Al Rajhi Bank’s US Dollar-denominated Trust Certificates: A Strategic Opportunity Amid Dollar Strength

The U.S. dollar’s volatility in 2025 has created a paradoxical landscape for global investors: while its decline has raised concerns about long-term fiscal health, it has simultaneously amplified the appeal of dollar-denominated Islamic instruments. For institutions like Al Rajhi Bank, the world’s largest Islamic bank by assets, this dynamic presents a strategic window to capitalize on both macroeconomic shifts and regional demand for sustainable finance.

Dollar Weakness and the Resilience of Sukuk

The U.S. dollar’s 10–11% drop in the first half of 2025—the worst performance in over 50 years—has been driven by slowing U.S. growth, rising deficits, and global capital reallocation [1]. Morgan Stanley projects further dollar weakness, with interest rates expected to fall from 5.25%–5.5% to as low as 2.5% by 2026 [2]. While this weakens the dollar’s traditional dominance, it has paradoxically boosted demand for dollar-denominated sukuk. Fitch-rated sukuk issuance surged to $210 billion in H1 2025, a 16% year-on-year increase, with over 90% of rated sukuk issued in dollars [3]. This resilience stems from the dollar’s entrenched role in global trade and the lack of viable alternatives for liquidity and trust.

Al Rajhi Bank’s Strategic Positioning

Al Rajhi Bank has positioned itself at the forefront of this trend. In Q2 2025, the bank announced plans to issue USD-denominated Tier 2 social sukuk under its updated international sukuk program, launched on May 29, 2025 [4]. The offering, to be structured through a special purpose vehicle (SPV), targets qualified investors globally and aligns with the bank’s sustainable finance framework. This move follows its $1.7 billion sustainable sukuk issuance in H1 2025, which supported Saudi Arabia’s Vision 2030 infrastructure goals [5]. By leveraging dollar strength—despite its recent decline—the bank taps into a market where investors seek both ethical alignment and yield.

The risk profile of these instruments is mitigated by Al Rajhi’s robust financials. Its Q2 2025 net income rose 31% year-on-year to SAR6,151 million, driven by strong credit growth and non-interest revenue [6]. This stability, combined with the sukuk’s social mandate (e.g., funding affordable housing or green projects), reduces default risk and enhances investor confidence.

Regional Demand and Geopolitical Tailwinds

The Gulf Cooperation Council (GCC) remains the epicenter of dollar-denominated sukuk demand. Saudi Arabia alone raised $47.93 billion through 71 sukuk and bond offerings in H1 2025, accounting for 66% of MENA sustainable bond activity [7]. Al Rajhi’s Tier 2 social sukuk benefits from this momentum, as Gulf investors increasingly prioritize ESG-aligned assets. The bank’s collaboration with global underwriters—including Goldman Sachs, Citigroup, and HSBC—further signals its appeal to international capital [8].

However, risks persist. The sukuk market’s concentration in Gulf countries exposes it to regional liquidity shocks, while AAOIFI Standard 62’s implementation uncertainty could disrupt future issuance [9]. Yet, these challenges are offset by the dollar’s enduring role in global finance. As JPMorgan notes, dollar weakness has historically preceded strong equity market performance, suggesting that sukuk investors may benefit from broader capital inflows into emerging markets [10].

Risk-Adjusted Returns and Timing

For investors, the timing of Al Rajhi’s USD Trust Certificates aligns with a critical inflection point. With U.S. interest rates expected to decline, the yield advantage of dollar-denominated sukuk—particularly those with social mandates—becomes more pronounced. Al Rajhi’s recent sukuk, which tightened yields to 6.375% from initial guidance of 6.875%, attracted oversubscription, underscoring strong demand [11]. This pricing efficiency, coupled with the bank’s AAA credit rating, offers a compelling risk-adjusted return profile.

Conclusion

Al Rajhi Bank’s USD Trust Certificates represent a strategic convergence of macroeconomic tailwinds and regional demand. While the dollar’s decline introduces volatility, it also amplifies the appeal of dollar-denominated sukuk as a hedge against inflation and a vehicle for ethical investing. For investors seeking to balance yield, liquidity, and ESG criteria, these instruments present a rare opportunity in a fragmented market.

Source:
[1] J.P. Morgan Research, Where is the U.S. dollar headed in 2025?
https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/where-is-the-us-dollar-headed-in-2025/
[2] Morgan Stanley, Devaluation of the U.S. Dollar 2025
https://www.morganstanley.com/insights/articles/us-dollar-declines
[3] Fitch Ratings, Fitch-rated sukuk surpasses $210bn as market expands 16%
https://www.arabnews.com/node/2610984/business-economy
[4] Al Rajhi Bank, USD-denominated Tier 2 social sukuk issuance
https://www.argaam.com/en/article/articledetail/id/1841647
[5] Kanebridge News ME, Saudi Arabia, UAE lead sustainable bond issuances in MENA
https://kanebridgenewsme.com/saudi-arabia-uae-lead-sustainable-bond-issuances-in-mena/
[6] Investing.com, Al Rajhi reports 31% rise in Q2 profit, beats estimates
https://www.investing.com/news/earnings/al-rajhi-reports-31-rise-in-q2-profit-beats-estimates-93CH-4143106
[7] Gulf Capital Market Association, Market Post
https://www.gulfcapitalmarket.org/market-post/
[8] Al Rajhi Bank, Joint lead managers for sukuk issuance
https://www.argaam.com/en/article/articledetail/id/1841647
[9] Fi-Desk, Sukuk market grows despite liquidity and concentration risk
https://www.fi-desk.com/morningstar-sukuk-market-grows-despite-liquidity-and-concentration-risk/
[10] J.P. Morgan, Mid-year market outlook 2025
https://www.jpmorgan.com/insights/global-research/outlook/mid-year-outlook
[11] Enterprise News, Al Rajhi Bank’s debt transaction
https://enterprise.news/ksa/en/industry/industry-list/al-rajhi-bank