Saudi Islamic finance represents two-thirds of total financing

Saudi Arabia’s Islamic finance accounts for two-thirds of total bank financing in the kingdom, with up to 38 percent coming from Islamic banks and 28 percent from sharia-compliant products issued by conventional banks.

The kingdom has the largest Islamic bank asset base of any country that allows commercial and Islamic banking, Fitch Ratings said in a recent report.

“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,” it added.

Of the 12 commercial banks in Saudi Arabia, four are fully sharia-compliant and the rest provide a combination of sharia-compliant and conventional banking.

The National Commercial Bank (NCB) may eventually replace Al Rajhi Bank as the world’s largest Islamic bank by assets when it converts to a fully sharia-compliant bank, as announced by the bank following its IPO in 2014, Fitch said. The challenge for the bank, however, is to generate the same yield from its large investment portfolio.

During the oil boom, Saudi conventional and Islamic banks have enjoyed the dividends of high government spending, but the times ahead are expected to be tougher as the Saudi government cuts spending and scales back or cancels projects all together.

“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 said, adding that it expected asset quality metrics to deteriorate over the same period.