Trading up: The Kingdom’s capital markets lead the region

It has been a good couple of years for the Saudi Stock Exchange (Tadawul), which posted considerable growth in 2011 and 2012. Throughout 2012, nearly all of the market’s major indicators improved substantially over the previous year. Market capitalisation was up more than 10% over 2011, for example, due to a spate of initial public offerings (IPOs) in late 2011 and 2012. Additionally, the Tadawul All Share Index (TASI) rose by nearly 6% and the value of shares traded was up by more than 75%.

According to a recent report published by Al Rajhi Capital, a major local investment firm, the exchange has matured rapidly in the years since the economic downturn. While the Tadawul is still broadly linked with oil prices, the exchange has become more aligned with regional and global markets in recent years.

In late 2012 the government regulator, the Capital Markets Authority (CMA), announced that new measures would gradually be taken to open the Tadawul to additional foreign participation. This move is expected to increase transparency and professionalism throughout the exchange (see analysis). In light of these future developments, the Kingdom’s capital market is widely expected to grow in coming years.

In Development

That said, investors and companies looking to list in the Kingdom still face a number of challenges. Activity on the Tadawul – the largest and one of the most liquid exchanges in the region – is driven largely by individual retail investors, who have accounted for around 90% of trading by volume in recent years. The lack of a large base of professional, institutional investors has contributed to occasional bouts of volatility in the market.

Additionally, while market activity has increased in recent years, in general the Tadawul lacks liquidity. Similarly, although the Kingdom does have a small bond market, it remains largely underdeveloped. This said, off-exchange sukuk (Islamic bonds) listings have become increasingly popular in recent years. Finally, as the exchange opens up to international participation, the CMA will face a number of broad challenges in terms of aligning the market with international standards and best practices.

History & Oversight

The Tadawul was officially launched in July 2003, after years of preparation and planning by the government. Prior to the establishment of the exchange, a number of local companies were traded on an informal basis.

The Kingdom’s first joint-stock companies were formed in the early 1930s, in conjunction with the rapid development of the oil industry. By the mid-1970s Saudi was home to around 14 public corporations, most of which were either cement or electricity firms. Throughout the 1970s and early 1980s many new companies were formed as a result of the partial nationalisation of foreign banks and other financial firms. Up until the mid-1980s all market activity was carried out through a network of private brokers.

In the early 1980s, rapidly rising oil prices and the subsequent proliferation of local companies caused the Kingdom’s financial leaders to look into launching a formal stock exchange. In 1984 the government issued a royal decree that established a new ministerial committee made up of representatives from the Ministry of Finance, the Ministry of Commerce and Industry and the Saudi Arabian Monetary Agency (SAMA). Under the royal decree the group had a mandate to develop and implement effective regulations and controls, with the goal of formalising the market.

New Regulators

Also in 1984 SAMA was named the de facto regulator of the exchange of corporate stocks in the Kingdom and local commercial banks were authorised to serve as brokers. In August 1990 SAMA, in conjunction with the banks, set up the Kingdom’s first electronic trading system, known as the Electronic Security Information System (ESIS).

Under ESIS the banks set up 12 central trading units, which were linked to a central hub at SAMA. The new system served to streamline the market, boosting trading activity and narrowing price spreads. In October 2001, the stock exchange implemented the “Tadawul” centralised electronic trading system, which is still in place today. In 2003 the government introduced the new capital market law, which resulted in the creation of a number of key institutions including the CMA, the Securities Disputes Settlement Committee and the Appeals Committee.

Improved Oversight

Since then the CMA has worked to roll out new regulations in an effort to maintain international best practices on the exchange. The Saudi Stock Exchange (Tadawul) Company was formally established in 2007, for example. A year later, the exchange was restructured and swap agreements were introduced, which partially opened the market to foreign investors. In 2009 the exchange launched an electronic trading platform for bonds and sukuk, and in 2010 it added exchange-traded funds.

For the past few years the regulator has been developing a new law that will allow foreign investors to directly participate in the market. Known as the Qualified Foreign Investors Law, the new legislation is expected to be approved in early 2013 (see analysis).

Additionally, in early March 2012 the regulator announced that it was working on a series of new prudential regulations, which would incorporate requirements laid out in the Basel II and Basel III standards.

In general, the Tadawul is considered to be well regulated, stable and transparent. For example, according to the CMA, as of the end of 2011 the average capital adequacy ratio for authorised securities business companies was around 35%, which is substantially higher than the 13% required by Basel III. In November 2012 the Tadawul was named the best-managed exchange in the Middle East, according to a survey of banks and research houses in the region.


In regard to performance, market activity and returns rose substantially in 2012 compared to the previous year. Trading activity dropped by more than 46% in 2010, falling to less than 20m transactions before rebounding by around 31% to reach around 25.5m transactions in 2011. The increase was the result of rising oil prices and wider recovery across the economy at large. This expansion continued through 2012, which registered 42.1m transactions, an increase of 65% on 2011.

Similarly, market capitalisation reached SR1.4trn ($373.33bn) by the end of 2012, which was an increase of 10.19% from SR1.27trn ($338.58bn) in 2011 and SR1.33trn ($354.58bn) in 2010. Despite of the low percentage of institutional participants in the market, the Tadawul was the largest stock exchange in the Middle East by three measures: market capitalisation, capital raised and by IPOs in 2011.

Jump In Activity

The market saw considerably more activity in 2012 than in the previous year. Total shares traded reached 82.54bn in 2012, up more than 71% from 48.26bn in 2011. Similarly, total value traded on the market jumped some 76% from SR1.1trn ($293.26bn) in 2011 to SR1.93trn ($514.54bn) during 2012. The Tadawul averaged 167,750 daily transactions in 2012, 328.86m shares traded per day and SR7.69bn ($2.05bn) in trade value per day, up from 103,010, 194.61m and SR4.43bn ($1.18bn) in 2011.


There has been significant volatility on the TASI in recent years, though by the end of 2012 the index was up substantially on previous years. The TASI reached 6801 by the end of 2012, up from 6418 in 2011 and 6621 at the end of 2010.

In the first quarter of 2012 the TASI rallied by around 22% to reach a peak of 7835 by April. In the months that followed the market underwent a period of correction, declining by around 14% to end the second quarter at 6710. Throughout the rest of the year, the index showed a slight recovery of around 1%, ending the year at 6801.22 points.

Overall, the market posted reasonable year-on-year returns of 5.98%. This places the TASI in third place in terms of annual returns in the region. The top two by that measure are Dubai Financial Market (based on the DFM General Index) and the Abu Dhabi Securities Exchange (ADX General Index) which posted returns in 2012 of 19.89% and 9.52%, respectively.

Major Sectors & Players

As of December 2012 there were 158 companies listed on the Tadawul, according to official data from the exchange. Year-end 2012 statistics show the petrochemicals sector dominated the Kingdom’s capital market, accounting for just over 31% of the total value, with a total capitalisation of SR439.91bn ($117.28bn).

The single largest company listed on the Tadawul is the state-owned Saudi Basic Industries Corporation (SABIC), which manufactures petrochemicals, industrial chemicals, plastics, metals and fertilisers. At the end of 2012 SABIC boasted a market capitalisation of SR269.25bn ($71.78bn), which represents just over 19.2% of the total value of the Tadawul.

Other major petrochemicals companies listed on the exchange include the Saudi Arabian Fertiliser Company, a subsidiary of SABIC, which accounted for 3.6% of the exchange’s total value; the Yanbu National Petrochemical Company, another SABIC subsidiary, which accounted for 1.9%; and the National Industrialisation Company and Saudi Kayan, which each accounted for some 1.3% of the exchange’s value.

The banking and financial services sector boasts market capitalisation of SR307.45bn ($81.97bn), which represents just under 22% of the Tadawul’s total value. After SABIC, the largest company on the exchange is the Al Rajhi Bank, with a market capitalisation of SR97.5bn ($25.99bn) at the end of 2012, representing just under 7% of the total value of the exchange. Other major banks and financial services firms listed on the Tadawul include the Samba Financial Group, which accounted for 2.9% of the exchange’s total capitalisation; Riyad Bank with 2.5%; the Saudi British Bank with 2.1%; and Saudi Fransi with 2.9%.

Together, the petrochemicals and banking and financial services sectors account for more than 53% of the value of the exchange. Additionally, the top-five largest companies on the exchange account for more than 40% of total capitalisation. The high concentration of capital in a just a handful of companies and sectors is reason for some concern and is considered to be one of the Tadawul’s weaknesses.

The IT and telecommunications sector, which has just five listed companies, represented some 10.9% of the value of the market at the end of 2012; while the cement sector represented 5.4%; the agriculture and food industries sector accounted for 4.8%; and the energy and utilities sector made up 4.1%.

The insurance sector, accounts for only around 2.8% of market capitalisation, but is made up of more than 30 companies and has dominated the Tadawul in terms of market activity in recent years. In 2012 insurance stocks accounted for nearly 31% of total transactions for the year, followed by petrochemicals stocks, with around 11% of market transactions, and IT and telecommunications, with 9%. In terms of value traded, the insurance sector also lead, with just over 23% of total value, followed by petrochemicals with around 16% and real estate development with roughly 11%.

New Listings

The Kingdom has been one of the largest IPO markets in the Middle East for the past five years, and was confirmed as the single largest IPO market in the region in 2012. The surge in market activity since mid-2011 has prompted a substantial number of companies to list shares on the exchange. In 2012, seven companies issued IPOs on the Tadawul, with a total market value of SR5.33bn ($1.42bn). This represents a substantial improvement on 2011, when the exchange attracted five IPOs worth a total of SR1.73bn ($461.22m) over the course of the year.

In May 2012 the Al Tayyar Travel Group – one of the region’s biggest tourism and travel companies – carried out the largest IPO on the Tadawul since 2010. The listing, which consisted of 30% of the company’s value, brought in SR1.37bn ($365.42m) in total, and was more than six times oversubscribed. Al Tayyar had originally planned to list in 2010, but the market’s poor performance at the time caused the firm to delay the process by two years.

In June 2012 Saudi Airlines Catering, the catering arm of the Kingdom’s national carrier, raised SR1.33bn ($354.58m) in an IPO of 30% of the company that was also 221% oversubscribed. Other major IPOs included City Cement Company, which raised SR946m ($252.20m) in September; Najran Cement, which raised SR850m ($226.61m) in April; and Dallah Health Company, which raised SR539m ($143.70m) in November; and another two smaller listings (see analysis).


The Tadawul has emerged as a rapidly maturing market in recent times. According to Al Rajhi Capital, the exchange “has become more aligned with global markets in last few years and relatively less correlated to crude prices.” Indeed, while activity on the exchange (not to mention the economy at large) remains closely tied to the price of oil, the correlation between oil exports and market activity has been somewhat subdued since early 2011.

This was largely the result of the Arab Spring protests, which caused a reduction in market activity throughout the region while simultaneously bumping up crude prices around the world. Since then, the Tadawul has followed benchmark international indices such as the MSCI World index, which tracks over 6000 stocks around the world. The movement away from oil prices is considered to be an indication of the exchange’s maturation and increased stability.

That said, the Tadawul is still somewhat prone to speculation and volatility. Indeed, in the first three months of 2012 the TASI jumped around 1500 points, reaching nearly 8000, before a market correction pushed the index back down to around 6800 in May. According to Al Rajhi Capital, the spike was fuelled by investor speculation after a few months of solid growth in late 2011, while the correction was the result of increasing worries about the international economic situation and the approaching summer months during which trading generally slows.

Indeed, while seasonal trends impact all economies, in the Kingdom these trends are especially pronounced. Market activity typically falls off during the long, hot summer months — which have coincided with the Islamic month of Ramadan in recent years — before gaining momentum again in late autumn. At the same time, the market generally picks up somewhat during the Hajj and Umrah periods, during which Saudi hosts as many as 2m-3m Muslim pilgrims as part of the Hajj.

The Secondary Market

In 2009, in an effort to add depth to the exchange, the CMA launched a secondary fixed-income market. While Saudi Arabia has seen rapidly expanding demand for both sukuk and conventional bonds on an off-exchange basis, the formal market has struggled to gain a foothold.

As of late 2012 the secondary market consisted of six listings, with maturity dates ranging from 2016 to 2030. Due to the small number of listings, the market has seen limited activity since it was launched and most bonds are held to maturity. In 2012 just 20 transactions took place on the market, with a total value traded of SR446m ($118.9m), compared to 49 transactions and SR1.81bn ($482.55m) in value traded the previous year. In 2011 the CMA launched the Tadawul Saudi Bond Index at a base value of 1000 and by year-end 2012 the index had dropped slightly to 992.79.

Islamic Financing

While the exchange-traded bond market has floundered somewhat, the over-the-counter market for sukuk has expanded rapidly in recent years. Indeed, according to local financial institution NCB, sukuk issuance reached around $10.5bn in 2012, up substantially from around $2.76bn during the previous year. In January 2012, the General Authority for Civil Aviation successfully carried out a SR15bn ($4bn) sukuk listing, which was both the largest sukuk ever issued in the Kingdom and the first issued by a government-guaranteed entity. Sukuk are widely expected to play an important role in financing the Kingdom’s ongoing housing and infrastructure projects (see Islamic Financial Services chapter).


Based on the uptick in trading and IPOs in late 2011 and throughout 2012, most local investors are looking forward to steadily increasing market activity and returns in the coming years. Indeed, in 2012 in particular, the Tadawul performed especially well, driven by solid expansion in the Kingdom’s economy at large and rising international oil prices.

The market still faces a number of challenges, including a lack of professional institutional investors, which has been closely linked with bouts of market volatility in recent years. Additionally, the exchange-based bond market remains small and largely operates on a buy-and-hold basis. Despite these issues, the Tadawul is widely expected to continue to grow.

The government’s ongoing large-scale infrastructure and housing investment programme will likely result in considerable demand for local financing for years to come. In particular, the new mortgage law, passed in July 2012, is expected to serve as a catalyst for increased activity and new listings.

Indeed, the Kingdom has been the region’s leading IPO market for the past four years, according to a report released by Ernst & Young. Although IPO activity lagged somewhat in 2010 and 2011, the large number of IPOs in 2012 bodes well for future expansion (see analysis). With the Tadawul anticipated to grow in the coming years, the future looks bright.

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The Report: Saudi Arabia 2013

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