Fitch Ratings said Tuesday the Islamic finance is a mature and developed industry in Saudi Arabia, representing about two-thirds of total bank financing. About 38 percent comes from Islamic banks and 28% from the Islamic windows of conventional banks. There are 12 licensed commercial banks in Saudi Arabia. Four are fully sharia compliant with the remainder providing a mix of sharia-compliant and conventional banking products and services.
Due to the largely Islamic finance nature of the lending market in Saudi Arabia, the performance and credit matrices of both Islamic and conventional banks are to a large extent similar (for more information on Saudi banks see Saudi Banks: Peer Review at www.fitchratings.com).
Al Rajhi Bank is the largest Islamic bank in Saudi Arabia, and also the largest Islamic bank internationally with assets of SAR325.2bn (USD87bn) at end-3Q15. National Commercial Bank ( NCB ) is aiming to convert to a fully sharia-compliant bank following its IPO in 2014. NCB ‘s loan book is already majority sharia compliant and once the bank is fully compliant it could replace Al Rajhi Bank as the world’s largest Islamic bank. NCB has a large investment portfolio that will be more challenging to convert into sharia-compliant securities, in terms of availability and variety of appropriate alternatives and maintaining the current yield on the portfolio.
Saudi Arabia has the largest Islamic bank asset base of any country that allows commercial banks to operate alongside Islamic banks. All banks are subject to a single supervisory authority and the same disclosure requirements. The Saudi Arabian Monetary Agency ( SAMA ) regulates sharia-compliant banks in the same way as it regulates conventional banks. No special treatment is applied to Islamic products and no additional support is given to Islamic banks. However, as a predominantly Muslim market, and now that similar retail products exist in both conventional and sharia-compliant form, Islamic banking is seeing the fastest growth.
In Saudi Arabia, banks benefit from large volumes of local currency liquid assets, including government securities and deposits with SAMA . However, one of the key differences between conventional and Islamic banks is the structure of their liquidity/investment portfolios. This is because Islamic banks have far fewer sharia-compliant investment options. These are mainly cash and central bank deposits, such as “mutajara” or “murabaha”, which are therefore relatively low risk and low return. Investments also include sukuk issued by other Islamic banks.
High spending, particularly in the form of large government projects, has started to reduce due to stricter screening, delays and cancellations, as the government reduces spending to match lower oil revenues. We expect the tougher economic environment to continue for at least two years. The challenging operating conditions are likely to affect earnings, with profitability metrics growing less quickly and possibly declining. Fitch also expects asset quality metrics to deteriorate over the next two years.
