Fitch Ratings says Saudi Arabia has the largest Islamic banking financing base of any country
Islamic banks operating in Saudi Arabia saw improved profitability last year as they benefited from stronger growth opportunities although asset-quality challenges continued, according to new research.
Fitch Ratings said in a new research note that Saudi Islamic banks remain well placed in the banking sector as they have the largest retail franchises, supporting a lower cost of funding and better asset quality.
Saudi Arabia has the largest Islamic banks' financing base (78 percent) of any country that allows commercial banks to operate alongside Islamic banks.
The ratings agency said that for 2019, financing growth will remain relatively muted. Capital buffers and profitability will remain sufficient to absorb a mild deterioration in asset quality.
Impaired financing ratios jumped for both Islamic and conventional banks in 2018, particularly due to the contracting, retail and retail/wholesale trade sectors, it said, adding that the deterioration was less pronounced in Islamic banks owing to sound performance of retail lending, particularly at Al Rajhi, the largest Saudi retail bank.
The report noted that Islamic banks' performance improved in 2018 and remained above conventional banks'. Performance benefits from a lower cost of funding due to stronger retail franchises and a higher share of non-profit-bearing deposits and a higher proportion of retail financing.
Four of Saudi Arabia's 12 licensed commercial banks are fully sharia compliant, with the others providing a mix of sharia-compliant and conventional banking products and services.