Debt Instruments Market Development Committee was established under the leadership of CMA Chairman, Mohammed ElKuwaiz. Its main objective is to unify efforts and set strategic directions for developing the sukuk and debt instruments market. This is to contribute towards achieving the goals of the Financial Sector Development Program, which aims to create an advanced financial market, particularly focusing on the sukuk and debt instruments market. The initiative is part of the CMA's commitment to fostering this market as one of the essential financing alternatives offered by the financial market for both public and private sector projects. The committee was established in 2018. A number of initiatives and strategic projects were implemented to deepen the market and enhance its liquidity through seizing development opportunities, which reflected positively on the market.

Q: To what extent is the sukuk and debt instruments market relied upon as an additional channel for financing alongside traditional banking finance in the Kingdom? How do you view the reliance on the sukuk and debt instruments market in the Kingdom as an alternative financing tool compared to G20 countries?

A: Historically, borrowers in the Kingdom largely relied on traditional banking finance as a means to provide enough liquidity to fund corporate operations. This is also a natural progression in the development of the financing system, where the banking system is developed compared with other channels globally for various reasons. Over the past years, we witnessed an increase in bank lending compared with bank deposits, which highlights the rising financing needs in the Kingdom in light of its ambitious goals to develop the national economy. This underscores the importance of activating complementary and alternative financing channels, with the local sukuk and debt instruments market being among the most prominent.

We believe there is potential to increase the total leverage of companies in the Kingdom through the local sukuk and debt market. If we take a deeper look at the distribution of corporate borrowing types, it becomes clear that financing through the local debt market accounts for nearly 10%, while commercial banks hold the remaining share. In contrast, the average for G20 countries is around 45% via the debt instruments market, which indicates significant growth opportunities for this market in the Kingdom.

Q: Could you give us insight into the size of the sukuk and corporate debt instruments market in the Kingdom today and its growth trajectory? How about the diversification of investors in this promising market?

A: The sukuk and corporate debt instruments market in the Kingdom has grown at an annual rate of 7.9% since 2019, with this growth mainly focused on unlisted issuances, which rose at an annual rate of 9.6%.

The number of issuers also increased, as the sukuk and corporate debt market expanded, reaching SAR 125 billion by the end of 2023, compared to SAR 95 billion by the end of 2019. Additionally, the number of issuers of debt instruments tripled by the end of 2023 compared to the end of 2019. We are optimistic that we will continue to see growth in the debt instrument issuances as a financing tool for companies, with further public offerings and listings on the market. This would be reflected on the growth in the number of issuers and market size, driven by regulatory and infrastructure improvements.

As for the diversification of the investor base in the sukuk and corporate debt market, the share of individual investors rose from nearly 1% at the end of 2021 to about 12.5% at the end of 2023. In addition, the share of investment funds increased from about 12% to 15% during the same period. We are also seeing more institutional investors such as insurance companies and asset managers adjusting their investment policies or offering investment products to expand and diversify their operations to include debt instruments, which in turn supports the diversification of the investor base and enhances liquidity.

Meanwhile, the banks' share fell from about 60% to 48% from 2021 to 2023. The increase of this diversification directly led to different investment strategies in the market, enhancing trading liquidity, and enabling issuers to obtain better pricing and a more diverse investor base.

Despite the recent positive developments, our aspirations are higher, and we believe there are many opportunities to develop the market to become one of the main financing channels for our national economy, as well as one of the main investment options for investors. Therefore, we continuously adopt a comprehensive approach to assess regulatory and infrastructure gaps, prepare benchmark comparisons and global best practices, in addition to gathering insights from market participants, leading strategic directions to develop this market. The authority published on its website a strategic direction document for developing the sukuk and debt instruments market in April 2024 to highlight the target future developments for this market and launch a portfolio of strategic initiatives to share with market participants who play a crucial role in its success.

Q: You referred to a "portfolio of strategic initiatives" to develop the sukuk and debt instruments market in the Kingdom, so what are these initiatives? What is their goal?

A: The portfolio of strategic initiatives includes several developmental opportunities that we believe will contribute to the growth of the debt instruments market through enhancing issuances and diversifying the investor base. These initiatives can be classified into three main areas:

First: Increasing the market’s attractiveness for investors

We are working on exploring ways to facilitate issuers' access to credit ratings, enabling them to attract diverse investor segments. This is important as investors may not have the specialized expertise to evaluate the credit risks of the issuer for each issuance they wish to participate in, or they may not have the time to do so. Therefore, the availability of a credit rating will increase the market’s appeal to various investor segments, such as asset managers, endowments, family offices, and high-net-worth investors.

The authority has also published a draft amendment to the Investment Funds Regulation, which aims to allow public funds to subscribe to privately offered debt instruments if they are issued in the Kingdom.

Second: Boosting the market’s attractiveness for issuers

The authority recently published the updated rules on the offer of securities and continuing obligations, which aim to improve the regulatory framework for issuing debt instruments through boosting the attractiveness of the local sukuk and debt instruments market for issuers. This allows issuers to expedite the issuance process and obtain the necessary financing at lower costs.

In light of the growing local and international interest in financing green projects, work is underway to develop the regulatory framework for sustainable debt instruments to enhance investor confidence and market transparency.

Third: Developing the market’s infrastructure

To enhance the efficiency of trading debt instruments and reduce associated costs, we are working on implementing an omnibus accounts model in the debt instruments market and activating market-making through providing a business model and incentive framework.

For the first time in the Saudi capital market, a license was granted several months ago to an alternative trading system (ATS) provided by one of the leading companies in this field. We hope this system will facilitate the trading of debt instruments and offer multiple investment and trading options for investors in the market. We expect this platform will be launched in the next year.

Q: On initiatives, let’s discuss the regulatory enhancements project for debt instruments issuance. Could you share some details about this project?

A: Allow me to elaborate on this important aspect of developing the market. We recently invited public feedback for a project aimed at improving the regulatory framework for issuing debt instruments, which has been incorporated into the updated rules on the offer of securities and continuing obligations. This project aims to deepen the sukuk and debt instruments market, diversify issuances and issuers, and increase the attractiveness of this financing channel, especially for listed companies.

Additionally, the project seeks to expedite issuers' access to funding through the sukuk and debt instruments market while reducing associated costs. Moreover, it enhances the clarity of regulatory requirements for issuing sukuk and debt instruments. All these objectives align with CMA’s continuous effort to develop this market, as we firmly believe it is a fundamental component in financing and driving the growth of the economy and its activities. Hence, we are committed to providing all possible solutions to achieve our goals, whether through development or empowerment, while upholding the principles of transparency, fairness, and investor protection.

CMA has also introduced significant amendments to the regulatory framework for the issuance and registration of debt instruments. These updates include revised regulatory requirements for exempt offers, private placements, and public offerings of sukuk and debt instruments. Among the most notable amendments to the exempt offering framework is the allowance for national development funds, local sovereign funds, and other specific entities to issue debt instruments under exempt offers, subject to defined rules and conditions, thereby facilitating the financing of strategic entities in the Kingdom through the sukuk and debt instruments market.

One of the key updates to the private placement framework is the removal of a mandatory notice period for issuers to notify the CMA before commencing the offering. Issuers can now notify the market regulator and begin the offering immediately, serving their financing needs more efficiently and expediting access to required funds. Additionally, the process of submitting notifications to the CMA and their subsequent review has been optimized to enhance efficiency.

As for the public offering framework, significant amendments have been made to the terms and requirements of offerings. These include simplifying the supporting documentation requirements, which significantly speeds up the preparation process for issuers, particularly for listed companies. The documentation requirements for issuers and advisors have been reduced by more than 50%. The amendments also introduced improvements to streamline the preparation of the prospectus by reducing the requirements and enabling the use of reference incorporation mechanisms for approved and disclosed data, linking to electronic resources for these details.

These amendments are expected to enhance the local sukuk and debt instruments market, increasing its attractiveness as a financing channel for issuers, thereby deepening and activating it as one of the main channels for financing the national economy.