After a fivefold increase during a run from 2000 to 2006, the Saudi stock market lost two-thirds of its value in downturns in 2006 and 2008.

It is little surprise, then, that falling trading volumes have dented revenues at Al Rajhi Capital, the kingdom’s largest brokerage by market share. Al Rajhi Capital is the investment banking subsidiary of Al Rajhi Bank, the largest commercial bank in the Gulf Co-operation Council countries by market capitalisation, and the largest Islamic bank in Saudi Arabia.

“Our brokerage is our biggest business, so low volumes directly affect us, even though we are the current market leader,’’ says Marcus Andrade, chief executive officer. He says many risk-averse investors have shunned equities for commodities.

To compensate, Al Rajhi is looking at structuring and trading sukuk, or Islamic bonds, as the market develops. Gaurav Shah, head of asset management at Al Rajhi Capital, says sukuk are likely to gain importance and increase in size over the years. “GCC institutions have a multibillion dollar infrastructure spending programme and we foresee sukuk issuance to be one of the key instruments to finance this. This will fuel growth and enhance liquidity for sukuk,” Mr Shah says.

Yet until last year, only four significant sukuk offerings had been approved by the Saudi Capital Market Authority, two for the Saudi Electric Company and two for the Saudi Basic Industries Company. Both are majority owned by the government or government funds, and both are among the largest in the region.

Saudi Arabia is therefore a relatively small issuer of sukuk. Dubai has sold more sukuk than all Saudi Arabian entities together.

Bankers blame the lack of issuance in Saudi Arabia on a complicated regulatory regime and a lack of suitable laws, allowing, for example, the creation of special-purpose vehicles.

“Unless you absolutely have to raise finance Islamically, you will think long and hard before issuing sukuk. If you’re a strong, government-linked entity, you can get waivers on some conditions, but this takes time,” says one banker who works in Saudi Arabia.

While the sukuk market is likely to evolve in the long term, Al Rajhi Capital also intends to target the dramatic growth in the number of sharia-compliant insurance companies on the Saudi stock exchange by offering sharia-compliant products.

Since regulations for the insurance industry took effect in 2007, 27 insurance companies have listed.

It is also looking to raise its market share with the launch of three principal-protected sharia-compliant funds focused on Saudi Rabian, Arab Gulf and global equities.

Mr Andrade says he is targeting retail and institutional investors who want to invest in three-year Islamic products.

He also intends to launch an actively managed offshore Saudi equity fund targeting foreign investors looking to tap the Middle East’s largest economy.

Al-Rajhi believes that Saudi investors are cautious on equities after suffering losses, but that they may invest in principal-protected products that guarantee the return of capital.

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