Islamic banks face tough operating climate in Saudi Arabia: Fitch

Saudi Arabia’s Islamic banks are expected to face challenges and lower profitability due to weak oil prices and lower government spending, which continues to put pressure on sectors such as contracting, Fitch Ratings said in its latest report.

“Asset-quality metrics are, therefore, likely to deteriorate from their current strong position, especially in light of slowing Islamic financing growth, and their high exposure to cyclical sectors, such as contracting and retail, which seasons more quickly,” the agency said.

Although liquidity has stabilized due the government’s latest measures, slower financing growth will continue to impact profitability, it added.

Islamic finance represented about two-thirds of total bank financing at end of first half of 2016.

Islamic banks accounted for about 43 percent of the sector at end of H1 2016, a year-on-year increase from 36.6 percent.  The Islamic windows of conventional banks were 24 percent, up from 18.6 percent in H1 2015, but unchanged from the end of 2015.

There are 12 licensed commercial banks in Saudi Arabia. Four are fully sharia-compliant, with the rest providing a mix of sharia-compliant and conventional banking products and services, Fitch said.

Al Rajhi Bank is the largest Islamic bank in the world, with assets of SAR 331.4 billion ($88 billion) at the end of H1 2016.

National Commercial Bank (NCB) is also aiming to convert to full sharia compliance.

NCB's financing book is already majority sharia-friendly and once the bank is fully compliant it could replace Al Rajhi Bank as the world's largest Islamic bank.