Saudi Central Bank Regulations Boost Transparency and Shariah Governance in Islamic Banking Sector
In a recent analysis, it was revealed that regulations implemented by the Saudi Central Bank from 2020 to the first half of this year have significantly improved transparency and Shariah governance in Islamic banks. This has also led to increased consumer confidence in the Shariah-compliance of products.
Saudi Arabia Dominates Global Islamic Banking Market
Fitch Ratings reported that Saudi Arabia is currently the largest Islamic banking market globally. Additionally, S&P Global noted that the Islamic banking industry saw growth rates of 8 percent in 2023 and 8.2 percent in 2022, driven by expanding banking assets and the sukuk industry.
Favorable Operating Environment Predicted for Islamic Financial Institutions
According to Fitch Ratings, the second half of this year is expected to have a favorable operating environment for Islamic financial institutions. However, there are still challenges to overcome in the sector, such as low standardization, evolving Shariah finance regulations, and fragmented disclosures.
Addressing Challenges with Financial Sector Development Program Charter 2021
Fitch Ratings highlighted the importance of the Kingdom’s Financial Sector Development Program Charter 2021 in accelerating the growth of the Islamic finance sector by addressing persistent challenges. The program aims to enhance Shariah governance structure, increase transparency, and set minimum regulatory requirements.
Centralized Shariah Board and Enhanced Disclosure Requirements
The analysis revealed that Saudi Islamic banks have started including disclosures related to profit-sharing investment accounts (PSIA) in their financial statements since the end of 2023. The regulations issued cover profit-sharing investment accounts to enhance Shariah compliance, transparency, and regulatory requirements.
SAMA Implements Additional Capital Adequacy Requirements
The Saudi Arabian Monetary Authority (SAMA) has also implemented additional capital adequacy requirements for Shariah-compliant banking. Fitch Ratings does not expect a significant impact from the adoption of this rule, as there is no material change in the treatment compared to existing frameworks for conventional banks.
Future Plans for Centralized Shariah Board and Strengthened Governance Procedures
The apex bank is planning to establish a centralized Shariah board to harmonize approaches to Shariah compliance across financial institutions. This aligns with SAMA’s efforts to strengthen Shariah-governance procedures and boost confidence in the Islamic finance sector.
Growth of Islamic Financing in Saudi Arabia
The report concluded by highlighting the strong growth of Islamic financing in Saudi Arabia, driven by factors such as the requirement for all residential mortgages to be Shariah-compliant. This, along with high public demand, has contributed to the robust expansion of Islamic finance in the country.