Why do Saudi Corporates favour floating rate for their Sukuk & Islamic loans?
October 26, 2018 | Updated at October 27, 2018
For unknown reasons, Saudi issuers have over-relied on the floating rate when it comes to pricing riyal denominated Islamic bonds (sukuk). We are not taking about short-term tenor here, rather medium-term. It is a unique feature that differentiates its local debt capital market from any part of the world. I would estimate 95% of total corporate Sukuk issues in Saudi are linked to Saibor (The Saudi Arabian Interbank Offered Rate). Saudi companies who follow this pricing practice for fixed income securities expose themselves to interest rate fluctuations, which can have a detrimental effect on pricing. This practice is in the interests of investors, not issuers. The same practice is also applied to long term loans.
ShortcomingsSaudi Arabia has implemented many refor...