We are seeing a surge in sustainable projects in the GCC with Saudi Arabia alone targeting SAR3 trillion (US$798.88 billion) in investments under its Vision 2030 economic transformation plan. With the funding for these projects largely coming from agnostic foreign direct investment (FDI) sources, ISFI spoke to analysts to understand how this would impact the regional Islamic finance market share.
“We expect more capital to come to the region given the transformative strategies that are being implemented by some governments and that will create opportunities in the sustainability space,” Dr Mohamed Damak, the global head of Islamic finance at S&P Global Ratings, told ISFI when commenting on the flow of funds in the GCC region.
Bashar Al Natoor, the global head of Islamic finance at Fitch Ratings, noted that sustainable investment maturity in the typical GCC investor is still at an early stage, hence the bulk of sustainability investment continues to be from international investors.
Islamic finance will continue to play a role in the financing of these projects, according to Bashar, as the region hopes to retain the domestic investor base. He noted that 58.4% of outstanding hard currency ESG debt in the GCC is in the form of Sukuk at the end of 2020 and expects this trend to continue.
”I think the trend over the medium-term is still expected to be more on the Sukuk side rather than a bond when it comes to ESG-related, sustainability-related issuances coming out from countries where Islamic finance is well established,” Bashar told ISFI.
The capital market is expected to be the torchbearer for sustainable projects in the GCC, bucking the historical regional trend where the government and the banking sector predominantly financed large-scale projects, Bashar suggested.
The success of diversifying funding through the capital market and FDI will depend on the track record of projects and investor confidence.
The flexibility afforded by the banking sector still makes it a preferred funding option. Banking facilities have the ability to include tranches customized to each investor through, for example, including a conventional tranche, an Islamic tranche and an AAOIFI-compliant tranche.
One such example is ACWA Power’s recent syndicated financing facility for the NEOM Green Hydrogen Project with a total investment cost of US$8.5 billion, which included an Islamic tranche and a conventional tranche to cater to investor preference.
The disclosure and paperwork required for syndicated deals are also less stringent compared with its capital market counterparts.
However, the banking sector alone may not be able to meet the region’s deep funding needs for sustainable projects, which Strategy&, part of the PwC Network, estimates to have the potential to unlock up to US$2 trillion in cumulative GDP contribution by 2030, hence the growing appeal for capital market instruments.
“There is a paradigm shift in the GCC mentality of diversifying through debt and that includes bonds and Sukuk. We will still see a lot of syndications, bilaterals and bank funding, but that does not satisfy the big pipeline of sustainable projects that we are seeing, if that pipeline actually materializes on the ground,” Bashar noted.