Fitch Ratings predicts a positive outlook for Saudi Arabia's Islamic banking sector, anticipating robust growth in the coming years. This optimism stems from the Kingdom's flourishing non-oil economy and a supportive operating environment.
According to the credit rating agency, Saudi Islamic banks hold a significant advantage with their large retail customer base. This translates to several benefits, including improved profitability, access to lower-cost funding, and a portfolio of high-quality, diversified assets.
A crucial factor driving growth is the mandatory Sharia-compliant nature of all residential mortgages in Saudi Arabia. This regulation steers individuals towards Islamic banks for mortgages and other financial services, leading to a consistent rise in deposits.
Fitch Ratings also highlights the strong capitalization of Islamic banks. As of the end of 2023, these banks boasted a healthy average common equity Tier 1 ratio of 16. 4 percent, which closely aligns with the 16. 6 percent ratio observed in conventional banks. This metric signifies a robust core equity capital position relative to risk-weighted assets, ensuring stability within the financial system.
Furthermore, Islamic banks exhibit a strategic focus on retail banking, reflected in their lower risk-weighted assets to total assets ratio of 70 percent. This figure stands in contrast to the 84 percent ratio seen in conventional banks and indicates a reduced involvement in off-balance sheet activities, which are generally considered riskier.
The inclusion of Saudi Arabia in prominent global bond indices has also played a role in bolstering the Islamic banking sector. This development has attracted increased interest from international investors, prompting Fitch to upgrade the ratings of several countries due to improved fiscal outlooks and investor-friendly policies implemented by their governments.
Looking ahead, Fitch Ratings' forecast for 2024 and 2025 anticipates that Saudi Islamic banks will maintain their strong credit profiles. This positive outlook is reinforced by the current high oil prices, which are contributing to a favorable economic climate.
However, the credit rating agency acknowledges that the anticipated robust credit growth could potentially strain the capital, funding, and liquidity positions of these banks. Careful management strategies will be crucial in navigating this potential challenge and ensuring the long-term sustainability of the sector's growth trajectory.