Sukuk: A Comprehensive Guide to Understanding Sukuk in Saudi Arabia

Sukuk are Islamic financial instruments, sometimes referred to as Islamic bonds, representing shared ownership in real assets or projects. Unlike traditional bonds that rely on interest, Sukuk returns come from profits or revenues generated by the assets for which the Sukuk were issued. The issuance of Sukuk is based on Sharia principles such as partnership, profit-sharing, leasing, or cost-plus financing, and is supervised by a Sharia board to ensure compliance with Islamic law. In the Saudi market, Sukuk are listed under the 'Bonds and Sukuk' sector on the Tadawul platform and are regulated by the Capital Market Authority and the National Center for Securities Depository. Sukuk are utilized to finance major projects, enhance capital in banks, or support government budget needs, giving them a pivotal role in Saudi financial strategy.

The Saudi Sukuk market is characterized by a variety of Sukuk categories based on the nature of the project or issuing entity. The most notable types include:

- Additional Tier 1 and Tier 2 Sukuk: Issued by banks to enhance capital according to Basel standards.
- Unsecured Investment Sukuk: Issued by major companies like Saudi Aramco or the Saudi Electricity Company to finance projects or expansions.
- Government Sukuk: Issued by the Saudi Ministry of Finance to support state projects or cover budget deficits.
- Short-term and Long-term Sukuk: Varying based on maturity, with returns determined by the time period and risks associated with the issuer.

Each type of Sukuk is subject to specific Sharia and regulatory standards, ensuring the interests of both investors and issuers are met within the framework of Islamic law.

Sukuk are issued in Saudi Arabia through organized steps that begin with obtaining approval from the Capital Market Authority, followed by preparing Sharia and financial structures, and concluding with their listing on the Tadawul platform. Issuers (government, private, or banking) prepare an issuance prospectus detailing the project or assets being securitized, the terms of return and maturity, and the credit rating. After listing, Sukuk can be traded among investors through licensed brokers in a manner similar to stocks, with differences in minimum transaction sizes and liquidity. The National Center for Securities Depository records all transactions, and trading data is periodically made available through official platforms like Tadawul and Argaam.

Official data indicates significant growth in the Saudi Sukuk market during 2024-2025. The total amount of listed Sukuk and bonds reached approximately 642 billion SAR by the end of Q1 2025, rising to 695.8 billion SAR by the end of Q3 of the same year, an increase of nearly 3% from Q2. Notable issuances included:

- Riyad Bank: Additional Tier 1 Sukuk worth 2 billion SAR.
- Saudi Electricity Company: International Sukuk valued at 2.75 billion USD.
- Saudi Aramco: International Sukuk worth 3 billion USD.

Sukuk returns range between 4% and 7% depending on the issuer and maturity, with high credit ratings for major companies and banks. Although market liquidity is lower compared to stocks, the annual trading volume of Sukuk exceeded 22 billion SAR in 2024, according to Tadawul reports.

The list of Sukuk issuers in Saudi Arabia varies between the government sector, banks, and major corporations:

- Banks and financial institutions: Issue Tier 1/Tier 2 Sukuk such as Riyad Bank, Al Ahli, Alinma, and Al Rajhi.
- Major corporations: Saudi Aramco and the Saudi Electricity Company are prominent issuers in the corporate sector, especially for large international issuances.
- Ministry of Finance: Issues sovereign Sukuk to finance state projects or manage public debt, often included in government debt programs.

This diversity enhances the strength of the Sukuk market and attracts various segments of local and international investors.

Sukuk and traditional bonds share the characteristic of being fixed-income financial instruments, but they differ in several fundamental aspects:

- Sukuk represent a share in real assets or projects, while traditional bonds are a financial obligation with a fixed interest.
- Sukuk returns are based on profits or revenues from the asset or project, and interest-based returns are not allowed.
- Sukuk are subject to oversight by Sharia boards to ensure compliance with Islamic law, while traditional bonds are governed by conventional debt laws.
- In the event of project default, Sukuk holders bear part of the risks associated with the asset, while traditional bondholders enjoy priority in repayment.

This distinction makes Sukuk a preferred financing tool for investors seeking Sharia compliance and investment in the real economy.

The Capital Market Authority oversees the regulation of Sukuk issuance and trading in Saudi Arabia and has issued detailed rules for Sharia-compliant financial instruments. Each issuance requires approval from a Sharia committee to ensure compliance with Islamic law, along with full disclosure of project risks and obligations on the issuing entity. The central bank (SAMA) supervises banking aspects, especially when banks issue capital Sukuk. The financial market has also updated registration, disclosure, and governance mechanisms as part of its strategic plans for 2024-2026, raising foreign ownership ceilings and enhancing transparency to attract international investments.

The Sukuk market falls under the debt and financing instruments sector and faces strong competition from traditional bonds, bank deposits, dividend stocks, and other Islamic financing products. Sukuk offer a medium-risk option with relatively fixed returns, making them attractive to conservative investors. Saudi Arabia's inclusion in global debt indices like the JP Morgan index enhances foreign investment flows, while Gulf and international Sukuk compete to attract investors seeking Sharia-compliant debt instruments. Vision 2030 projects have also shown an increasing role for Sukuk in financing major infrastructure.

Most Sukuk issued by major Saudi entities receive high credit ratings (A to AAA), reflecting the strength of the Saudi economy and the solvency of major companies. Sukuk returns currently range between 4% and 7%, depending on maturity and the type of issuing entity. For example, Aramco's international Sukuk for 2025 offered returns of 4.125% and 4.625% depending on the tranche, while Saudi Electricity Sukuk recorded returns of up to 5.875% for the longest tranche. This diversity in returns provides investors with various options based on risk tolerance and desired duration.

Although the liquidity of the Sukuk market is lower than that of the stock market, the listing of Sukuk on the Tadawul platform has provided greater flexibility for buying and selling. The annual trading volume of Sukuk exceeded 22 billion SAR in 2024. Liquidity varies depending on the size of the issuance, the issuing entity, and the maturity period. Listed Sukuk provide price transparency and transaction details, with transactions typically set at a minimum nominal value (varying by issuance). The Tadawul platform also offers detailed data on trading volumes, nominal values, and latest prices, aiding investors in making informed decisions.

The Saudi Sukuk market has witnessed significant developments in 2024-2025, including:

- Saudi Arabia's inclusion in the JP Morgan Government Bond Index, attracting new foreign investment flows.
- Raising the foreign ownership ceiling in debt instruments and Saudi companies to 100%, enhancing liquidity and diversifying investors.
- Major issuances from government Sukuk and large corporations like Aramco and Electricity.
- Development of the legislative framework and improvement of disclosure and governance mechanisms in the debt instruments market.

All these developments reflect the market's trend towards globalization and increasing attractiveness of Sukuk as a key financing and investment tool in the Saudi economy.

Sukuk offer several advantages, including Sharia compliance, relatively fixed returns, diversification of funding sources for issuers, and transparency in disclosure and trading. They also allow individual and institutional investors to invest in real projects or productive assets. Challenges include lower liquidity compared to stocks, complexity of Sharia structuring, fluctuating returns in case of declining asset profits, and the need for continuous monitoring of regulatory developments. Therefore, every investor should carefully study the issuance prospectus and understand the risks associated with each issuance before making any investment decision.

Indicators suggest continued growth for the Saudi Sukuk market in the coming years, driven by Vision 2030 projects, expansion in issuances from government entities and major corporations, and integration of the Saudi market with global indices. Innovative financial products are expected to evolve, along with increased participation from foreign investors and improved liquidity as listings and issuer diversity increase. Amid this growth, Sukuk will remain a strategic option for financing and investment, with the importance of adhering to Sharia and regulatory standards to achieve financial sustainability.