Progress in the Saudi Islamic finance industry

Progress in the Saudi Islamic finance industry

The Islamic banking industry has shown a far higher level of resilience than conventional banking during international financial crises over the past two decades. I am proud to have been part of this journey. I started my career at the Saudi National Commercial Bank (NCB) almost 30 years ago, where I led the setting up of the country’s first trade finance (murabaha) fund.
Islamic banking is now represented in 56 countries by 1,389 Shariah-compliant financial firms, it was worth a combined $2.4 trillion in assets as of 2017, and it is expected to grow to $3.8 trillion in assets by 2022, according to Thomson Reuters.
Full-fledged Islamic banks still retain the lion’s share of the industry, accounting for 71 percent of total assets, but their growth has been muted. Having said that, many lenders in the Gulf have been rapidly consolidating as they seek to stay competitive in an era of lower oil prices.
Saudi Arabia’s biggest bank announced talks on a megamerger with a domestic rival. Abu Dhabi is working on a merger of three of its banks, potentially the emirate’s second in just over a year. And about a dozen other regional lenders are involved in takeover or merger talks.
Saudi Arabia is one of the most active and influential markets in Islamic finance, and the biggest of the Gulf Cooperation Council (GCC) countries. With landmark steps including the opening of the Tadawul stock exchange to foreign investors, the potential for access to the Saudi Islamic debt market (sukuk) and booming asset classes including initial public offerings, real estate and project finance, a growing number of issuers are coming to the market, and the overall investment scene is growing dramatically.
Last October, the Saudi Arabian Monetary Authority (SAMA) joined an international standard-setting body for Islamic finance, a move that could help standardize industry practices and ease cross-border transactions in the Kingdom.
The Saudi government has also taken steps to tap into Islamic finance, issuing debt bonds earlier this year denominated in both riyals and dollars. Moreover, the Jeddah-based Islamic Research and Training Institute said it had signed an agreement to develop blockchain technology in the Islamic finance sector.
The agreement is the latest effort to combine blockchain technology to tap demand from Muslim investors, with firms from Indonesia to Canada having already received Shariah-compliant certification for their products.
The involvement of the Islamic Development Bank (IDB), a multilateral development institution, could encourage other financial technology (fintech) firms to incorporate Islamic finance to tap markets across the Middle East, Asia and Africa.
I believe that the growth of the Islamic finance sector will continue to outstrip that of conventional assets across core Islamic finance markets in coming years, as demand for Shariah-compliant financial instruments — also called ethical banking — rises. The industry is poised for further change with the advent of fintech products and more consolidations in the region.

Basil M.K. Al-Ghalayini is the Chairman and CEO of BMG Financial Group.

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