Saudi Banks Are Currently Riding The Economic Growth Wave

Saudi Arabia’s banking sector is playing a major role in the kingdom’s economic overhaul as the fastest-growing G20 nation and the Middle East’s most vibrant economy at the moment.

Much obliged in some measure to a limited extent to Vision 2030, a radical reform program started by Crown Prince Mohammed Bin Salman in 2016.

According to the International Monetary Fund’s most recent Article IV publication, the Saudi economy is flourishing as a result of rising oil prices, a significant increase in private investment, and the implementation of reforms.

Due to the murder of Saudi journalist Jamal Khashoggi, a widespread crackdown on dissent, and a prolonged and bloody war in Yemen, the crown prince’s leadership has received criticism from Western governments.

However, Saudi banks, which are among the richest in the region, are riding the monetary growth wave. Local moneylenders began 2023 on extremely strong ground. The top five banks made $13.7 billion last year, and in the first four months of 2023, net profits at the top 10 banks increased by another 2.7 percent.

Saudi banks are universally among the best capitalized in a very much regulated environment. They are a vital area of a solid economy that has shown good growth and resilience.

In June, Moody’s redesigned the Saudi financial system from stable to positive, taking note of, interest for credit is high and loan performance is improving, and this is probably going to convert into strong profit for banks.

While “profitability—driven by net interest margins—is high and above pre-pandemic levels, with the non-performing loans ratio also low and declining,” the aggregate capital adequacy ratio is strong. The ongoing efforts to modernize the regulatory and supervisory systems support the strong performance of banks.

The Saudi financial sector has completely reformed throughout the course of recent years, in accordance with Vision 2030. The leadership’s ground breaking strategy to differentiate the economy away from oil, which actually represents 70% of income and commodities, includes merging the local banking sector to make territorial players, cut expenses and lift efficiency.

Last year, National Commercial Bank and Samba Financial Group merged to create Saudi National Bank, the Arab world’s third-biggest lender with over $250 billion in assets. A year prior, Saudi Arabian British Bank joined forces with Alawwal Bank to create Saudi Awwal Bank, the kingdom’s fourth -argest lender with total assets worth $84 billion.

Saudi banks are expected to support the country’s rapid transformation in line with the leaders’ goals: from funding infrastructure projects to boosting Saudi homeownership to increasing small to medium-size enterprises’ share of the economy.

Between 2011 and 2022, Saudi banks’ loan volume increased at a 9.6% compound annual growth rate while deposits grew 6.8%, according to Boston Consulting Group, citing figures from the Saudi Central Bank (SAMA).

But while Saudi Arabia has ample liquidity, boosted in recent years by high global energy prices, a total economic revamp will also depend on its ability to attract foreign direct investment.

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However, some Global raters are of the view that, the local banking system alone will not be able to cater to all the needs, and therefore, the country is working on the development of the local capital market and, at the same time, allowing some space for international players to help resources mobilization.

The strategy to mobilize international capital includes attracting foreign banks to set up in Saudi Arabia; the central bank has simplified the licensing process to encourage them to do so.

In February, Bank of Jordan, Egypt’s Bank Misr, National Bank of Egypt, Oman’s Sohar International, Bank of China and the Trade Bank of Iraq were granted banking business licenses.

They will join 16 other foreign banks including Deutsche Bank, BNP Paribas, JPMorgan Chase, Standard Chartered, Emirates NBD, First Abu Dhabi and Qatar National Bank, which have all entered the market in the past few years.

Saudi Arabia also wants to position itself as a regional fintech hub, and its startup and fintech markets are growing exponentially, thanks partly to strong government and institutional support. Last year, Saudi fintechs raised $239 million, up 167% from 2021, according to Magnitt, a Dubai-based research firm.

The kingdom saw 147 fintechs set up in 2022 from only 10 in 2018, but it hopes that is just a start. Last year’s fintech roadmap published by the government predicted that Saudi Arabia will be home to at least 525 fintech firms by 2030, creating 18,000 jobs and adding $3.5 billion to annual GDP. The authorities have also pledged to increase the share of bank SME loans from 5.7% in 2019 to 20% by 2030.

Local lenders are stepping up their game in the digital space, be it through in-house development, acquisitions or investments in startups, innovation hubs or incubator programs.

An open banking framework approved late in November, which allows third-party providers to access banks’ customer databases with application programming interfaces (APIs), is pushing Saudi lenders one step further, to practically reinvent themselves.

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All Saudi banks are currently working on fitting their operations to the new requirements, as open banking is now compulsory. In June, local lender Bank Albilad was the first to complete the process. As of that same month, 12 tech companies received their open banking licenses from the central bank.

For foreign businesses, partnering with a locally licensed firm can be a way to penetrate a fast-evolving market without too much hassle. This was the case for London-based Strabo, a global consumer portfolio-tracking platform that has started expanding in Saudi Arabia through a partnership with Lean Technologies, the kingdom’s largest API provider.

Saudi Arabia is also looking to be a leader in big data and artificial intelligence, a market that could grow to $150 billion in revenue in the GCC over the next several years, according to a recent study by McKinsey.

In this fast-changing environment, challenges remain. Entrepreneurs often cite the high cost of compliance in Saudi Arabia as an obstacle to growth.

In a survey of 100 Saudi fintechs late last year by Impact46, a Riyadh-based asset management firm, and the global entrepreneur network Endeavour, half of respondents indicated they were spending more than $100,000 a year on compliance. But the biggest challenge is the central bank requirements on cybersecurity.