Saudi Arabia, home to the largest Islamic finance market in the world, will likely see its sector expand due to increased demand and a supportive regulatory environment, said a report by the ratings agency Moody’s Investors Service on Tuesday.
“Islamic finance is growing faster than conventional banking in the Kingdom, and the market is opening up to international investors as the government seeks to diversify the Saudi economy [away] from its oil dependency,” said Ashraf Madani, VP-Senior Analyst at Moody’s.
This year marked Saudi Arabia’s inclusion in the MSCI and FTSE Russell emerging market indexes, significantly increasing foreign investor flows into the Kingdom and aiding efforts by authorities to diversify the economy.
“Higher penetration of Islamic finance is boosting banking system profits due to the favorable funding profile of Islamic banks, where Sharia-compliant deposit accounts do not earn interest,” Madani added.
The agency added that the Saudi Arabia Monetary Authority (SAMA) and Capital Market Authority (CMA) are both working closely with the Ministry of Finance to foster a supportive regulatory environment.
As of March, Saudi Arabia has some $299 billion in Islamic finance assets, said Moody’s, more than double the closest contender – Malaysia with $134 billion.
The agency expects Islamic finance penetration to increase to 80 percent over the next 12-18 months, up from 77 percent in 2018.