The sector is in the process of updating the Kingdom’s banking laws for the first time in over 50 years, with draft changes currently under public consultation. This, along with regulatory sandboxes and new support for financial technology (fintech) businesses, has added further momentum to a rapidly changing and burgeoning sector, which has seen ATMs and bank branches close as digital payments and smartphone banking have skyrocketed. Furthermore, Saudi Arabia has a highly competitive banking sector with wide participation from local and international banks, and continues to be a global leader in the Islamic finance segment.
The Kingdom has a well-respected and effective regulator in the Saudi Central Bank (SAMA), and its banks are buoyed by the country’s strong macroeconomic fundamentals (see Economy chapter). The latest data show increases in net profit and assets, with analysts expecting growth to continue. Although rebranded by the Saudi Central Bank Law of 2020, the central bank has retained the acronym SAMA from the time when it was known as the Saudi Arabian Monetary Authority.
Structure
As of August 2023, 36 banks were registered with SAMA – 14 local, including three fully digital banks, and 22 foreign. In addition, there were 59 registered financial firms, including four buy now/pay later companies, five debt-based financing companies, four debt-collection service providers, 25 firms specialising in financial leasing and small and medium-sized enterprise (SME) financing, four microfinance firms and seven specialising in real estate finance. There were also a total of 216 licensed insurance companies in operation and 24 licensed payment service providers (PSPs).
According to international credit ratings agency Fitch Ratings, 86% of financing in the Kingdom is Islamic, the highest proportion of any country that permits sharia-compliant banking to operate alongside conventional banking. The total number of bank branches was 1903 as of the second quarter of 2023, down from 2064 in 2018, which is largely attributable to the transition to digital banking. Branch closures are governed by the SAMA Regulation on Branch Network, which stipulates that branches and ATMs must continue to be distributed evenly across the country to ensure accessibility and financial inclusion. Similarly, the number of ATMs located in the Kingdom declined from 18,685 in 2018 to 16,089 in the second quarter of 2023.
Major Players
Saudi National Bank (SNB) has the largest asset share in the sector, at 29% as of the third quarter of 2022. SNB began operations in April 2021, when National Commercial Bank acquired Samba Financial Group, becoming the third-largest bank in the Gulf by assets. The largest shareholder in SNB is the Kingdom’s sovereign wealth fund, the Public Investment Fund (PIF), with 37.2%. While fundamentally strong, SNB experienced challenges after paying SR5.5bn ($1.5bn) in November 2022 for a 9.9% stake in troubled lender Credit Suisse. In March 2023 it became apparent that it could not increase its stake on regulatory grounds, causing a sell-off. That month Swiss rival UBS bought Credit Suisse, cementing a more than $1bn loss for SNB. Nonetheless, it remains in a strong position, with SR976m ($260.2m) in assets as of March 2023.
Al Rajhi Bank, the world’s largest Islamic bank by assets, holds the second-largest market share in Saudi Arabia by assets, at 23% as of the third quarter of 2022. Its total assets stood at SR776m ($206.9m) in the first quarter of 2023. Riyadh Bank had the third-largest market share in the third quarter of 2022, with 11% of assets, followed by Saudi Awwal Bank (SAB) at 9%. SAB, which, prior to April 2023, was known as Saudi British Bank, is majority owned by HSBC.
While domestic lenders dominate the universal banking segment, there are some foreign banks that compete directly in the space, albeit on a smaller scale. They are mainly focused on providing finance to major projects and enhancing the Kingdom’s global connectivity with financial services peers and systems. Additionally, they have retail operations which makes the international banking space unique. As of the first quarter of 2023 foreign banks accounted for approximately 2.33% of total assets, and are geographically diverse, with representation from China, Japan, Pakistan, the UAE and the US, among other countries.
SAMA maintains financial and administrative independence from policymakers, in line with international best practices. In February 2023 Ayman Al Sayari took over from Fahad Al Mubarak as governor, with the latter assuming the role of adviser to the Royal Court, with the rank of minister. Al Sayari is a long-time SAMA official, most recently serving as the central bank’s vice-governor for investment and research. He is also chairman of the Gulf Monetary Council’s board of directors.
In 2021 SAMA launched an instant interbank payment system called sarie, to serve individuals and companies. The old payment system focused on large financial operations between financial institutions. In August 2022 SAMA announced that it would raise the ceiling of money that can be transferred using the system from SR20,000 ($5330) to more than SR80,000 ($21,300).
Oversight
SAMA regulates and supervises banks, and the Banking Control Law of 1966 governs the broader sector. SAMA is also the regulator for finance companies, insurance and payments companies, money exchange and remittance companies, and the Kingdom’s two credit bureaux. In August 2023 the Saudi Cabinet voted to establish an independent insurance authority. Operations of the new entity will commence 90 days after the Cabinet announces the resolution. In January 2023 SAMA proposed a new Banking Control Law and opened it up to public consultation until late-February 2023. If it comes into effect, it would mark the first change to the law governing banking and would apply to all banks and financial institutions, foreign and domestic, that provide banking services to clients in Saudi Arabia. Notably, the law would enhance the definitions of the existing banking law. As of August 2023 the law had yet to be implemented.
The Banking Control Law also transfers some licensing authority to SAMA. Banks had previously needed to obtain licences from the Council of Ministers to set up operations in the Kingdom, but this authority would be transferred to SAMA under the new legislation. However, licensing requirements are not applied to banks or financial institutions that are regulated and licensed by competent authorities outside of the Kingdom and provide cross-border credits.
Another step that centralises regulatory authority in the hands of SAMA is a provision to grant it sole authority to regulate IT, data and cybersecurity at banks. It also revises penalties and requires all bank employees to notify SAMA about suspected violations of the law.
Security
In line with the Financial Sector Development Programme (FSDP), which is based on Vision 2030, SAMA has played a vital role in elevating the awareness of cybersecurity threats in the sector. In the last few years SAMA has promoted a cybersecurity control-conscious environment for financial institutions by embedding cybersecurity control practices into its regulatory and supervisory exercises.
In accordance with SAMA’s mission to establish a reliable, adaptable and protected banking sector, SAMA created a cybersecurity framework while also accounting for new technologies and emerging cybersecurity risks. In terms of resilience, it formulated a business continuity-management framework and mandated that banks adhere to the control requirements.
In 2019 SAMA released the Financial Entities Ethical Red Teaming Framework and cyberthreat intelligence principles. This initiative aims to tackle the evolving cyberthreat landscape by introducing threat intelligence-driven ethical hacking, tailored to the systemic financial infrastructure of financial institutions.
Given the pace at which technological advancements are unfolding, and recognising the ongoing shift from traditional fraud typologies to digitally enabled fraud and scams, SAMA issued a counter-fraud framework in October 2022. This measure addresses emerging fraud threats to support stability and safeguard the Kingdom’s financial sector. SAMA also established a sector counter-fraud task force that acts as a central platform for information exchange and collaboration among stakeholders within the banking sector.
A new Foreign Investment Law implemented in 2022 looks set to help attract more foreign demand for banking services in Saudi Arabia. The law removes any advantage provided to domestic investment not provided to foreign investors. Foreign investors will have the freedom to manage, sell and dispose of their economic projects, conclude commercial contracts, and acquire, liquidate or sell any company. The law is expected to grow the Kingdom’s non-oil economy as well as increase international business in the country.
SAMA plays a key role in the realisation of the Financial Sector Development Programme (FSDP), created in 2017 to add specific details of projects and execution strategies to meet Vision 2030 strategic objectives in the sector. Of the 41 initiatives contained in the FSDP, SAMA is responsible for 16 and has so far achieved 12. The plan includes targets for 2030 as well as the intervening years, and targets are continuously reviewed and updated as needed. For example, the initial aim was for cashless payments to constitute 70% of all payments by 2030, but SAMA is now aiming to reach the 70% benchmark by 2025 after rapid progress in recent years.
Monetary Policy
The banking sector has recorded positive performance in key metrics, despite uncertainties in the global economic environment. The Saudi riyal is pegged to the US dollar, with the rate unchanged at $1:SR3.75 since 1986. The currency peg reduces foreign exchange risk for the Kingdom, taking into account that a significant proportion of national revenue is generated from oil sales in US dollars. However, it also exposes Saudi Arabia to inflationary pressures in the US, with the inflation rate in the world’s largest economy spiking to 7% in 2021 and remaining elevated at 6.5% in 2022 on the back of higher oil prices, a rapid increase in demand as the Covid-19 pandemic subsided and global supply pressures exacerbated by Russia’s invasion of Ukraine. This contributed to the US Federal Reserve’s decision to progressively raise interest rates to 5.5% in July 2023, the highest rate in 22 years.
SAMA has followed this tightening cycle, with its repurchase agreement and reverse rates rising to 6% and 5.5%, respectively. Inflation in the Kingdom has remained relatively stable, averaging 2.5% in 2022. Nevertheless, the hikes could place pressure on corporate and individual borrowers that could translate into higher delinquency rates and lower liquidity, though there has been little evidence of this so far – a testament to the robustness of the sector.
Performance
Total assets reached SR3.38trn ($901.1bn) at end-2022, up 11.5% from the previous year. Total customer deposits, meanwhile, were up 8.3% at SR2.3trn ($613.2bn). Profit after zakat (a payment under Islamic law that is used for charitable or religious purposes) and tax increased, growing by 28.4% to SR62.7bn ($16.7bn) in 2022. The FSDP set a goal of reaching SR3.52trn ($938.4bn) in assets by 2025 and SR4.6trn ($1.2trn) by 2030. If the sector maintained its 11.5% growth rate, it would surpass its 2025 goal by end-2023 and reach its 2030 goal by end-2025. However, assets grew at an unusually fast pace in 2022. By contrast, the rate in 2021 was 3.8%, reflecting the dampening impact of the pandemic, which caused a global economic slowdown in 2020 and into 2021.
The expected credit loss for 2022 was SR9.9bn ($2.6bn), down 19.3% from 2021, indicating portfolio performance improvements across various sectors as the Kingdom’s economy experienced accelerated growth. The return on assets was 3.27% in 2022, compared to 3.40% in 2021. Meanwhile, return on equity fell slightly from 8.91% to 8.34%.
As of 2021 Saudi Arabia had $896bn in total Islamic financial assets, including sukuk, takaful (Islamic insurance) and other assets, the most of any country other than Iran, as well as $606bn in Islamic banking assets. According to the latest data from SAMA, in the first quarter of 2023, the Islamic banking industry held SR2.8trn ($746.5bn) in assets, an increase from SR2.5trn ($666.5bn) in the first quarter of 2022. In the same time period, the segment had SR1.9trn ($506.5bn) in deposits, up slightly from SR1.8trn ($479.9bn) compared to the first quarter of 2022.
The banking sector is well capitalised and is expected to remain stable throughout potential external crises, thanks to a capital adequacy ratio that exceeds the recommended threshold. The capital adequacy ratio was 19.9% of risk-weighted assets (RWAs) in 2022 – unchanged from 2021. Despite the risks posed by rising interest rates, Saudi Arabia’s non-performing loan ratio has remained low, declining slightly from 1.9% in 2021 to 1.8% in 2022. SAMA attributed this to the resiliency of domestic banks and the fact that the majority of bank lending is fixed rate, which minimises the risks posed by interest rate hikes. Indeed, Saudi banks have been committed to a disciplined approach, learning from previous experiences and charting a more sustainable path forwards in carrying out risk assessments.
Capital Adequacy
In January 2023 SAMA implemented reforms in accordance with the Basel III standards developed by the Basel Committee on Banking Supervision in 2017. The Kingdom was one of the few countries to meet the internationally agreed-upon implementation deadline. The reforms will reduce the reliance of banks on an internal ratings-based approach. Specifically, it puts constraints on the use of internal models to calculate RWAs – which determine the amount of capital a bank must hold as a buffer against potential losses from risk exposure – as banks have an incentive to manipulate their internal ratings to be more optimistic. It also sets an output floor so that regardless of what a bank’s internal ratings-based model dictates about its minimal capital requirements, it will never fall below a certain threshold – namely, 72.5% of RWAs calculated using standardised models.
In addition, at national discretion, supervisors may cap the increase in a bank’s total RWAs that results from the application of the output floor during its phase-in period. The transitional cap on the increase in RWAs will be set at 25% of a bank’s RWAs before the application of the floor. The cap will be removed on January 1, 2027.
To maintain monetary stability and mitigate borrowing cost pressures, SAMA has used open market operations and ad hoc liquidity injections to address short-term liquidity imbalances in the local banking system. As of the third quarter of 2023 market rates have increased in response to policy rate decisions.
SME Lending & Financial Inclusion
Credit to SMEs remained stable throughout 2022, with total credit facilities rising by less than 1% to SR229bn ($61.1bn) from 2021. This equated to 8.1% of all credit facilities, compared to 8.2% in the previous year. Looking at banks specifically, the overall credit allocated to SMEs rose by 13.1%, while the share of credit to SMEs in total credit dropped slightly, from 7.8% to 7.7%. Notably, financial institutions have a higher percentage of SME lending within their portfolios, at approximately 21%.
Based on sector-wide lending data from 2020 to 2023, faster progress is needed to achieve the government’s aim of raising SMEs’ share of total credit facilities to 20% by 2030, requiring the closure of an 11.7-percentage-point gap by the end of the decade.
In March 2023 the Kingdom’s Small and Medium Enterprises Bank announced that it would allocate SR10.5bn ($2.8bn) to various programmes to support the SME segment over the following three years. The bank’s goal is to help raise the contribution of SMEs to national GDP to 35%, in line with the objectives of Vision 2030. It will also receive an allocation of SR1bn ($266.6m) from Kafalah, the government’s SME Financing Guarantee Programme, to back its initiatives and expand business. Kafalah is offered through the Saudi Industrial Development Fund, providing loan guarantees to lenders willing to extend credit to SMEs. In 2020 it supported financing worth SR12.3bn ($3.3bn). SMEs can use the bank’s website to apply for financing.
In terms of retail banking, Saudi Arabia has made substantial strides in enhancing both financial inclusivity and the uptake of banking services across the broader population. As of year-end 2022 the penetration of financial services had reached 94% of the adult demographic aged 15 and older. This penetration rate was defined by the presence of an actively utilised and unique bank account or e-wallet account. This figure is a notable increase from the 72.6% recorded in 2019.
Another potential area of growth in the sector is mortgage lending, with total housing demand expected to reach 153,000 houses by 2030, up from 99,600 in 2021 (see Real Estate & Construction chapter). In 2018 the government launched a programme to increase access to housing for Saudi families.
Amid the current high-interest rate environment, Saudi Real Estate Refinance Company (SRC) – which is fully owned by the PIF and has a mandate to provide liquidity and facilitate access to sustainable financing solutions for homebuyers – plans to refinance more than 20% of the residential mortgage market by 2025. SRC had injected more than SR6.5bn ($1.7bn) of financing into the mortgage market as of 2020. Meanwhile, SAMA, in its regulatory capacity, reduced the minimum down payment requirements from 30% to 10% of the purchase price. Additionally, SAMA expanded the number of banks offering home loans, underscoring its dedication to creating an equitable housing market and responding to the evolving needs of its citizens.
Fintech
The fintech segment is supported by Fintech Saudi, which was launched in 2018 as a joint venture of SAMA and the CMA. It supports fintech infrastructure, releases data and reports on the sector, and works to develop talent and capabilities. Fintech Saudi has launched the Fintech Accelerator Programme, the Fintech Ecosystem Directory and the Fintech Job Portal in order to support entrepreneurs and talent in the segment, and provide information on data and regulations through the Fintech Data & Research Initiative and the Fintech Regularity Assessment Tool.
In June 2022 the Council of Ministers approved the Fintech Strategy. This strategy is included as a new pillar within the FSDP, which is aimed at developing the national economy, diversifying sources of income and enabling financial institutions to support private sector growth by allowing new companies the opportunity to provide financial products and services.
The strategy articulates the goals to achieve by 2030, including the aim to have 525 fintech companies operating in the Kingdom, create more than 18,000 direct jobs, achieve a SR13bn ($3.5bn) direct GDP contribution and reach SR12bn ($3.3bn) in cumulative investment in the sector. As of the second quarter of 2023 there were 183 fintech companies in the country, up from 147 in 2022, 82 in 2021 and 10 in 2018.
The rapid digitalisation of finance and the development of the fintech industry is unsurprising given that Saudi Arabia is one of the most digitally connected countries in the world, with a 98% internet penetration rate, six percentage points higher than the US, and a 92% smartphone penetration rate (see ICT chapter). There are 24 PSPs licensed by SAMA, and their annual smartphone payment transactions grew from 9m in 2019 to 128m in 2021, helped in large part by the pandemic. PSPs are regulated by the PSP Regulations introduced by SAMA in January 2020.
Payment companies make up 30% of all fintechs operating in the Kingdom. Lending and finance comprise another 19%, while 14% of fintechs provide business tools and information. In 2022 fintech was the industry that received the most venture capital funding in the Kingdom, raising $239m out of a total of $1bn across all Saudi start-ups. This number marks an increase of 167%, according to Dubai-based research firm MAGNiTT’s “2022 Saudi Arabia Venture Capital Report”.
There are three fully digital banks licensed by SAMA that will be operating within the Kingdom, with the first two having been licensed in 2021. The first licensed digital-only bank, STC Bank, is sharia compliant and backed by stc. The most recent entrant, D360 Bank, is sharia-compliant and backed by the PIF. Both of these digital-only banks aim to target underserved retail banking segments by making services more convenient and accessible. In January 2023 SAMA also licensed two crowdfunding platforms, Forus and Tameed, after successfully testing in SAMA’s regulatory sandbox.
Open Banking
A large shift is taking place in the open banking field, in which banks enable customers to share their financial data with third parties in authorised and controlled settings using APIs. This is expected to empower third-party fintechs to create innovative and customisable products and services that will address gaps and challenges in the market, and also allow the platforms to integrate them. These types of innovations could also be integrated with the current solutions used by legacy banks.
“Banks must consider emerging fintech firms not as disruptors but as potential partners, and seek to work together with them to address any gaps in current service and product offerings,” Bader Al Salloom, CEO of Banque Saudi Fransi, told OBG. “This will also allow banks to expand into new areas while continuously improving their internal systems, which may include enhancing security measures to protect clients from fraud and cybersecurity threats. These partnerships demonstrate the benefits of collaboration rather than competition,” Al Salloom added.
SAMA began permitting companies to offer open banking solutions as part of its Regulatory Sandbox Framework in September 2022. In November 2022 it introduced the Open Banking Framework, and in January 2023 began offering an Open Banking Lab that provides a technical testing environment to enable banks and fintechs to develop, test and certify their open banking services to ensure conformance with the Open Banking Framework. Importantly, per the 2023 draft banking law, SAMA will have the authority to compel financial institutions to share client data with licensed fintech providers.
Outlook
With a regulatory environment that is becoming increasingly supportive of innovation and fintech, the Saudi banking sector is on a path to continued modernisation. Measures such as covering fintech in the new draft banking law and the introduction of the Open Banking Lab are key steps towards SAMA’s goals of promoting innovation and modernisation within banking. As traditional banks weigh the choice between competing or collaborating with upstarts in the fintech space, against a backdrop of a highly digitally connected population, the fintech segment is poised to become an increasingly dynamic area of the Saudi economy over the coming years.
Elsewhere, banks remain well capitalised and highly liquid, as indicated by financial soundness indicators. Moreover, the impact of higher interest rates on GDP has been limited given the structure of the economy and the role of public spending in driving economic activity. Amid these dynamics, there is a discernible uptick in net profit and assets across the board, according to the latest data. With the modernisation of the banking sector taking place at a rapid pace, there are many reasons to be optimistic about the sector’s future.
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