- The Saudi Sukuk market will continue to grow over the next 12-18 months, a credit positive for Saudi banks, according to Moody's Investors Service.

The ratings agency says a record SAR25.2bn ($6.7bn) issuance of riyal-denominated Sukuk in 2012 has continued in 2013, with SAR11.6bn already issued during Q1. Moody's expects that 2013 Sukuk issuance will surpass last year's levels.

Report co-author Khalid Howladar - a senior credit officer - said: "We believe that the growing Sukuk market will be credit positive for Saudi Banks because it will provide a deeper pool of Shari'ah compliant securities to facilitate liquidity management and support profitability at Islamic financial institutions.

"We also believe that growth will support more term funding for all banks and ultimately encourage the reduction of persistent asset-liability mismatches, whilst facilitating further loan growth given regulatory constraints on loan-to-deposit ratios."

With limited investment options available, IFIs tend to maintain higher levels of very low-yielding cash and Islamic interbank placements on their balance sheet, thus partly sacrificing profitability to sustain their liquidity positions.

A larger Sukuk market would facilitate liquidity management through a pool of higher-yielding Shari'ah compliant securities and offer a profitability boost to local IFIs.

Moody's believes that a deeper Sukuk market in Saudi Arabia also provides a competitively priced longer-term funding option in domestic currency, which will allow conventional and Islamic banks to diversify and lengthen their funding profiles and ultimately help reduce contractual mismatches in the maturity profiles of assets and liabilities.

The report - Saudi Sukuk: Market Growth is Credit-Positive for Saudi Banks - is now available on

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