Four sectors set to benefit from Saudi financial development plan

Saudi Arabia launched the Financial Sector Development Program (FSDP) in April to develop a diversified and effective financial services sector, as part of the Kingdom’s goals under the Vision 2030 reforms.

The key focus areas under the FSDP include: growth of small and medium enterprises (SMEs), expansion of the insurance industry, more support for FinTech players, development of debt and capital markets, moving towards a cashless society, and raising the level of financial literacy to help improve household savings.

The FSDP charter sets definitive and measurable sector specific targets, which align with the government’s commitments for 2020, Jadwa Investment said in a recent report.

Below are some of the key 2020 metrics in detail:

1) Insurance industry expansion

The insurance sector has been afforded a fair amount of attention within the FSDP charter, with three 2020 commitments allocated to the sector, Jadwa said. The first of these relates to raising the level of gross written premiums (GWPs) compared to non-oil GDP.

“According to our calculations, GWPs will have to increase by SAR 1.56 billion between 2017 and 2020 in order for this metric to be attained. Whilst this seems a very achievable target, it comes at a time when the sector is facing a number of challenges,” it said.

Jadwa expects insurance sector to face more challenges in the year ahead as rises in both the expat dependency fees and expat levies lead to more people leaving the Kingdom.

In addition, the full effects of gasoline price hikes in 2018 are still to be felt, even as the value added tax (VAT) raises the cost of vehicles.

However, with women now permitted to drive in the Kingdom, it could help to increase GWPs, the report said, adding that a more rigorous enforcement of mandatory insurance will also offer support.

2) More FinTech players

Ahead of the FSDP launch, Saudi Arabian Monetary Authority unveiled the FinTech Saudi initiative, which lists many of the targets identified within the charter as its objectives.

The FinTech initiative will focus on opening financial services to non-banking players with the objective of promoting innovation and competition in the financial sector, Jadwa said.

“Efforts will also be made to attract investment in this area, with an emphasis on developing FinTech focused funds/accelerators/incubators, which provide VC funding, whilst ways to attract foreign direct investment into the sector will also be explored,” it added.

The Public Investment Fund (PIF) is also expected to lend support by investing in the ventures.

3) Growth of SME sector

Saudi Arabia is keen to ensure that a percentage of bank loans go to the SME sector. “Seemingly with this in mind, the FSDP highlights the need to establish an ‘ecosystem’ prior to incentivizing banks,” the report said.

To further boost SME financing, the country seek to raise the value of SME funding through private equity and venture capital firms.

4) Development of debt and capital markets

This includes increasing total market capitalization to GDP by increasing the market capitalization of the Saudi stock exchange and by encouraging growth within existing debt capital markets, Jadwa said.

“At the same time, the program will seek to further deepen the debt capital markets in Saudi Arabia in order to provide an alternative funding away from banking and equity,” it added.

The charter also expects debt from the Saudi Real Estate Refinance Company (SRC) to be listed on the exchange as well.

Additionally, the FSDP seeks to raise the level of institutional investment and foreign investor ownership within equity markets.