On Thursday the credit ratings agency Fitch Ratings released a report showing that Islamic bank performance in Saudi Arabia improved throughout 2018 and remained above conventional banks. The agency said that the Kingdom’s Islamic banking sector benefits from a lower cost of funding and a higher proportion of retail financing.
Saudi Arabia has the largest Islamic banks’ financing base, at 78 percent, of any country that allows commercial banks to operate alongside Islamic banks.
Asset quality of both Islamic and conventional banks decreased in 2018, mainly because of a contraction of the retail and retail/wholesale trade sectors. This deterioration, however, had less impact on Islamic banks due to sound performance of retail lending. Islamic banks also benefit from a lower impact of asset value deterioration than conventional banks as Islamic institutions have a lower proportion of corporate banking.
The agency added that the ratio of financing to deposits ratio at Islamic banks reduced slightly and is more in line with conventional banks.
Islamic banks also benefit from the Ministry of Finance’s Saudi riyal-denominated sukuk program to help manage liquidity, said Fitch.
Four of the Kingdom’s 12 licensed commercial banks are fully sharia-compliant, while others offer a combination of sharia-compliant and conventional banking products.