Saudi Islamic banking sector remains dominant, says Fitch

Profitability of Islamic banks in Saudi Arabia improved due to stronger growth opportunities but asset-quality challenges continue, Fitch Ratings said in a recent report.

“Saudi Islamic banks remain well placed in the banking sector as they have the largest retail franchises, supporting a lower cost of funding and better asset quality,” it noted.

“For 2019, financing growth will remain relatively muted,” the report said, adding that capital buffers and profitability will remain sufficient to absorb a mild deterioration in asset quality.

Saudi Arabia has the largest Islamic banks' financing base (78 percent) of any country that allows commercial banks to operate alongside Islamic banks.

Islamic banks' performance improved in 2018 and remained above conventional banks from a lower cost of funding and a higher proportion of retail financing.

Additionally, capital ratios decreased due to high financing growth. However, Islamic banks are well capitalized, with an average Fitch Core Capital ratio of 17.9 percent at end-2018.

Four of Saudi Arabia's 12 licensed commercial banks are fully Sharia compliant, with the others providing a mix of Sharia-compliant and conventional banking products and services. All banks are regulated by the Saudi Arabian Monetary Authority with the same disclosure requirements.

The recent guidelines from the General Authority of Zakat and Tax for Sharia-compliant financial products are broadly comparable with those of conventional banks, ensuring similar rules for all banks, the report said.