Saudi Bank’s Shariah Pledge Seen Inspiring Few Followers

National Commercial Bank (NCB)’s pledge to convert to Islamic banking is unlikely to inspire many Saudi Arabian rivals to follow anytime soon.

Most banks in the kingdom, the birthplace of Islam and home to its holiest sites, are too profitable to switch to Shariah lending, said Asim Bukhtiar at Riyad Capital, the investment arm of the country’s third-largest bank. Moody’s Investors Service says conversion is a complex process. Eight of the 12 banks in the nation don’t fully adhere to the religion’s tenets, according to Saudi Arabian Monetary Agency data.

“They don’t see the point,” Riyadh-based Bukhtiar, a vice president and head of research, said by phone on Nov. 5. “The reward for doing this conversion wouldn’t be justified given the current environment. They’re all operating really well, strong earnings. There’s no pressure to do that.”

Credit growth in Saudi Arabia will be between 12 percent and 15 percent through next year as the world’s biggest oil producer boosts spending on housing, education and transport, Moody’s said in a report last month. Even after going to the trouble of adhering to Islam’s ban on interest, Shariah-compliant banks are missing out on “huge” growth opportunities because of a perception among Muslims in the region that they’re “not true” to the religion’s values, according to PricewaterhouseCoopers LLP.

National Commercial Bank vowed last month to convert within five years after its initial public offering, the year’s biggest after Alibaba Group Holding Ltd., attracted criticism from Islamic scholars. In order to become fully Shariah-compliant, the bank pledged to divest about $38 billion of assets.

Net Interest

Saudi Arabian banks’ total credit to the private sector rose 13 percent in September from a year earlier, the most since November 2013, according to SAMA data compiled by Bloomberg. Net interest income was the bulk of lenders’ earnings in the first half of the year, accounting for 65 percent, according to the Moody’s report.

“Saudi banks enjoy a very low cost of funds and despite the low interest rate environment make good margins on lending,” Khalid Howladar, Dubai-based global head of Islamic finance at Moody’s, said by e-mail on Nov. 13. “The country is relatively underbanked and with only 12 banks and such a large population, competition is relatively limited.”

While Saudi Arabia is the wealthiest and most populous of the six nations that make up the GCC, less than half of its adults hold bank accounts, the lowest percentage in the region, according to World Bank data. Almost 90 percent of adults in Kuwait, whose economy is about a quarter the size of Saudi Arabia’s, have accounts.

Shariah Driven

National Commercial Bank’s conversion to Shariah-compliance may encourage other lenders to follow suit, according to the chief executive officer of SEDCO Capital, a Jeddah-based Shariah-compliant investment company. The lender’s shares rose 45 percent to 65.25 riyals at 2:43 p.m. in Riyadh since they began trading last week.

“This is a big drive because it’s the largest bank in Saudi Arabia,” SEDCO’s Hasan Al Jabri said in an interview in Dubai on Oct. 29. “It’s a very serious drive, largely driven by retail market. The largest investment companies are also driven by Shariah.”

The nation’s Islamic banks’ compound annual growth rate was about 17 percent in the four years through 2013, compared with about 7 percent for conventional lenders in the same period, Howladar said.

Uphill Battle

None of the kingdom’s eight non-Islamic banks replied to questions by telephone or e-mails seeking comment last week.

“The other banks already know that the demand is there and they offer products,” Hani Ibrahim, Doha-based managing director of investment banking at QInvest LLC, said by phone on Nov. 5. “Even the conventional banks, the large portion of their business is Islamic.”

PricewaterhouseCoopers said in a report last month that Shariah-compliant banks face a perception problem in the region. About half the lenders’ existing clients said the banks aren’t adhering to Shariah principles.

Conventional financial institutions don’t see the benefit of changing, Riyad Capital’s Bukhtiar said. “It would be an uphill battle. As it is they are operating well, so why would they take on conversion?”