Within the global Islamic financial services (IFS) industry, Saudi Arabia occupies a prominent position. The professional services firm EY identifies the country as one of the nine core markets that is driving the growth of Islamic banking, along with Bahrain, Qatar, Indonesia, Malaysia, the UAE, Turkey, Kuwait and Pakistan. Together, these countries account for 93% of worldwide industry assets, estimated to have exceeded $920bn in 2015, according to the firm’s “World Islamic Banking Competitiveness Report 2016”. Of the nine markets, Saudi Arabia is the largest by some distance: at the outset of 2016 the Kingdom had a 33% share of worldwide Islamic banking assets, more than twice the amount of the second-largest market, Malaysia, which held 15.5%.

Islamic banking assets have grown impressively in Saudi Arabia over the past decade. In 2010 they accounted for just over half the amount of the conventional banking assets, but by 2013 they had grown to almost same level, and the following year they overtook conventional assets for the first time, ending the year at $291bn, compared to $277bn for the conventional segment. The most recent EY estimate from 2016 puts Islamic banking assets at 51.2% of Saudi Arabia’s total.

Sector Structure

The majority of the Kingdom’s banks compete for business in the sharia-compliant arena. Much of this effort, however, is carried out through Islamic windows, with only four of the 12 locally licensed banks operating as fully fledged sharia-compliant lenders. The largest of these is Al Rahji Bank, which, with assets of SR338bn ($90.1bn) as of the third quarter of 2017, is also one of the biggest Islamic banks in the world. Established in 1957, it operates a network of more than 500 domestic branches.

In addition, the bank conducts business outside of Saudi Arabia, entering the Malaysian market in 2006, where it currently has 24 branches. In 2010 Al Rahji Bank opened a branch in Kuwait to offer both retail and corporate services, and the following year it began operations in Jordan, where it currently has six branches Saudi Arabia’s second-largest Islamic bank, with total assets of SR111.4bn ($29.7bn) in the third quarter of 2017, is a more recent arrival to the market. Alinma Bank was established in 2006 with three government funds as its founding shareholders. The state-backed institution is headquartered in Riyadh and maintains a network of 79 branches across the country.

Bank Aljazira, with total assets of SR67.5bn ($18bn) in mid-2017, is the third-largest sharia-compliant financer in the Kingdom. Established in 1975 as a conventional lender, it made the strategic decision to transform itself into an Islamic bank in 1998. By the close of 2016 it operated a domestic network of 79 branches.

Lastly, Bank Albilad is another relatively recent arrival to the market. Established in 2004 it held approximately SR62.5bn ($16.7bn) in total assets as of September 2017 and currently operates more than 110 branches across the country. All four of Saudi Arabia’s fully fledged Islamic banks are universal operations, offering services across the retail, corporate, Treasury, investment and brokerage segments.


Despite the Kingdom’s prominence within the global IFS sector, the Saudi Arabian Monetary Authority (SAMA) has not formulated a regulatory framework for its Islamic banks. The supervisor has a relatively relaxed system of oversight with relation to sharia-compliance, which has resulted in a diverse market in terms of products and services. Islamic banks are permitted to consult their own boards to determine the compatibility of their offerings with the precepts of sharia law – an approach that differs from the Malaysian model, by which new products and services must be approved by the nation’s central bank.

Due to the different regulatory approach in Saudi Arabia for Islamic banks, banking activities are occasionally called into question. In 2014, for example, Saudi Arabia’s biggest bank, the state-owned National Commercial Bank (NCB), was criticised by some members of the Kingdom’s highest religious body, the Council of Senior Scholars, for not being fully sharia-compliant. In response, the institution pledged to implement a gradual transition to become a fully fledged Islamic bank, and in 2016 reported that 73% of its SR441bn ($117.6bn) assets were in compliance. Interestingly, NCB’s corporate financing – which in most markets lags behind retail financing in terms of sharia adoption – has risen to nearly 70% compliance.

Popular Models

The field of sharia-compliant financing is evolving rapidly, and Saudi Arabia’s decentralised approach to sharia regulation has resulted in a variety of products and services. Much of the market’s activity, however, stems from two models. First, murabaha, (cost-plus financing) whereby a bank purchases an asset on behalf of a client and then sells it on to the same client at a prearranged price, is one of the most popular Islamic finance products in the Kingdom. Many local retail banks extend murabaha to customers to finance car or house purchases, and the broader sharia-compliant consumer financing market in Saudi Arabia relies heavily on the instrument. The structure has been widely used in the corporate sphere as well. A number of Islamic banks offer commodity murabaha transactions, which can be employed as a substitute for conventional term deposits, as well as a vehicle to obtain cash financing in the reverse-murabaha mode.

The other popular form of Islamic financing in the Saudi Arabian market is musharaka (joint venture), by which a bank provides funding for a client to purchase an asset, with the two parties agreeing to share the resulting profits and losses. In general, musharaka deals entail less risk for lenders than murabaha ones.

Perhaps one of the most significant developments in Saudi banking in recent years is the evolving stance of sharia boards on credit cards. For many years card usage in the Kingdom was driven by debit cards, due in large part to the prohibition of interest in Islamic law. In 2015 a HSBC report stated that 90% of payment cards in circulation in the country were based on the debit model. Advances in sharia scholarship, however, have allowed institutions to add credit cards to their product array. Banks usually align their card products with sharia law in one of three ways: by providing a line of credit to the cardholder and charging periodical fees; instantly purchasing an item paid for by a customer’s card before selling it back to the customer at a marginally higher price; or by entering into a lease-purchase agreement with the cardholder and retaining the title to the item until the customer makes the final payment.

This development has allowed the Kingdom’s Islamic banks to partner with global credit card brands to roll out new products. According to HSBC, Visa and MasterCard are the two largest credit card brands in Saudi Arabia, followed by American Express. Most domestic banks also offer the SPAN debit card, which takes its name from the Saudi Payments Network – the routing switch for all cross-bank ATM transactions and point-of-sale transactions in Saudi Arabia.

Corporate Shift

Several factors, such as higher costs and a lack of sharia-compliant funds, mean that the corporate sector has traditionally been viewed as a secondary consideration after retail by many Islamic banks. However, this has changed in recent years, and claiming a greater stake of the corporate market has now become a priority for sharia institutions. Al Rajhi Bank, the biggest lender in the segment, accounts for 7% of the aggregate corporate lending book. In 2016 it gained market share in the corporate segment for the first time in four years, and over the medium term it intends to balance its portfolio by building on this trend.

According to Steve Bertamini, CEO of Al Rajhi Bank, the implementation of Saudi Arabia’s National Transformation Programme 2020 will provide numerous opportunities for the bank to increase its exposure to the corporate arena. “By 2020 we aim to grow our corporate banking focus in the health care services, affordable housing, transportation and energy areas,” he told international press in February 2017.

These efforts have helped the local Islamic banking sector deliver a relatively strong performance in the region since 2014. According to S&P Global Ratings, that year was the last in which the growth of the GCC’s Islamic financiers significantly outpaced that of their conventional counterparts, with assets expanding by more than 12% in 12 months, compared to 10% for the rest of the sector. The following year the decline in oil prices brought the region’s Islamic and conventional lenders to a similar level of growth, at a rate of just over 6%. The segments’ asset growth remained at around 6% in 2016. S&P foresees both segments following a 5% growth trajectory over 2017 and 2018 as government spending cuts and revenue-boosting efforts – such as the introduction of new taxes – reduce opportunities in the corporate and retail sectors. This levelling of performance, however, has yet to emerge in Saudi Arabia. Between June 2016 and June 2017 the aggregate assets of the four sharia-compliant banks increased by 5.71%, compared to 0.79% for the sector overall. All but one of them saw a substantial asset increase over the period, with Alinma topping the scale with a gain of 13.4%.