Saudi Islamic banks positioned for robust growth amidst economic expansion: Fitch Ratings 

According to the report, Islamic banks demonstrate a better impaired financing ratio compared to conventional banks. Shutterstock
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Updated 26 June 2024
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Saudi Islamic banks positioned for robust growth amidst economic expansion: Fitch Ratings 

RIYADH: Saudi Islamic banks are poised to maintain a robust performance this year and in 2025, buoyed by non-oil economic growth and favorable operating conditions, a new report stated. 

According to Fitch Ratings, these banks leverage a substantial retail customer base which helps improve profitability, secure lower-cost funds, and maintain high-quality, diversified assets. 

In the Kingdom, where all residential mortgages must comply with Islamic law, strong demand for Shariah-compliant financial products leads individuals to Islamic banks for mortgages and other services, thereby increasing deposits. 

“In general, financing growth has outpaced lending over the past few years, supported by the requirement for residential mortgages to all be Shariah-compliant. Islamic banking is dominant in Saudi Arabia, with the largest proportion of Islamic financing (85 percent) of any country that allows conventional banks to operate alongside Islamic banks,” the agency added. 

Customers’ trust in Islamic banking principles further encourages them to deposit funds in banks that uphold these values. Additionally, mandatory Shariah compliance for mortgages also solidifies Islamic banks as the preferred option for such financing. 

Asset quality 

According to the report, Islamic banks demonstrate a better impaired financing ratio compared to conventional banks, attributed to their lower exposure to risky corporate financing. This ratio stood at 1.5 percent for Islamic banks, contrasting with slightly over 2 percent for conventional banks. 

Islamic banks also improved their impaired financing ratio from 1.7 percent in 2022 to 1.5 percent in 2023, indicating enhanced loan performance.

This progress was bolstered by robust financing growth, which facilitated portfolio diversification and reduced overall risk. Favorable economic and regulatory conditions further supported these gains, leading to better borrower performance and reduced default rates.   

This key financial metric, also referred to as the non-performing financing ratio, is used to evaluate the quality of loans within banks or financial institutions. It specifically measures the proportion of loans that are experiencing difficulties or are at risk of default. 

Profitability 

According to the agency, Islamic banks show higher profitability with operating profit relative to risk-weighted assets exceeding 3 percent, compared to approximately 2.5 percent for conventional banks. 

In 2023, sector profitability remained stable at high levels, despite facing increased funding costs that offset the benefits from credit growth and reduced impairment charges. 

Islamic banks stood out with profit exceeding that of conventional banks, largely due to their ability to maintain higher margins supported by lower funding costs. 

This advantage stemmed from their strong retail franchises, which attracted a larger base of non-profit-bearing deposits compared to conventional banks. These stable and cost-effective funding sources allowed Islamic banks to sustain profitability levels above their counterparts, highlighting their resilience in a challenging financial environment. 




Fitch Ratings produced the report analyzing the Saudi Islamic banking sector. Shutterstock

Capital levels 

Islamic banks maintained a strong capitalization with an average common equity Tier 1 ratio of 16.4 percent as of the end of 2023, closely aligned with conventional banks’ ratio of 16.6 percent. 

This ratio indicates robust core equity capital relative to risk-weighted assets, ensuring solid financial stability. Additionally, Islamic banks’ lower risk-weighted assets to total assets ratio of 70 percent — compared to 84 percent for conventional banks — reflects a strategic emphasis on retail banking and reduced off-balance-sheet activities. 

These factors collectively enhance Islamic banks’ resilience by minimizing risk exposure and supporting sustainable growth amid challenging financial conditions.   

Conventional banks’ capital adequacy ratio, which measures their financial health by comparing capital, including equity and reserves, to risk-weighted assets, ensuring sufficient capital to absorb potential losses, stood at around 20 percent, similar to Islamic banks. 




Al Rajhi Banking stands out by having a more diversified retail deposit base than other institutions. Shutterstock

Funding and liquidity 

As of the end of 2023, customer deposits constituted 80 percent of the funding for Islamic banks, slightly less than the 84 percent observed for conventional banks, the agency noted in its report. 

Islamic banks saw their average financing-to-deposits ratio rise to 102 percent, up from 99 percent in 2022, indicating that their financing activities grew faster than their deposit base. 

Fitch Ratings noted that deposit concentration, where a substantial proportion of a bank’s deposits originates from a limited number of depositors or sources, tends to be prevalent among Islamic banks.

However, Al Rajhi Banking and Investment Corp. stands out due to its advantage of having a more diversified retail deposit base. 

Despite challenging financial conditions, Islamic banks have effectively managed liquidity, supported by increased availability of government sukuk and liquidity-management tools provided by the central bank.   

These measures ensure that Islamic banks maintain adequate liquidity levels to meet their financial obligations and operate smoothly amidst fluctuating market conditions. 

According to another June report from the agency focusing on emerging markets debt, Saudi Arabia is actively working to expand and strengthen its sukuk and debt markets. 

This strategic initiative is primarily motivated by the Kingdom’s need to address budget deficits effectively. By deepening these markets, Saudi Arabia aims to not only raise essential funds to bridge fiscal gaps but also to foster greater liquidity and diversification within its financial sector. 

This approach not only supports the government’s financial planning and infrastructure development goals but also strengthens the overall resilience and attractiveness of the Kingdom’s capital markets on a global scale. 

Saudi Arabia’s sukuk and debt capital market have demonstrated robust growth, with annual increases of 7.9 percent overall and 9.6 percent for unlisted issuances, as reported by the Capital Markets Authority in the same month. 

The market size for unlisted sukuk and debt expanded from SR72 billion ($19 billion) in 2019 to approximately SR105 billion by 2023. Corporate sukuk and debt reached SR125 billion by 2023, up from SR95 billion in 2019, with the number of issuing companies tripling. 

Government contributions dominated, comprising 70 percent of the market at SR529.8 billion by 2023. Market activity surged, with traded value hitting SR2.5 billion and transactions rising to 36,961. 

The Capital Market Authority aims to enhance market attractiveness through regulatory improvements and infrastructure expansions, supporting economic diversification and international investor interest in Saudi Arabia. 

According to Fitch Ratings, in 2024, GCC countries, Malaysia, Indonesia, and Turkiye have significantly increased their issuance of US dollar-denominated debt within emerging markets, collectively accounting for 51 percent of total EM dollar debt, up from 43.7 percent in 2023 and 32.8 percent in 2020. 

This rise reflects governmental efforts to develop debt capital markets, diversify funding sources, finance fiscal deficits, and manage maturing debts. Sukuk, a pivotal Islamic financing tool, comprised 12.4 percent of EM dollar debt issuance during this period. 

Their inclusion in global bond indices has bolstered demand from international investors, prompting Fitch to upgrade ratings for several countries due to improved fiscal outlooks and investor-friendly policies. 

Outlook 

In Fitch Ratings’ outlook for 2024 and 2025, Saudi Islamic banks are anticipated to maintain robust standalone credit profiles. 

This strength is bolstered by high oil prices and favorable operating conditions. However, strong credit growth is expected to exert pressure on banks’ capital, funding, and liquidity positions. 

To mitigate these pressures, Islamic banks are likely to diversify their funding sources beyond traditional deposits. This diversification includes increasing reliance on wholesale funding options such as sukuk issuance, which are expected to play a larger role in their funding mix. 

Despite this shift, deposits are anticipated to remain the primary and most stable source of funding for Islamic banks. Overall, while facing challenges related to capital, funding, and liquidity, Saudi Islamic banks are poised to uphold strong credit profiles supported by favorable economic conditions and strategic funding diversification efforts. 


Saudi Arabia launches company to transform Asir into global tourism hub

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Saudi Arabia launches company to transform Asir into global tourism hub

RIYADH: Saudi Arabia’s Asir region has launched a new tourism venture through a partnership with the aim of creating a holding company to transform the area into a global tourist destination.

The collaboration between Aseer Investment Co., a subsidiary of the Public Investment Fund, and Rikaz Real Estate, aligns with the goal of transforming Asir into a world-class tourist destination that combines authentic heritage with sustainable development, according to the Saudi Press Agency.

The holding company seeks to contribute to enhancing a tourism environment that enriches guests’ experiences with unique offerings, connecting visitors to local culture and community traditions, SPA reported.

It is also committed to promoting sustainable tourism by protecting the environment, developing local communities, and collaborating with artisans and local businesses to preserve the authenticity of Asir’s heritage.

In October, the Kingdom’s Abha city secured a new investment partnership to boost tourism by developing culturally rich dining and retail experiences. 

PIF firm Aseer Investment Co. signed the deal with Nimr Real Estate and the National Co. for Tourism, or Syahya, to propel the project, the Saudi Press Agency reported. 

This aligns with the objectives of developing Abha, which will offer a range of benefits, including retail stores that reflect the cultural heritage of the Asir region.

The partnership also seeks to be a model for multiple collaborations with private sector investors and create more regional job opportunities.

Investments in the region are expected to create between 14,000 and 18,000 job prospects and contribute to up to 6 percent of the non-oil gross domestic product within 10 years, as outlined by AIC Chief Executive Osama Al-Othman in February.

Saudi Arabia emerged as a leader in tourism growth among G20 nations, experiencing a 73 percent increase in international visitors in the first seven months of 2024 compared to 2019.

According to the UN World Tourism Barometer report in September, the Kingdom welcomed 17.5 million international tourists during this timeframe, showcasing its growing allure as a global travel destination.

This surge is part of the nation’s Vision 2030 initiative, which aims to diversify the economy and reduce dependence on oil revenues.

“Saudi Arabia cements its global leadership and takes the first spot among G20 countries in international tourist arrivals growth, with a 73 percent increase in the first seven months of 2024 compared to the same period in 2019,” stated the Saudi Tourism Ministry on X.

Under the National Tourism Strategy, the Kingdom aims to attract 150 million visitors by 2030 and increase the sector’s contribution to the nation’s gross domestic product from 6 percent to 10 percent.

These goals reflect the country’s commitment to strengthening its tourism sector and enhancing its global appeal.


IMF, Saudi Arabia announce new annual conference tackling global economic challenges

Updated 19 min 18 sec ago
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IMF, Saudi Arabia announce new annual conference tackling global economic challenges

RIYADH: The International Monetary Fund and Saudi Arabia will jointly organize a high-level annual conference in AlUla to discuss global economic challenges, it has been announced.

The AlUla Conference for Emerging Market Economies will bring together a select group of finance ministers, central bank governors, and policymakers, along with leaders from the public and private sectors, representatives from international institutions, and members of academia.

According to a joint statement by Kristalina Georgieva, managing director of IMF and the Minister of Finance Mohammed Al-Jadaan, the first edition of this series will be held from Feb. 16-17, 2025.

“The world is confronting deeper and more frequent shocks, including from conflicts, geoeconomic fragmentation, pandemics, climate change, food insecurity, and the digital divide,” according to the statement.

They continued: “If not addressed adequately, these shocks put at risk emerging market economies’ hard-won improvements in living standards. Such setbacks would affect large segments of the world population and put at risk global growth and macro-financial stability.”

The gathering will offer a platform to exchange views on domestic, regional, and global economic developments and discuss policies and reforms to spur inclusive prosperity and build resilience supported by international cooperation.

Recent economic issues affecting the global landscape include rising inflation rates, driven by supply chain disruptions and increased demand for goods post-pandemic.

Supply chain delays continue to impact the availability of essential products, causing bottlenecks in manufacturing and increasing costs.

Additionally, geopolitical conflicts, such as the war in Gaza, have disrupted energy supplies and food exports, leading to global food insecurity and fuel price volatility.

Concerns over the using the Red Sea shipping lane increased dramatically at the end of 2023, when Houthi militants stepped up attacks on vessels in the wake of the escalation of the Israel-Hamas conflict.

The effects of these challenges pose significant risks to economic stability, especially for emerging markets that are more vulnerable to such global shocks.

The AlUla conference is the latest example of the growing relationship between Saudi Arabia and the IMF, with the organization in April establishing its first office in the Middle East and North Africa region in Riyadh.

The facility was launched during the Joint Regional Conference on Industrial Policy for Diversification, jointly organized by the IMF and the Ministry of Finance, on April 24.

The new office aims to strengthen capacity building, regional surveillance, and outreach to foster stability, growth, and integration, thereby promoting partnerships in the Middle East and beyond, according to the Saudi Press Agency.

The work hub will promote closer collaboration between the IMF and regional institutions, governments, and other stakeholders, according to the SPA report.

The IMF also expressed its gratitude to the Kingdom for its financial contribution aimed at supporting capacity development in member countries, including fragile states.


Closing Bell: Saudi Arabia’s TASI ends in the red, trading volume hits $2.95bn

Updated 14 November 2024
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Closing Bell: Saudi Arabia’s TASI ends in the red, trading volume hits $2.95bn

RIYADH: The Tadawul All Share Index concluded the last session of the week at 11,791.18 points, down by 139.27 points or 1.17 percent.

The MSCI Tadawul 30 Index also saw a decline, dropping 19.18 points to close at 1,481.36, reflecting a 1.28 percent loss. In contrast, the parallel market Nomu finished Thursday’s trading at 29,467.71 points, up 262.18 points or 0.90 percent.

TASI reported a trading volume of SR11.10 billion ($2.95 billion), with 51 stocks advancing and 182 declining. The top performer of the day was Saudi Cable Co., which saw its share price surge by 5.10 percent to SR92.70.

Other strong performers included Shatirah House Restaurant Co., which gained 3.75 percent to reach SR21, and Arabian Mills for Food Products Co., which rose by 3.08 percent to SR53.60. Naseej International Trading Co. and Saudi Real Estate Co. also posted notable gains.

The worst performer was Saudi Real Estate Co., which dropped 4.94 percent to close at SR10. Alkhaleej Training and Education Co. and Red Sea International Co. also suffered significant losses, with their share prices falling by 4.90 percent to SR29.10 and 4.84 percent to SR68.80, respectively. Astra Industrial Group and Al-Omran Industrial Trading Co. were also among the day’s largest decliners.

On the parallel market, Nomu, Alqemam for Computer Systems Co. was the top gainer, rising by 9.57 percent to SR103. Other gainers included Dar Almarkabah for Renting Cars Co., which climbed 9.10 percent to SR42.55, and Horizon Educational Co., which rose by 7.58 percent to SR79.50. Mulkia Investment Co. and Knowledge Tower Trading Co. also saw significant increases.

On the losing side of Nomu, WSM for Information Technology Co. recorded the largest drop, with its share price falling by 6.18 percent to SR44. Osool and Bakheet Investment Co. and Natural Gas Distribution Co. also experienced notable declines, with their shares dropping by 5.37 percent to SR37.85 and 5 percent to SR57, respectively.

 


Leaders stress urgent need for climate finance at COP29 ministerial dialogue

Updated 14 November 2024
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Leaders stress urgent need for climate finance at COP29 ministerial dialogue

RIYADH: Global climate finance continues to fall short of expectations, as leaders gathered at the COP29 Ministerial Dialogue on Climate Finance to address ongoing challenges and map out next steps.

The meeting, held in Baku, Azerbaijan, underscored the urgent need for increased and more effective funding mechanisms. COP29 President Mukhtar Babayev emphasized that climate finance plays a central role in the broader negotiations.

“The urgency of the situation is evident,” Babayev remarked, pointing to the severe impacts of climate change observed over the past year. “Recently, we witnessed catastrophic flooding in Spain, and in the Pacific region, island communities are faced with the possibility of being wiped out entirely. We must act now; failure to do so will have grave human and economic costs.”

The president stressed the importance of fulfilling the $100 billion-per-year commitment made in Copenhagen and reiterated in Paris, urging leaders to reflect on lessons learned and consider the quality and allocation of financial resources.

Developing countries once again voiced the need for tangible action, with Fiji’s Deputy Prime Minister Biman Prasad highlighting the importance of aligning climate finance with the goals of the Paris Agreement.

“This is a ‘put your money where your mouth is’ moment,” Prasad said. “The 1.5°C temperature goal and the Paris Agreement itself will not be deliverable from both an economic and scientific perspective if we do not invest right. The New Collective Quantified Goal is critical for aligning our priorities and addressing major inconsistencies,” he added.

The EU reaffirmed its commitment to climate finance, noting that the $100 billion goal was first collectively met in 2022, with contributions reaching $115.9 billion.

“The EU and its member states contributed €28.5 billion, or around $30 billion, in climate finance from public sources,” a representative said. “Almost half of the public funding came in the form of grants, with a significant portion provided on concessional terms. We need to make further efforts to facilitate the mobilization of private funding, as it remains a key source of climate finance,” the representative added.

Simon Stiell, executive secretary of the UN Framework Convention on Climate Change, emphasized the critical juncture at which the global community now finds itself.

“The huge opportunities we have and the terrible risks we face are real,” Stiell said. “It’s time to take action to bridge gaps, solve problems, and come together to ensure climate finance and climate action benefit everyone.”

Sweden also announced a significant new contribution, with Ministerial representatives unveiling an $8 billion Swedish krona ($723.6 million) pledge to the second replenishment of the Green Climate Fund.

“This makes Sweden the largest per capita donor to the GCF among the larger donors,” the Swedish representative noted.

As discussions progressed, leaders acknowledged the widening gap between current financial commitments and the funds required to meet the 1.5°C target. There were calls for more robust mobilization of both public and private finance.

The COP29 president concluded: “Delivering the climate fairness that developing countries need is one of the main metrics of shared success. We can learn from past efforts to inform the road ahead, but significant determination and leadership from all parties are required to bridge these critical gaps.”


IsDB, multilateral banks aim for $120bn in annual climate finance by 2030

Updated 14 November 2024
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IsDB, multilateral banks aim for $120bn in annual climate finance by 2030

RIYADH: Multilateral development banks are aiming to mobilize $120 billion annually by 2030 for climate financing in low- and middle-income countries, according to recent projections.

This ambitious funding goal includes $42 billion dedicated to climate adaptation efforts, with an additional $65 billion expected to come from private sector investments.

The target was unveiled in a joint statement issued during COP29 in Baku, Azerbaijan, by several prominent MDBs, including the Islamic Development Bank, African Development Bank, the Asian Development Bank, the Asian Infrastructure Investment Bank, the Development Bank of the Council of Europe, the European Bank for Reconstruction and Development, and the European Investment Bank. Additionally, the Inter-American Development Bank, the New Development Bank, and the World Bank Group are part of the initiative.

The statement emphasized that setting a strong, collective climate finance target is crucial to meeting the goals of the Paris Agreement.

“A new collective quantitative target on climate finance that is both strong and ambitious is essential to achieving the Paris Agreement’s objectives,” the statement read. “We urge parties to reach a robust conclusion on this target.”

For high-income countries, the MDBs have set a target of $50 billion in annual climate finance, including $7 billion specifically for adaptation, with private sector mobilization expected to generate an additional $65 billion. This new target builds on the success of previous climate finance goals, with MDBs already surpassing their climate financing projections for 2025. Since 2019, the MDBs have increased direct climate finance by 25 percent and doubled climate mobilization efforts over the past year.

In response to the urgent need for enhanced climate action, the MDBs also emphasized the importance of establishing a new collective quantitative target for climate finance at COP29. The institutions highlighted their commitment to ensuring that the finance provided leads to meaningful, measurable impacts on both climate mitigation and adaptation.

To further enhance the effectiveness of climate finance, the MDBs released the “Common Approach to Measuring Climate Outcomes,” a framework that provides standardized indicators for tracking global progress on climate mitigation and adaptation. This framework aims to better align MDB activities with global climate goals and improve transparency in measuring outcomes.

Additionally, the MDBs published their “Country Climate Action Platforms,” reaffirming their commitment to strengthening collaboration between host countries, MDBs, donors, and the private sector. These platforms are designed to ensure that climate finance is targeted effectively and that developing countries have the support they need to implement robust climate policies.

COP29 has emerged as a critical moment in global climate negotiations, especially for the Global South, where developing nations are pushing for significant climate financing, stronger adaptation measures, and equitable policy outcomes. These countries continue to advocate for a climate finance framework based on the principle of common but differentiated responsibilities, recognizing that nations’ contributions should reflect their respective capabilities and historical responsibilities.