Saudi Islamic finance penetration to rise to 80% of loans over next 18 months

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Saudi Arabia is expected to see a rise in Islamic finance penetration over the next 12 to 18 months, according to Moody's Investors Service.

The ratings agency predicts that Islamic finance penetration in the kingdom to increase to 80 percent of system-wide loans from 77 percent in 2018.

Demand from retail and corporate clients in the Islamic finance sector is set to grow as the Saudi regulatory authorities promote the industry’s growth through supportive regulatory framework, according to Moody’s report.

"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 from its oil dependency," said Ashraf Madani, VP-Senior Analyst at Moody's in the report.

"Higher penetration of Islamic finance is boosting banking system profits due to the favourable funding profile of Islamic banks, where Shariah-compliant deposit accounts do not earn interest," he added.

As of March, Saudi Arabia had the world’s largest Islamic finance assets of $299 billion, way ahead of the world’s second largest market Malaysia that had $134 billion worth of assets.

Earlier this month, another ratings agency ‘Fitch Ratings’ said that Saudi Islamic banks performance remained above conventional banks in 2018. But while profitability of Islamic banks in the kingdom improved last year, weakened asset quality remained a challenge. It also expected that financing growth will remain muted for 2019.