Infrastructure projects in Saudi Arabia are likely to receive a larger portion of funding through the sukuk market, Khalid Nasser al-Muammar, chief executive officer of investment banking firm Saudi Hollandi Capital, tells MEED.

“We’ve seen [sukuk issuance] with GACA [Saudi’s General Authority for Civil Aviation, which raised SR30bn through two sukuk issues over the past couple of years] and I believe we’ll see others. For the $25bn Riyadh transportation system nothing has been announced yet but most likely they will tap into the sukuk market as well. The various contracts have been signed, so you will either see authority itself launching the sukuk or perhaps the contractors tapping into it to finalise the project.”

A number of companies are currently contemplating issuing sukuk, he added.

“I believe banks are coming on-stream as well as some of the largest contractors, which may launch sukuk this year.”

Saudi companies traditionally receive most of their funding from cash-rich local banks, but that could change as banks reach their legal lending limits - their exposures to companies are capped at 25 percent of capital. Some have already reached that.

International banks, for which it has become pricier to lend due to tighter global regulatory requirements, are unlikely to fill the gap, forcing Saudi-based companies to look to capital markets.

There is also a need among issuers to tap a broader investor base. Because the domestic pool is concentrated among a few major players, they could face having to accept higher than average prices if the issue is timed badly.

Companies are more likely to issue in US dollars in order to attract international investors, while traditionally the market is dominated by riyal-denominated issues.

“There will be more balance. It’s the need to diversify, so they will be willing [to accept higher pricing]. They will pay small premium as a result but generally that will be the theme,” said Al-Muammar, referring to the higher fees on issuing in foreign currency as opposed to domestic currency.