Saudi Islamic Banks Set to Shine in 2025
A new report has predicted that Saudi Islamic banks will continue to exhibit strong performance in the upcoming year and beyond, fueled by non-oil economic growth and favorable operating conditions.
Robust Retail Customer Base Boosts Profitability
Fitch Ratings highlighted that Saudi Islamic banks leverage a substantial retail customer base to enhance profitability, secure lower-cost funds, and maintain high-quality, diversified assets. The strong demand for Shariah-compliant financial products in the Kingdom leads individuals to Islamic banks for mortgages and other services, resulting in increased deposits.
Dominance of Islamic Banking in Saudi Arabia
The report emphasized that Islamic banking is dominant in Saudi Arabia, with the largest proportion of Islamic financing (85 percent) compared to any other country allowing conventional banks to operate alongside Islamic banks. Customers’ trust in Islamic banking principles and mandatory Shariah compliance for mortgages solidify Islamic banks as the preferred option for financing.
Superior Asset Quality and Profitability
Islamic banks demonstrate a better impaired financing ratio and higher profitability compared to conventional banks. Their progress is attributed to robust financing growth, portfolio diversification, lower funding costs, and strong retail franchises, allowing them to sustain profitability levels above their counterparts.
Strong Capitalization and Funding Strategies
Islamic banks maintain a strong capitalization with solid core equity capital relative to risk-weighted assets, ensuring financial stability. They also focus on retail banking and reduced off-balance-sheet activities to minimize risk exposure. Despite challenging financial conditions, Islamic banks effectively manage liquidity by diversifying funding sources and utilizing government sukuk and liquidity-management tools.
Expanding Sukuk and Debt Markets in Saudi Arabia
Saudi Arabia is actively working to expand and strengthen its sukuk and debt markets to address budget deficits effectively and foster greater liquidity and diversification. The market has shown robust growth, with annual increases in unlisted issuances and corporate sukuk and debt, attracting international investor interest and supporting economic diversification.
Anticipated Outlook for Saudi Islamic Banks
In the outlook for 2024 and 2025, Saudi Islamic banks are expected to maintain robust standalone credit profiles despite challenges related to capital, funding, and liquidity. To mitigate these pressures, Islamic banks are likely to diversify their funding sources beyond traditional deposits, with a focus on sukuk issuance. Overall, Saudi Islamic banks are poised to uphold strong credit profiles supported by favorable economic conditions and strategic funding diversification efforts.