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ISLAMIC FINANCE

IN SAUDI ARABIA:
Leading the Way to Vision 2030
© Islamic Research and Training Institute, Islamic Development Bank, 2020
All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system or transmitted in any form or by any means, electro-
nic, mechanical, photocopied, recorded, or otherwise, without prior written
permission of the copyright holder, except for reference and citation, with
proper acknowledgment.

Disclaimer
This work is a product of the staff of the Islamic Research and Training Insti-
tute (IRTI) with external contributions. The findings, interpretations, and con-
clusions expressed in this work do not necessarily reflect the views of IRTI
or IsDB, or IsDB Board of Executive Directors. IRTI Does not guarantee the
accuracy of the data included in this work. Content of this report is intended
to provide general information only and as such should not be considered as
legal or professional advice.

II
CORPORATE PROFILE
ISLAMIC RESEARCH AND TRAINING INSTITUTE

ESTABLISHMENT MAIN FUNCTIONS


The Islamic Research and Training Institute • Conduct pioneering research to address de-
(IRTI), a Member of the Islamic Development velopment challenges facing IsDB member
Bank (IsDB) Group, was established in 1981 countries.
with the primary aim of supporting the IsDB’s • Lead a problem-solving approach to know-
mission of providing development finance in ledge creation and dissemination in Islamic
accordance with the Islamic law. Economics and Finance.
• Undertake capacity building of future
STRATEGIC GOAL knowledge leaders in Islamic Economics
To develop knowledge-based Islamic economic and Finance who shall lead entrepreneurial
and financial solutions to support socio-econo- development of IsDB Member Countries.
mic development in IsDB Member Countries • Development and delivery of innovative and
and Muslim communities worldwide. effective learning, training, and certification
programs, to enhance knowledge and skills
MISSION of individuals, institutions and other stake-
• To lead in providing innovative, knowledge- holders.
based solutions for development • Produce and disseminate high-quality,
challenges facing IsDB Member Countries high-value, publications in the area of Isla-
in accordance with the principles of Islamic mic Economics and Finance.
Economics and Finance. • Develop and ensure effective use of
• To lead in providing learning and capacity knowledge and information dissemination
building for IsDB Member Countries to channels, to disseminate Islamic financial
achieve the Sustainable Development Goals knowledge and engage stakeholders.
(SDGs). • Design and structuring of innovative, know-
• To work with partners to deliver cutting- ledge-based solutions of development chal-
edge research, enhance human capital and lenges of IsDB Member Countries in line
provide information services to support with the principles of Islamic Economics
the development of the Islamic financial and Finance.
industry worldwide. • Identify new opportunities and emerging
needs for the delivery of state-of-the-art ap-
plications of Islamic Fintech.

III
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CONTENTS
EXCLUSIVE INTERVIEWS...........................................................................................................................................VIII
LETTER OF TRANSMITTAL..........................................................................................................................................IX
FOREWORD........................................................................................................................................................................X
ACKNOWLEDGEMENT...................................................................................................................................................XI
EXECUTIVE SUMMARY................................................................................................................................................ XII

CHAPTER I: ECONOMIC AND FINANCIAL LANDSCAPE 2


Overview........................................................................................................................................................................... 3
Economic Performance................................................................................................................................................. 4
Inflation....................................................................................................................................................................... 4
Monetary and Fiscal Policy..................................................................................................................................... 5
Openness of the Saudi Economy........................................................................................................................... 6
Competitiveness of the Saudi Economy.............................................................................................................. 8
Oil Production............................................................................................................................................................ 9
Alignment of Vision 2030 with Sustainable Development Goals........................................................................10
Financial Industry Structure and Landscape...........................................................................................................12
Financial Institutions Play a Key Role in Saudi Arabia...........................................................................................12
The Architecture of Saudi Financial System...........................................................................................................13
Overview of Islamic Finance in KSA..........................................................................................................................15
The Financial Sector Development Program (FSDP).............................................................................................16
Financial Regulatory System......................................................................................................................................18
Saudi Arabian Monetary Authority (SAMA)........................................................................................................18
Saudi Capital Market Authority (CMA)................................................................................................................19
Conclusion.....................................................................................................................................................................20

CHAPTER II: BANKING SECTOR 26


Overview.........................................................................................................................................................................27
Sector Size and Growth...............................................................................................................................................28
Saudi Banks are Highly Concentrated......................................................................................................................30
The Development of Islamic Banks..........................................................................................................................31
Islamic Banking Assets are On the Rise.............................................................................................................32
The Lion’s Share of Banking Assets....................................................................................................................34
Sharīʿah-Compliant Banking Maintains Strong Position in Operational Efficiency.....................................35
Stable Capital Adequacy Ratio.............................................................................................................................38
Saudi Islamic Asset is leading in the GCC Region..................................................................................................41
Liquidity.....................................................................................................................................................................43
E-Banking in Saudi Arabia...........................................................................................................................................44
Conclusion.....................................................................................................................................................................46

IV
CHAPTER III: CAPITAL MARKET 48
Overview.........................................................................................................................................................................49
Capital Market Development and Vision 2030........................................................................................................49
The Stock Market: A Brief History..............................................................................................................................50
Market Indices.........................................................................................................................................................51
Performance of the Stock Market.......................................................................................................................53
A Leader in the Region...........................................................................................................................................55
CMA Strategic Plan: Financial Leadership Program (2019-2021).......................................................................56
Ṣukūk: A Global Market Overview..............................................................................................................................57
Ṣukūk Issuance in Saudi Arabia...........................................................................................................................58
The First Sovereign Ṣukūk of Saudi Arabia........................................................................................................58
Pushing the Market to A New Level....................................................................................................................59
Ṣukūk Structure in KSA..........................................................................................................................................59
Saudi Arabia is the Second Largest Ṣukūk Issuer Globally............................................................................60
Capital Market Authority’s Initiatives to Develop Ṣukūk Market..........................................................................61
Islamic Funds................................................................................................................................................................62
Exchange-Traded Funds (ETFs).................................................................................................................................64
Real Estate Investment Traded Funds (REITs).......................................................................................................65
Conclusion.....................................................................................................................................................................66

CHAPTER IV: TAKĀFUL (INSURANCE) MARKET 70


Overview.........................................................................................................................................................................71
Outlook of Global Insurance Market.........................................................................................................................71
Takāful is an Essential Element of Islamic Financial Ecosystem........................................................................73
Overview and Structure of Saudi Arabia Market.....................................................................................................73
Gross Written Premiums.......................................................................................................................................75
Insurance Market Penetration..............................................................................................................................76
Insurance Density...................................................................................................................................................77
Net Written Premium.............................................................................................................................................78
Retention Ratios......................................................................................................................................................79
Insurance Assets....................................................................................................................................................79
The Regulatory Environment and Recent Developments.....................................................................................80
The Cooperative Insurance Companies Control Law......................................................................................81
Cooperative Health Insurance (CCHI).................................................................................................................82
Conclusion.....................................................................................................................................................................82

V
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER V: SOCIAL AND DEVELOPMENT FINANCE 84


Overview.........................................................................................................................................................................85
National Laws and Regulations Affecting Social Finance in Saudi Arabia........................................................85
Setting Up Regulatory Body for the Waqf Sector...................................................................................................87
Initiatives by General Authority for Awqāf..........................................................................................................87
Waqf Investment Funds........................................................................................................................................88
Role of Islamic Development Bank (IsDB) in Awqāf Sector in KSA....................................................................88
Operationalization of Awqāf Support within IsDB............................................................................................89
Outlook on Development Finance in KSA................................................................................................................97
Establishment of the National Development Fund................................................................................................98
Conclusion.....................................................................................................................................................................98

CHAPTER VI: ENTREPRENEURSHIP AND INNOVATION 104


Overview...................................................................................................................................................................... 105
The Role of Entrepreneurship in Realizing 2030 Vision..................................................................................... 105
Entrepreneurial Ecosystem in KSA......................................................................................................................... 106
Domains for Efficient Entrepreneurship Ecosystem..................................................................................... 108
Saudi Arabia Entrepreneurship Ecosystem Performance........................................................................... 111
Saudi Arabia Ecosystem valuation Vs 54 Economies Selected by the GEM........................................... 111
Impact of Ecosystem Facilities on Doing Business...................................................................................... 113
Saudi Arabia Competitiveness................................................................................................................................ 115
Innovation Policies and Incentives in KSA...................................................................................................... 116
Incubators and Startups........................................................................................................................................... 120
Venture Capital and Private Equity in Saudi Arabia............................................................................................. 125
Venture Capital Vs Private Equity and their Role in Financing Startups and SMEs................................ 126
Conclusion.................................................................................................................................................................. 127

VI
CHAPTER VII: FINTECH 128
Overview...................................................................................................................................................................... 129
Fintech and Financial Industry................................................................................................................................ 129
What Makes Fintech Succeed and Flourish?................................................................................................. 130
History of Fintech in Saudi Arabia.................................................................................................................... 130
Understanding the Current Saudi Fintech Market......................................................................................... 131
Major Trends in the Swarming Saudi Financial Sector & Major Reforms...................................................... 132
Social Impact of Fintech in Saudi Arabia.............................................................................................................. 134
Saudi Banking and Payments Market.............................................................................................................. 134
Mobile and Internet Penetration............................................................................................................................. 137
Case Study............................................................................................................................................................ 138
Lessons Learnt..................................................................................................................................................... 140
Saudi market is expected to continue............................................................................................................. 140
Being ahead of the tide (innovation)................................................................................................................ 140
Second mover advantage in disruptive innovation....................................................................................... 140
Conclusion.................................................................................................................................................................. 140

CHAPTER VIII: KSA LEADING THE WAY 144


Major Hub.................................................................................................................................................................... 145
Comparative Advantages......................................................................................................................................... 146
Fintech......................................................................................................................................................................... 146
The Way Forward....................................................................................................................................................... 147

LIST OF CONTRIBUTORS.......................................................................................................................................... 150


ENDNOTES.................................................................................................................................................................... 154

VII
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

EXCLUSIVE INTERVIEWS
Dr. Ahmed Abdulkarim Al-Kholifey
Governor of Saudi Arabian Monetary Agency (SAMA)

Mr. Ammar A. Shata


Founder and Executive Director, Al Khabeer Capital

Mr. Emad bin Saleh Al-Kharashi


Governor of Saudi Arabia General Authority for Awqaf (GAA)

Mr. Stephen Groff


Governor of the National Development Fund, Saudi Arabia

Ms. Muna Abu Sulayman


A Leader on Entrepreneurship and Humanitarian Development in KSA

Ms. Nejoud Al-Mulaik


Director, Saudi Fintech

VIII
Dr. Bandar M.H. Hajjar
President,
Islamic Development Bank Group

LETTER OF TRANSMITTAL
The Kingdom of Saudi Arabia Islamic Finance Coun- “Fintech Saudi” to act as a catalyst to develop the
try Report is part of a series designed to provide Fintech ecosystem alongside with vibrant regula-
key insights and analysis on the development of tory sandbox set out by the Kingdom’s monetary
emerging or frontier Islamic finance markets. The authority.
Report’s objectives are to provide insightful analysis
and to promote transparency and access to infor- The Report also sheds some light on the Kingdom’s
mation on the broader Islamic Economy. swift response to combat Covid-19 pandemic which
has adversely affected the global communities.
Saudi Arabia is unquestionably a major hub of the
Islamic financial industry not only in the Middle East, The rich and diverse coverage of the Report will
but also worldwide. With Vision 2030, and with an hopefully be beneficial for readers and relevant sta-
energetic and innovative youth population, Saudi keholders in enhancing their understanding about
Arabia has a great potential to lead the industry in the immense potential of the Islamic finance indus-
the 21st century. Not surprisingly, Islamic finance try in the kingdom.
is one of the key pillars of the Financial Sector De-
velopment Program set out by the Government of It is, therefore, with immense pleasure that I present
Saudi Arabia. the Kingdom of Saudi Arabia Islamic Finance Coun-
try Report.
The Kingdom of Saudi Arabia Islamic Finance Coun-
try Report under the theme “Islamic Finance in Sau- I hope the Report avails readers with the necessary
di Arabia: Leading the Way to Vision 2030” is a ma- information to appreciate the potential leadership of
nifestation of potential leadership of Saudi Arabia of Saudi Arabia in the global Islamic finance industry.
Islamic finance.
We are grateful for the valuable support and coo-
By the end of 2018, in total, Islamic finance assets in peration of the various authorities in the Kingdom.
Saudi Arabia reached a remarkable US$ 879.2 billi- Our colleagues at the Islamic Research and Training
on (SAR 3,297 billion), which makes Saudi Arabia the Institute (IRTI) did their best to collect, synthesize,
largest Islamic finance market globally. Furthermore, and analyze a large number of data sets and reports
the return on assets of Islamic banks in Saudi Arabia on the Saudi economy. They also worked hard to in-
consistently outperforms their peers in the G20, na- tegrate all the comments and suggestions received
mely Indonesia and Turkey, as well as Malaysia. from external experts and reviewers. Nonetheless,
we invite our readers to provide constructive re-
The Kingdom is also taking the digital transforma- marks and feedback on the Report.
tion very seriously, evidenced by the formation of

IX
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Dr. Sami Al-Suwailem


Acting Director General,
Islamic Research and Training Institute

FOREWORD
The Islamic Research and Training Institute (IRTI) every number and statement in this Report, we ac-
continues its pioneering role as a knowledge hub knowledge our fallible human nature and make no
of Islamic economics and finance. The Islamic Fi- claim for perfection.
nance Country Report, a flagship publication of the
Institute, offers extensive analysis of Islamic finan- The Covid-19 crisis added another layer of complexi-
ce in selected Member Countries of the Islamic De- ty that was not in our plans. The team though thinks
velopment Bank (IsDB). The present Report studies that the Saudi economy will be able to weather this
the Islamic finance sector in the Kingdom of Saudi crisis resiliently, and thus we do not expect the main
Arabia, the largest economy in the Middle East and a results of the analysis to change much once the
major shareholder of the IsDB. Endowed with a uni- storm has passed. Long-term consequences of the
que set of advantages, the Kingdom has the poten- crisis are still a highly speculative subject, but one
tial to lead the Islamic finance industry on a global thing seems certain: digitization of the Saudi eco-
scale. nomy will probably progress at even a faster pace.
This most likely will strengthen the results of the
Analyzing the region’s largest Islamic finance indus- analysis.
try in such a large and dynamic economy is not a
trivial matter. The team behind the Report has been We at IRTI are proud to serve our Member Coun-
tirelessly working for over 21 months. Countless tries, and we are honored to produce this knowledge
hours were devoted for digging up data, analyzing product. Other knowledge products are in the pipe-
graphs, inspecting reports, contacting stakeholders, line, and we look forward to meeting you in another
etc. Although we did our best to check each and opportunity soon.

X
ACKNOWLEDGEMENT
We owe a huge debt of appreciation to many people various issues in economic development and Isla-
whose encouragement and unfailing support have mic finance in the Kingdom of Saudi Arabia.
instilled a positive energy throughout the production
of the report. We thank Dr. Khalid Khalafalla of the Islamic Deve-
lopment Bank for his valuable comments and sug-
A dedicated IRTI team, composed of Dr. Sami gestions.
Al-Suwailem, Dr. Hylmun Izhar, Dr. Turkhan Ali Abdul
Manap, Mr. Aziz Gulomov and Mr. Salah Al-Sherbi- The Report would surely not have seen the light of
ni, undertook the drafting of the report. Dr. Abdul the day without the valuable comments and sugge-
Qayoom Al-Hendi of Islamic University in Madinah stions from the experts at the Ministry of Finance of
contributed to chapter five, Dr. Slim Mseddi of Imam Saudi Arabia and the Saudi Arabian Monetary Au-
Muhammad Ibn Saud Islamic University contributed thority, for which we are extremely grateful. Nonet-
to chapter six, and Mr. Abdulelah Al-Sayegh, Fintech heless, these two respectable institutions shall not
Director at UniGulf, contributed to chapter seven. be held responsible for the analysis and findings ar-
IRTI’s former interns, Ms. Mariam Al-Naghi and Mr. ticulated in the Report.
Wala Sumait, contributed to the initial draft of the
report. To our Diamond Sponsor, the Saudi British Bank
(SABB), we would like to extend our gratitude for ha-
Our appreciation goes to our interviewees: Mr. Step- ving confidence and trust in IRTI in producing this
hen Groff, Governor of the National Development report.
Fund of Saudi Arabia; Mr. Ammar A. Shata, Founder
and Executive Director of Alkhabeer Capital; Ms. Ne- Sincerely,
joud Al-Mulaik, Fintech Director KSA; and Ms. Muna
Abu Sulayman, who have provided insights on the KSA IFCR Team
progress and challenges and shed some lights on

XI
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

EXECUTIVE SUMMARY
As the largest economy in the Middle East and the Chapter 3 highlights the recent developments and
leading Islamic finance industry worldwide, the performance of the capital market in the Kingdom.
Kingdom of Saudi Arabia has the potential to beco- As the largest market in the GCC region, the Saudi
me a prominent leader in the global Islamic finance capital market is undergoing rapid changes bolste-
landscape. red by the development of advanced infrastructure,
new markets, and new products and services. The
The analysis presented in this report reveals various market has been promoted to emerging market sta-
multifaceted endeavors of the Kingdom to realize tus by FTSE, Russell and MSCI. Ṣukūk market in the
Vision 2030, taking into account the spirit of entre- Kingdom is developing relatively fast and is current-
preneurship and innovation combined with the ad- ly the second largest ṣukūk issuer globally, next only
vanced application of technology. Islamic finance to Malaysia.
as a paradigm promotes entrepreneurship, innovati-
on and social responsibility and therefore could be- One of the key pillars of Vision 2030 is to develop
come a major catalyst in the Kingdom’s endeavors the Saudi capital markets to enable the economy to
to achieve the objectives of Vision 2030. achieve sustainable and diversified growth. The pri-
mary objective of diversification is to reduce depen-
Chapter 1 highlights the distinctive features of Saudi dence on hydrocarbons by increasing investments
Arabia’s economy and its financial landscape. The in the financial, construction, real estate, tourism
Kingdom is the largest economy in the Middle East, and social infrastructure (healthcare, education,
and also the largest country in terms of land mass. It and innovation) sectors. The comprehensive de-
possesses one of the largest proven reserves of oil velopment of capital markets will not only aid the
and natural gas and has the largest mineral deposits KSA economy in meeting its huge financing require-
in the Middle East. On the financial landscape, the ments but also help it emerge as a regional financial
aggregated Islamic finance assets in Saudi Arabia hub in the coming years.
by the end of 2018 exceeded US$ 800 billion, which
makes Saudi Arabia the largest Islamic finance mar- Chapter 4 illustrates the well-regulated Saudi coo-
ket globally in dual-system economies. The King- perative insurance market. Although the insurance
dom has embarked on several reform programs, in- penetration and density are relatively modest, Saudi
cluding the Financial Sector Development Program, Arabia is the second-largest insurance market after
to enhance and strengthen its leading position in the UAE in the MENA region, and it accounted for 20.3%
region and worldwide. of the region’s Gross Written Premiums (GWPs) in
2018. Saudi Arabia, Malaysia, and the UAE are the
Chapter 2 charts the resilience and encouraging major Islamic insurance markets, accounting for
performance of the banking sector in the Kingdom. more than 87% of total contributions in 2017. Inspi-
The return on assets and NPL Coverage for Islamic red by Vision 2030, there will be abundant oppor-
banks in Saudi Arabia consistently outperform their tunities for the insurance sector to flourish if the
peers in the G20 countries, namely Indonesia and economic reforms take place in a coherent and
Turkey, as well as Malaysia. The resilience of the Is- measured manner.
lamic banking sector in the Kingdom also surpasses
these peers for the most part of the period 2014- Chapter 5 depicts the huge potential of awqāf
2018. Overall, the analysis shows that the Islamic sector in the Kingdom, in addition to a number of
banking sector in the Kingdom is well established breakthrough initiatives in further bolstering the so-
and solidly competitive, which paves the way for re- cial finance sector. Moreover, with the successive
gional and global leadership of the industry. amendments and the incremental openness of the

XII
Kingdom to foreign investment, it is expected that Chapter 8 articulates the notion that Saudi Arabia,
it will increase the size of endowments in the King- given its gigantic potentials coupled with its unique
dom. Another insight provided in this chapter is the set of comparative advantages, could become a
role of specialized credit institutions in helping to global leader in Islamic financial services industry,
achieve the goals of Vision 2030 by contributing to particularly if it can capitalize its distinctiveness in
the Kingdom’s economic and social transformation. two areas:

Chapter 6 investigates entrepreneurial and innova- • Awqāf: As a spiritual destination for Muslims
tion ecosystem in the Kingdom. Entrepreneurial ac- worldwide who seek to visit the two Holy Mos-
tivities in the Kingdom are growing rapidly, with an ques every year, the Kingdom offers favorable
increase in deals, funding, number of investors and incentives and can benefit from sizeable oppor-
government initiatives. This chapter compares the tunities in terms of investment and spending.
ecosystem of the Kingdom with other comparable Awqāf can surely be an ideal channel for invest-
countries and offers specific recommendations to ment as awqāf require sustainable income gene-
enhance the ecosystem of innovation in the country. ration.

Chapter 7 elucidates many encouraging findings • Small and Medium Enterprises (SMEs): The
that Saudi Arabia is blessed with the right recipe to SMEs sector can be an ideal investment chan-
make it a global hub for Fintech in Islamic finance, nel for awqāf. Mobilizing resources for the SMEs
having a tech savvy society with high internet pene- through ṣukūk, equity, crowdfunding, venture
tration and majority of the population being under capital, inter alia, would provide Islamic finance
the age of 35. This made embracing new techno- industry an edge in innovation, diversity and eco-
logies considerably faster and easier than in many nomic impact. Since SMEs are the engine of job
other parts of the world. Saudi Arabia also establis- creation, investing in the SMEs sector is essenti-
hed “Fintech Saudi” to act as a catalyst to develop al for sustainable economic growth.
the Fintech ecosystem alongside a vibrant regula-
tory sandbox to cope with the fast-paced Fintech
industry. It is evident that Saudi Arabia is taking di-
gital transformation very seriously.

XIII
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

XIV
XV
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER I:
ECONOMIC
AND
FINANCIAL
LANDSCAPE
2
Chapter I: Economic And Financial Landscape

Overview
According to the International Monetary Fund (IMF), Such richness in natural resources became the pri-
the Kingdom of Saudi Arabia maintained its 18th mary engine for the economic progress of the coun-
place among the biggest countries in the world in try for many decades, which started to alter with the
terms of the nominal GDP amounting to US$ 786.5 launch of Saudi Arabia Vision 2030 in 2016. Saudi
billion (SAR 2.95 trillion) by the end of 20181. The Vision 2030 is a grand plan to reduce the country’s
strength of the Kingdom’s economy is reflected dependence on oil, diversify its economy, and deve-
by per capita Gross Domestic Product (GDP) of lop public service sectors such as health, education,
US$ 55,730 equivalent to SAR 208,987 (per capita infrastructure, recreation and tourism. Goals inclu-
purchasing power). Moreover, the Kingdom of Saudi de reinforcing economic and investment activities,
Arabia ranked 39th out of 140 countries around the increasing non-oil industry trade between countries
world in the most competitive countries list, as per a through goods and consumer products, and incre-
report issued by the World Economic Forum2. asing government spending on the military, manu-
facturing equipment and ammunition.
The Kingdom of Saudi Arabia is considered a spe-
cial place by many, especially in the Muslim world. Vision 2030 was built on three pillars, namely a) a
This is due to Saudi Arabia being the land of the Two vibrant society, b) a thriving economy, and c) an am-
Holy Mosques which undeniably positions the King- bitious nation.
dom in the heart of the Arab and the Muslim world.
The strategic geographic location of Saudi Arabia This chapter analyses the macro and micro dimen-
has also enabled the country to interconnect three sions of the Kingdom’s economy that is geared to-
continents: Africa, Asia and Europe; which has beco- wards the alignment with 2030 Vision, under which
me the intrinsic niche strength of the Kingdom. This Financial Sector Development Program was set up
has further been underscored by the fact that the to build a diversified and robust financial services
Kingdom is endowed with the largest reserves of oil, sector that can effectively contribute to the develop-
natural gas and mineral deposits in the Middle East3 ment of the national economy.
and arguably in the world.

3
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Economic Performance
Over the past decade, Saudi Arabia’s GDP was gro- growth in 2011. In 2017, the GDP witnessed a ne-
wing at an average annual rate of 3.5%. Growth, ho- gative growth of -0.74% before picking up in 2018
wever, has shown fluctuations with a peak of 10% to 2.43%4.

Figure 1.1: GDP Growth in KSA (%)

9.99

6.25
5.41
5.04
4.10
3.65
2.70
2.22
1.85 1.67

2009 2017
2007 2008 2010 2011 2012 2013 2014 2015 2016 2018
-0.86

-1.95

Source: SAMA

In light of Vision 2030, the government intends to cal content. The construction sector, for instance, is
raise the share of non-oil exports in non-oil GDP set out to be revived through the Public Investments
from 16% to 50% by 20305. In doing so, the private Fund’s (PIF) giga-projects. Accompanied by a larger
sector’s contribution is expected to increase from public spending and value-added tax (VAT) reform,
40% to 65% of GDP by 20306. The boost is likely to the economy is likely to be heading up and catching
continue through various programs, such as the Fi- up on its growth.
nancial Sector Development Program, National In-

Inflation
dustrial Development and Logistics Program, Public
Investment Fund Program, Privatization Program,
Strategic Program, and many other programs set
out in Vision 2030. The objective is none other than Inflation in KSA is generally manageable. Inflation,
to transform the Kingdom into a leading industrial as measured by the Consumer Price Index (CPI),
powerhouse and a global logistics hub in promising has recorded a negative growth on a yearly basis by
growth sectors (with a focus on Industry 4.0) , which around 1.2% in 2019. However, it started to recover
is expected to generate ample job opportunities for in the second half of the year by around 0.5% com-
Saudis, enhance the trade balance and maximize lo- pared to the first half of 2019.

4
Chapter I: Economic And Financial Landscape

Figure 1.2: Inflation in KSA

3.78 3.76
3.51
2.86

2.24
2.05

1.22 3.00
2017

2010 2011 2012 2013 2014 2015 2016 2018

-0.83
Source: SAMA

Monetary and Fiscal Policy


Saudi Arabia’s fiscal position has remarkably im- The current account recorded a significant improve-
proved over the past years. The increase of 40% ment by the end of 2018. Estimated data suggests
in oil revenues during 2018 added to the positive that there could be a surplus of SAR 264.7 billion,
change, simultaneously reflecting the increase in which is around 10.06% of the nominal GDP. The
pricing and production8. Parts of the Fiscal Balance improvements in the current account in 2018 are
Program included the rationalization of expenditu- primarily driven by a higher oil price and increased
res and subsidies, which is in contrast to the expen- production.
diture-driven policy before 2016.
The intervention of the Public Investment Fund
In an effort to stabilize the Saudi Riyal and preserve (PIF), the largest sovereign fund globally, through
its value internally and externally, the Saudi Arabian debt inflows caused the Balance of Payments (BoP)
Monetary Authority (SAMA) is targeting the exchan- dynamics to stabilize. The outflows of investment
ge rate. Since 1986, the exchange rate parity has the PIF is undertaking are expected to yield greater
remained at 3.75 Riyals per US Dollar. The stability inflows to the current account, making sure it stays
of the exchange rate incentivizes investment and in surplus. As for the fiscal account, its situation is
is convenient as international transactions and re- expected to improve as investors run to better op-
ceipts are carried out predominantly in US dollars. portunities to invest domestically, further shrinking
outflows.

Figure 1.3: Current Account of KSA (SAR Billion)

594.5 617.9

496.2 507.9

371.0 350.0
250.3 276.6 264.8

78.6
39.2
2015 2016
2006 2007 2008 2009 2010 2011 2012 2013 2014 2017 2018

-89.4

-212.7
Source: SAMA
5
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Openness of the Saudi Economy


Trade openness is a measure of economic policies Figure 1.4 demonstrates how the Kingdom’s level of
that either restrict or invite trade between countries. openness has surprisingly outperformed Indonesia
Generally, openness is defined as the sum of im- and Turkey, its peers in the G20, over the past two
ports and exports normalized by GDP9. Empirical decades indicating the government’s commitment
results on the links between trade openness and to increasing economic development and sustaina-
economic growth often suggest that, in the long ble growth in the Kingdom.
run, more outward‐oriented countries register better
economic growth10.

Figure 1.4: Trade Openness (Exports plus Imports as percentage of GDP)

100

80

Saudi Arabia
60 Turkey

Indonesia
40

20

0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: TheGlobalEconomy.com, World Bank

On the aspect of FDI, despite a descending trend, Foreign investment in Saudi Arabia increased by
due to some domestic factors and lower oil prices, 14% year-on-year (YoY) to around SAR 1.78 trillion
some new projects outside the oil and gas sector in 2019, compared to SAR 1.56 trillion a year earlier,
have helped bolster the FDI rate to recover. Accor- based on the latest official data issued by the Saudi
ding to UNCTAD’s World Investment Report 2020, Arabian Monetary Authority (SAMA).
inflows of FDI flows have increased by 7% between
2018 and 2019, reaching US$ 4.6 billion (SAR 17.25 According to the World Bank, net portfolio invest-
billion), more than three times the level recorded in ments, covering transactions in equity securities
2017. This is mainly due by the fact that the country and debt securities, fluctuated notably during 2010-
removed the ownership limits for foreign strategic 2019. As we shall see later, however, the Kingdom
investors. Similarly, the stock of FDI rose in 2019 is improving the competitiveness of the Saudi eco-
and reached US$ 236 billion (SAR 885 billion) in nomy and is expected to be able to attract foreign
2019, by far the highest number among Arab coun- investments in a sustainable manner in the coming
tries11. Figure 1.5 depicts the trend of FDI from 2010 years.
to 2018.

6
Chapter I: Economic And Financial Landscape

The Kingdom’s level of openness


has surprisingly outperformed Indonesia and Turkey,
its peers in the G20, over the past two decades
indicating the government’s commitment
to increasing economic development and
sustainable growth in the Kingdom.

Figure 1.5: Foreign Direct Investment, Net inflows (% of GDP)

5.53

2.43 0.54
0.21
1.66
1.19 1.06 1.16
1.24

2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: World Bank

Figure 1.6: Portfolio Investment, net (SAR, billions)

11.94

60.17 100.43
56.82
14.30
40.39
24.77 2017

2010 2011 2012 2013 2014 2015 2016 2018 2019

-9.85

-42.80
-47.53

Source: World Bank

7
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

In 2018, the export of non-oil produce grew by business zones. On the road to becoming a more
21.7%. A full chain production is incorporated in the open economy and a trans-shipment hub, the go-
phosphate industry, helping the government achie- vernment is pouring funds into new industrial cities.
ve the goal of diversification as well as achieve lar- Saudi Arabia is one of the world’s fastest growing
ge-scale upgrades to the national railway and the countries in the manufacturing sector, contributing
port of Ras Al-Khair. Spatial diversification emphasi- about 11.87% to the nation’s GDP in 2019, a modest
zes the inauguration and expansion of industrial and decline of 12.1% from the previous year12.

Competitiveness of the Saudi Economy


Not only is KSA working up the economic develop- with a score of 0.944 and Australia with a score of
ment ladder, but it is also unequivocally directing its 0.939.
resources towards human development. The King-
dom’s Human Development Index (HDI) for 2019 The Kingdom scored 70 by the Global Competitive-
amounts to 0.857, which puts the country in the very ness Index 2019, where Singapore has the top score
high human development category, positioning it at of 100. It was ranked as the 36th economy out of 141
36 out of 189 countries.13 The top three nations on countries, compared to the 39 in 2018.
this list is Norway with a score of 0.953, Switzerland

Figure 1.7: Saudi Arabia’s Competitiveness Index

GLOBAL COMPETITIVENESS INDEX 4.0 2019 edition Rank in 2018 edition: 39th/140

Performance Overview Previous edition High-income group average Middle East and North Africa average
2019
Overall
Score Enabling Environment Human Capital Markets Innovation Ecosystem

Best SGP FIN SGP KOR 100 (4) CHE HKG SGP HKG CHN USA DEU
100

90 82
78 75 76
80
70 69 71
70 63 65
57
60 53 51
50

40

30

20

10

Score
ICT macro- product labour financial market business innovation
overall institutions infrastructure adoption economic health skills market market system size dynamism capability
stability
Rank/141 36th 37th 34th 38th 1st 58th 25th 19th 89th 38th 17th 109th 36th

Source: World Economic Forum

8
Chapter I: Economic And Financial Landscape

A comparable ranking is indicated by the IMD World ceding year. Saudi Arabia compares reasonably well
Competitiveness Ranking 2020 of 63 countries, with OIC G20 members, namely Indonesia and Tur-
which places Saudi Arabia in a respectable 24th key. Table 1.1 summarizes the ranking of IMD and
ranking, climbing up from the 26th ranking in the pre- WEF for the three OIC G20 members.

Table 1.1: Global Competitiveness Ranking of G20 OIC Members

IMD Ranking 2020 (63 countries) WEF Ranking 2019 (141 countries)
Saudi Arabia 24 36

Indonesia 40 50

Turkey 46 61

Source: IMD Competitiveness Center and World Economic Forum

Oil Production
Saudi Arabia has 18% of confirmed worldwide re- at SAR 868.4 billion in 2018, with an increase of 36%
serves of petroleum. For decades, the economy has over the previous year, and accounted for 78.7% of
mainly depended on oil export revenues to finance total exports.
the yearly budget. Oil exports of Saudi Arabia valued

Table 1.2: Saudi Arabia’s Oil Exports

Oil Exports

Year Value (Million Riyals) Annual Change (%) Share in Total Exports (%)

2009 611,490 42.0 ▾ 84.8

2010 807,176 32.0 ▴ 85.7

2011 1,191,052 47.6 ▴ 87.1

2012 1,265,551 6.3 ▴ 86.9

2013 1,207,080 4.6 ▾ 85.6

2014 1,067,092 11.6 ▾ 83.1

2015 573,412 46.3 ▾ 75.1

2016 510,729 10.9 ▾ 74.2

2017 638,402 25.0 ▴ 76.7

2018 868,442 36.0 ▴ 78.7

Source: The General Authority for Statistics (www.stats.gov.sa)

9
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Alignment of Vision 2030 with


Sustainable Development Goals
As alluded to in the earlier section of this chapter, productivity is narrowing, fueling economic speciali-
Saudi Arabia adopted Vision 2030 as a roadmap for zation and making use of comparative advantage in
economic growth and national development. Vision different sectors. The goal is to concurrently equip
2030, comprising of 96 strategic objectives, outlines new labor market entrants with readiness to enter
the Kingdom’s general objectives, goals, and targets the market through equitable educational oppor-
to become a world-class model of successful and tunities, developing the brightest minds in priority
pioneering nation. In order to achieve such strategic fields and enabling integration of the disabled into
objectives, the Council of Economic and Develop- the work force.
ment Affairs (CEDA) established 13 Vision Realizati-
on Programs (VRPs). Each VRP comprises a series In 2020, the target participation rate of the disabled
of initiatives and delivery plans, guided by pre-defin- is set at 25%. For the short-term labor market dy-
ed objectives and KPIs tied to 5-year milestones. namics, efforts to lower unemployment have been
showing significant results for youth. Moving for-
The changes the Saudi government is undertaking ward, raising women’s participation to reach 25%
are set out to expand beyond financial and econo- in 2020 is a priority. By 2030, unemployment is ex-
mic growth to cultural and human capital invest- pected to go down to 7%. To realize this economic
ments. With the growing trend of the United Nations’ aspiration, the PIF is expected to invest $56 billion in
Sustainable Development Goals (SDGs), the Saudi new fields, which will create 11,000 jobs. SDG 8 also
Government, primarily the Ministry of Economy and targets increased economic productivity, entrepre-
Planning (MEP), is working to align both the SDGs neurship, creativity and innovation to which the Sau-
and Vision 2030 to realize development throughout di government is helping achieve by supporting and
the next decade. encouraging small and medium enterprises (SMEs).

The Sustainable Development Goals constitute the Similar to SDG 8, SDG 9 pushes building resilient
guidelines to achieve a better and more sustainable infrastructure, promoting inclusive and sustaina-
future for all. They address the global challenges the ble industrialization and fostering innovation. The
world faces, including those related to poverty, ine- budget for transport network and roads connecting
quality, climate change, environmental degradation, and reaching all parts of the Kingdom amounts to
peace and justice. The 17 SDGs are all interconnec- US$ 106 billion. The 2018 budget for transport de-
ted, and in order to leave no one behind, it is aspired velopment was estimated at US$ 14.4 billion. The
that all goals are achieved by 2030. National Transformation Program also includes a
segment for digital transformation. As of 2016, ex-
According to Voluntary National Review of Saudi penditure on R&D, technology transfer, advanced
Arabia, the Kingdom is close to achieving several strategic technologies, support of inventors and
goals as shown in Figure 1.6. However, we will focus projects relating to Science and Technology amoun-
on SDGs 8 and 9. ted to US$ 173 million.

SDG 8 promotes economic growth and decent work To sum up, the Kingdom is undergoing a broad pro-
for all, which is in harmony with the government’s la- gram of reforms. The main objective of these re-
bor market demands for the realization of the vision. forms is to enable the private sector to play a larger
The gap between education output and labor force role in the economy and for innovative global busi-

10
Chapter I: Economic And Financial Landscape

Figure 1.8: SDGs Realization in KSA

Partnerships
for the goals Peace, justice and
No poverty 100% strong institutions
Zero hunger

Good health 90% Life on land


and well-being
80%
Life below water
70%

60%
Quality Education
50% Climate action
40%
30%
20%
10%
Gender Equality
0%
Responsible
consumptions
and production

Clean water
and sanitation

Sustainable cities
and communities
Affordable and
clean energy
Reduced Inequalities
Decent work and
economic growth Industry, innovation
and infrastructure

Source: KSA First Voluntary National Review14

nesses and entrepreneurs to come to Saudi Arabia employment, the successful introduction of the va-
and drive greater productivity and job creation. lue-added tax that has underpinned an increase in
non-oil fiscal revenues, and energy price reforms
As elucidated by the International Monetary Fund that have helped reduce per capita consumption of
(IMF), the economic reforms in Saudi Arabia have gasoline and electricity. The government has the-
started to yield positive results. Some of the pro- refore continued to pursue reforms in order to en-
mising results include the rise of non-oil growth, hance the investment environment in a number of
increased female labor force participation and different areas.

11
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Financial Industry Structure


and Landscape
The current financial system in the Kingdom of Saudi • Other institutions offering services of rating such
Arabia comprises: as SIMAH.
• Saudi Arabia Monetary Authority (SAMA), which is
Saudi Arabia’s central bank In 2003, the Saudi government issued the Capital
• Commercial and investment banks, domestic and Market Law, which resulted in the creation of the
foreign Capital Market Authority (CMA), the regulator for
• Specialized credit institutions (SCIs), including the the capital market. SAMA and CMA fulfill comple-
Saudi Agricultural Bank, the Saudi Credit Bank, the mentary mandates to create a robust regulatory
State Development Fund, the Industrial Develop- framework and ensure the soundness of Saudi Ara-
ment Fund and the Saudi Development Fund bian financial system. The Saudi Arabian financial
• Non-banking financial institutions, including insu- system also has a fully functional credit bureau
rance and investment companies (SIMAH) that is licensed by SAMA and owned by
• Autonomous government institutions, like the Pu- the Saudi banks. The credit bureau collects data on
blic Investment Fund retail and corporate customers and provides credit
• The capital market which includes equity and information to members for a fee. SIMAH also hou-
debt (bond and Ṣukūk) markets ses a national data pool where it collects informati-
• The Capital Market Authority of Saudi Arabia on on the corporate sector to feed into a Probability
(CMA), which is the financial regulatory authority of Default model, whose output is available to all
responsible for capital markets member banks for use as benchmarking informati-
• The Saudi Stock Exchange (Tadawul), which is on for their own internal credit risk models.
the only authorized entity to carry out the trading
of securities in the Kingdom of Saudi Arabia

Financial Institutions Play a Key Role


in Saudi Arabia
The financial sector plays an important role in the versifying has been an important driver of the deve-
context of economic development. Financial institu- lopment of its banking and financial sector.
tions have been directly supporting Saudi Arabia’s
economic development and serving the needs of its Over the years, with continuous improvement and
rapidly expanding population, which increased by expansion, Saudi Arabia built a highly developed fi-
22% to 33.55 million in 2018 from 27.45 million in nancial system. Especially in the 1990s, along with
2010. The requirement for efficient financial inter- the financial liberalization, Saudi Arabia greatly im-
mediaries in Saudi Arabia was and remains vital. proved the financial services industry through finan-
The over-reliance on oil revenues made Saudi Ara- cial reforms, the introduction of advanced technolo-
bia’s economic growth subject to an excessive ex- gies and management systems. The Saudi financial
posure to unstable global energy markets, thus it is institutions not only improved efficiency but also
of great importance for the government to diversify enriched their financial products, thus providing
its economic activities away from the hydrocarbon customers with faster and more diversified financial
industry. The government’s policy of vigorously di- services.

12
Chapter I: Economic And Financial Landscape

The financial services sector is the fourth largest estate activities grew at a CAGR of 9.07 % between
sector in KSA in terms of its share of GDP. It con- 2011 and 2018. The year-to-year growth peaked in
tributed SAR 358 billion in 2018 or 12.1% of total 2012 (19.17%) and 2013 (16.08%), before decelera-
GDP at current prices, growing from SAR 195 billion ting to 4.53% in 2018.
in 2011. GDP share of finance, insurance, and real

Figure 1.9: Financial Services Contribution to Saudi’s GDP (2013-2018)


358,194
342,668
324,848
310,412
292,991
269,805
13.42% 13.27%
12.65%
12.14%

10.33%
9.64%

2013 2014 2015 2016 2017 2018

GDP from Financial and Insurance Activities (SAR million)


Contribution to Total GDP (% of GDP)
Source: SAMA and IRTI staff calculation

The Architecture of Saudi Financial


System
The Saudi financial system consists primarily of two lued at SAR 4.75 trillion. The banking sector is va-
parts: one being overseen by SAMA and the other lued at SAR 2.36 trillion, out of which Islamic banks
under the supervision of CMA. By the end of 2018, and windows account for 65% and the conventional
the overall assets of the financial system were va- banks make up the remaining 35%.15

Table 1.3: Financial Assets Distribution in Saudi Arabia 2018

Total Financial Assets Islamic Financial Assets


Assets SAR (Billion) US$ (Billion) Percentage SAR (Billion) US$ (Billion)
Banking Assets 2,363.4 630.2 64.9% 1,533.8 409.0
Equity Market 1,858.8 495.7 67.2% 1,248.8 333.0
Ṣukūk Outstanding 369.8 98.6 100.0% 369.8 98.6
Assets Under
111.9 29.8 80.0% 71.6 19.1
Management
Insurance 58.5 15.6 100.0% 58.5 15.6
Finance Companies 14.4 3.8 100.0% 14.4 3.8
Total 4,776.8 1,273.8 3,297.0 879.2

Sources: SAMA, IFSB, Tadawul and Individual Fund Managers Reports

13
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

By the end of 2018, the total stock market capitaliza- Meanwhile, the total number of investment funds
tion reached SAR 1,858.95 billion. As per the Sharīʿah managed by investment companies in Saudi Arabia
screening of Al Rajhi Capital, out of the 199 listed is 249 in 2018, worth at SAR 111.9 billion.18 Based
stocks, 29 stocks are not Sharīʿah complaint (valued on the analysis of individual funds, 47, or about 80%,
at SAR 610.2 billion by the end of 2018). Thus, the of the 249 funds are classified as non-Sharīʿah com-
total market capitalization of Sharīʿah-compliant pliant. This means that Sharīʿah-compliant funds
stocks by the end of 2018 is SAR 1,248.8 billion are valued at 89.5 billion (US$ 23.8 billion) by the
(US$ 333 billion). The cooperative insurance sector end of 2018.
is assumed to be Sharīʿah-compliant, estimated at
SAR 58.5 billion (US$ 15.6 billion)16. Another impor- In sum, the total Islamic financial assets in Saudi
tant component is ṣukūk which stands at SAR 369. Arabia by the end of 2018 is SAR 3,297 billion (US$
8 billion (US$ 98.6 billion)17. 879.2 billion), as depicted in Table 1.3.

Figure 1.10: Islamic Financial System Assets Distribution By Sector in Saudi Arabia 2018 (SAR Billion)

1533.8
Banking Sector
49.7%

1248.8
Equity Market
39.1%

Sukuk Outstanding 369.8


7.8%

Assests Under Management 89.5


2.4%

58.5
Insurance
0.7%

14.4
Finance Companies
0.3%

Source: SAMA Annual Report 2019, Tadawul, IIFM, IFSB, and IRTI staff calculations19

14
Chapter I: Economic And Financial Landscape

Overview of Islamic Finance in KSA


For the past few decades, Saudi Arabia has been at on shows that by the end of 2018, in total, Islamic fi-
the forefront of the development of the Islamic fi- nance assets in Saudi Arabia mark a staggering US$
nancial Services Industry (IFSI). In the early 1970s, 563 billion, which makes Saudi Arabia the largest
Saudi Arabia was a key participant in a series of aca- Islamic finance market globally. One of the key suc-
demic and professional conferences aimed at libe- cess factors of a thriving financial services sector is
ralizing the regional financial sector and developing its ability to serve a broad set of economic players.
Sharīʿah-compliant products and services, which In 2016, 74% of adults had a bank account in Sau-
until that point had been largely marginal in the Gulf di Arabia, while developed markets registered over
region. It was in fact the first International Confe- 90% inclusion. More specifically, financial inclusion
rence on Islamic Economics, held in Makkah Al-Mu- among female adults and residents in rural areas is
karramah in 1976, that marked the renaissance of low at 61% and 72%, respectively, in 2016.20
Islamic economics as a modern scientific discipli-
ne. Indeed, the Jeddah-based Islamic Development Vision 2030 has become a compass in providing a
Bank (IsDB) is one of the largest Sharīʿah-compliant sense of direction in tapping the enormous potential
financial institutions in the world which was foun- of Islamic finance in the country underpinned by the
ded by finance ministers of the Organization of the strong economic fundamentals, huge unbanked po-
Islamic Conference (now known as the Organization pulation21 as well as the ongoing and yet ambitious
of Islamic Cooperation, OIC) in 1973. These events government infrastructure spending, particularly in
encouraged many countries across the region to the area of ṣukūk and awqāf. However, in terms of
consider and permit the creation and growth of the regulation, the Saudi Arabian Monetary Authority
Islamic financial services industry. Despite the fact (SAMA) provides equal and unified management
that IFSI is treated neutrally by regulators, it saw tre- and supervision of Islamic and conventional banks.
mendous growth and became an important compo- Although both groups provide deposit and financing
nent of Saudi Arabia’s financial system. business, there are fundamental differences in con-
ducting the banking activities.
Saudi Arabia, home to more than a quarter of the
GCC’s Islamic financial assets, is currently among Meanwhile, ṣukūk and Sharīʿah-compliant insurance
the top IFSI in the world. Saudi Arabia’s reputation sector in Saudi have become key economic contri-
as a regional and, indeed, a global center for the IFSI butors in recent years. Since the first quarter of 2012
is poised to grow for the foreseeable future. The res- Saudi Arabia overtook the UAE to become the single
ilience of IFSI against the 2008 global financial crisis largest ṣukūk issuer in the GCC and the second in
proved that the sector is more likely to continue its the world behind Malaysia. As a matter of fact, the
growth through the 21st century. Kingdom’s local ṣukūk market has been primarily
driven by the issuance of government ṣukūk. Additi-
The Saudi Arabia banking sector is home to four onally, given Saudi Arabia’s status as the birthplace
full-fledged Islamic banks and eight Islamic win- and home of Islam, it has the potential to become a
dows in all conventional banks. In 2018, the top four global hub for Islamic finance. With these develop-
Sharīʿah-compliant banks accounted for over 40% of ments in mind, most local IFSI players are broadly
total Islamic banking assets. Saudi Arabia also has optimistic about the future. Saudi Arabia is home
the largest Islamic banking industry in the GCC in to a variety of Islamic banks, insurance companies
terms of assets size (US$ 409 billion). Our calculati- and other entities.

15
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

The Financial Sector Development


Program (FSDP)
Back in May 2016, a document entitled KSA Vision The program is underpinned by three main pillars:
2030, Strategic Objectives and Vision Realization 1) Ensure the formation of an advanced capital
Programs, was published. Vision 2030 is the blue- market
print for Saudi Arabia’s future. It is built on three pil- 2) Enable financial institutions to support private
lars: sector growth
1. Saudi Arabia’s historic position as the heart of 3) Promote and enable financial planning (retire-
the Arab and Islamic worlds; ment, savings, etc.).
2. The determination to become a global invest-
ment powerhouse; and These pillars are aligned with the ambitious strate-
3. Leveraging the geographic location to become a gic objectives of Saudi Vison 2030 of diversifying
hub connecting three continents. the economy, growing investments to new sectors,
supporting emerging sectors and attracting foreign
The Vision elaborated on three key themes, namely: investment.
• A vibrant society – one that enjoys a good life
in a beautiful environment with social protection The first pillar includes a number of Vision 2030-re-
while keeping its religious and cultural heritage lated initiatives, such as enabling new types of
• A thriving economy – that creates opportunities players to enter the market, incentivizing the finan-
for all, by building an education system aligned cial sector to finance SMEs, and driving towards a
with market needs cashless society. These initiatives involve a number
• An ambitious nation – this would be achieved of measures, including revising and enhancing exi-
through effective, responsible, transparent, ena- sting laws and regulations, incentivizing merchants
bling, and high performing government at all le- and citizens to adopt e-payment solutions, ensuring
vels. enforcement of mandatory vehicle and health in-
surance, and facilitating mergers and acquisitions
In April 2017, as part of the ongoing implementa- within the insurance sector to increase its scale and
tion and planning towards Vision 2030, the Finan- solvency.
cial Sector Development Program (FSDP) was lau-
nched. The FSDP is one of 12 executive programs The second pillar aims to render the Saudi financi-
launched by the Council of Economic and Develop- al market more attractive to local and international
ment Affairs to achieve the objectives outlined in investors through a number of initiatives that will
Vision 2030 (See Figure 1.11). see more diversified investment products and deve-
loped legislations. The program will also encourage
It aims to build a diversified and robust financial ser- the privatization of some state-owned services and
vices sector that can effectively contribute to the de- entities, thus further deepening the equity market
velopment of the national economy by encouraging and increasing market capitalization, while at the
savings among individuals, attracting investments same time improving service quality and spending
and strengthening Saudi Arabia’s financial sector efficiency. The program’s initiatives also involve the
institutions. The Program will effectively transform development of several regulatory aspects related to
the financial market in Saudi Arabia into an advan- the debt facilities market to deepen the debt market.
ced market that provides innovative financial soluti-
ons for all segments of Saudi society.

16
Chapter I: Economic And Financial Landscape

Figure 1.11: Financial Sector Development Program’s 2020 Commitments

VISION 2030

Vibrant society A thriving economy An ambitious nation

Growth and diversify Enable social


the economy responsibility

FINANCIAL SECTOR DEVELOPMENT PROGRAM (FSDP)

Ensure the formation Enable financial institutions


of an advanced to support private sector Promote & enable
capital market growth financial planning

2020 COMMITMENTS 2030 ASPIRATIONS

Increase the total size of financial assets


to GDP ratio to reach 201% by 2020 Achieve a sufficient level of financial
from 192% in 2016 assets relative to GDP ratio

Diversification through transformational


Increase share of capital markets change and emerging players (i.e. FinTech)
assets from 41% in 2016 to 45% by 2020 are expected to stimulate innovation
and competition

Increase the share of SMA financing at Improved inclusive structure through


banks from the 2% to 5% & share of higher bank account penetration and
mortgages financing from 7% to 16% SME/mortgage lending
by 2020

Number of adults with bank acount Envision a digitized infrastructure that


from 74% to 80% by 2020 moves toward a cashless society
Increase the share of non-cash Ensure long-term sustainability
transactions from 18% in 2016 to 28% and continued health of the financial
by 2020 services sector

Insure the overall financial stability


through compliance with international
standards

Source: Financial Sector Development Program Charter Delivery Plan 2020

17
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

The third pillar aligns with the vision of the National ning. This, in turn, is expected to encourage banks to
Savings Strategy to increase Saudi household sa- diversify their savings offerings to reach a broader
vings from 6% to 10% by 2030. This entails the crea- customer base. Increasing financial literacy is also
tion of incentives to offer a variety of affordable and one of the objectives where Islamic finance is given
safe saving products and, at the same time, raise particular attention, aimed at developing and diver-
awareness and promote financial literacy and plan- sifying Islamic financial offerings in Saudi Arabia.

Financial Regulatory System


Saudi Arabian Monetary
A well-functioning financial system is vital to the
economy, businesses and consumers. Financial
regulation is part of ensuring the safety and sound-
ness of the financial system and protection of con-
Authority (SAMA)
sumers. Financial regulation refers to the rules and
The Banking Control Law, enacted in 1966, has
laws operating in the financial industry, such as
vested SAMA with broad supervisory powers. It re-
banks, credit unions, insurance companies, financial
quires SAMA to conduct on-site and off-site supervi-
brokers and asset managers. However, financial re-
sion and require banks to have stringent provisions
gulation is more than just having rules in place – it is
for capital adequacy, liquidity and reserve require-
also about the ongoing oversight and enforcement
ments, loan concentration, etc. The law also provi-
of such rules.
des for banks to submit regular financial and sta-
tistical statements to SAMA and for SAMA to carry
There are three laws and also a set of regulations
out on-site and off-site banking supervision. SAMA
that regulate ṣukūk, cooperative insurance and Is-
is chaired by board of directors composed of a go-
lamic financial derivatives side by side with conven-
vernor appointed by the King, deputy governors and
tional commercial banks in Saudi Arabia. The issu-
non-government officials. It is an independent and
ance of ṣukūk in Saudi Arabia is regulated under the
autonomous government authority. SAMA’s primary
Offers of Securities Regulations and the Listing Ru-
functions are as follows:
les. Islamic banking is regulated under the Banking
Control Law (BCL) of 1966. While cooperative insu-
• Dealing with the banking affairs of the Govern-
rance is regulated under the Law of Supervision of
ment;
Cooperative Insurance Companies, supplemented
• Minting and printing the national currency (the
with regulations for its implementation. The existing
Saudi Riyal), strengthening the Saudi currency
law of the BCL of 1966 is still applicable and has not
and stabilizing its external and internal value, in
been repealed or amended in order to cover a wider
addition to strengthening the currency’s cover;
range of financial investment instruments, such as
• Managing the Kingdom’s foreign exchange re-
Islamic financial products and ṣukūk22. With regard
serves;
to supervisory authorities, Islamic insurance and
• Managing the monetary policy for maintaining
Islamic banking are supervised by SAMA, whereas
the stability of prices and exchange rate;
ṣukūk are supervised by CMA.

18
Chapter I: Economic And Financial Landscape

Saudi Capital Market


• Promoting the growth of the financial system
and ensuring its soundness;
• Supervising commercial banks and exchange
dealers;
Authority (CMA)
• Supervising cooperative insurance companies
According to the Capital Market Authority (CMA),
and the self-employment professions relating to
Saudi joint-stock companies started their business
the insurance activity;
in the mid-1930s. By 1975, there were 14 joint-stock
• Supervising finance companies; and
companies. The market remained unofficial until
• Supervising credit information companies.
1984 when the Saudi Arabian Monetary Agency
(SAMA) was entrusted with the task of regulating
SAMA has always considered a strong liquidity ade-
the market on a daily basis. In 1984, the Saudi Sha-
quacy framework to be the cornerstone of a sound
re Registration Company (SSRC) was founded by
banking system. This important principle was em-
commercial banks. This company helps joint-stock
bedded in the Banking Control Law, which provided
companies in central registration. It also settles and
for a liquidity ratio for Saudi banks as far back as
clears all stock operations. The electronic settle-
1966. Over the years, SAMA has undertaken sever-
ment and clearing system was introduced in 1989.
al noteworthy initiatives designed to strengthen the
In 1990, the Electronic Securities Information Sys-
prudential framework relating to bank capital. SAMA
tem (ESIS) was developed and operated by SAMA.
introduced the Basel I Capital Adequacy Accord in
Tadawul, which is the new system for trading, clea-
1992, and the Basel II Framework in 2008. It also
ring and settling securities, went into operation as of
issued the final rule on Basel III risk-based capital
October 2001.
in December 2012 to implement the first phase. A
number of new rules and policies were also put in
SAMA continued to play the role until CMA was esta-
place in October and December 2012, particularly
blished in 2003 after the Capital Market Law (CML)
on capital requirements for bank exposures to cen-
was passed by Royal Decree No. (M/30) in July that
tral counterparties (CCPs) and Pillar 3 of Basel III,
year, which made the CMA the sole regulatory and
respectively.
supervisory body that is responsible of organizing
and developing the capital market in Saudi Arabia.
The first phase of Basel III was implemented on 1
This is done by issuing the necessary rules, regula-
January 2013 in accordance with the Basel-agreed
tions, and instructions to ensure trust, fairness, and
timelines. Furthermore, SAMA introduced the Liqui-
efficiency in issuing securities as well as justice and
dity Coverage Ratio (LCR) as a binding minimum
full disclosure of joint-stock companies listed on the
requirement in 2015 in accordance with the Ba-
exchange. It is an official capital market regulatory
sel-agreed timeline and introducing the Net Stable
authority which operates under full financial, legal,
Funding Ratio (NSFR) standard as a binding mini-
and administrative independence.
mum requirement in 2016, two years ahead of the
Basel III implementation date. The KSA NSFR re-
Other tasks of the CMA include:
gulation is applicable to all 12 locally incorporated
• to develop measures to reduce the risks pertai-
banks on a consolidated basis. As of 30 June 2018,
ning to securities transactions;
the NSFR regulation in the KSA is compliant with the
• to develop, regulate and monitor the issuance
Basel III NSFR standard. Saudi banks already meet
and trading in securities;
the Basel III capital, liquidity and leverage standards
• to regulate and monitor full disclosure of infor-
that international banks are expected to meet by
mation for transparency and accountability rela-
2019.
ted to securities and their issuers; and
• to regulate proxy and purchase requests and pu-
blic share offerings.

19
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

One of the many initiatives that follow the establish- Capital Market Law in Saudi Arabia is broad enough
ment of CMA was a requirement that all Saudi finan- to accommodate the issuance of Islamic capital
cial institutions hive off their asset management, market (ICM) instruments and activities without
brokerage and investment banking units into sepa- necessarily stating explicitly their specificities. For
rate entities. Since then, the CMA has issued new instance, under the Capital Market Law, CMA does
licenses both for established players and new ones. not possess Sharīʿah supervisory responsibilities.
Nevertheless, the law allows CMA to adapt and im-
The CMA Listing Rules of 22/12/1426 H (22 January pose regulatory standards introduced by internati-
2006) and the CMA Regulations of 1718/1429 (18 onal standard-setting body such as Islamic Finan-
August 2008) are among the key regulations that cial Services Board (IFSB). Moreover, Capital Law
govern the issuance of capital market instruments of Saudi Arabia provides for the establishment and
by Saudi Arabian companies, including ṣukūk. role of the ‘Committee for Settlement of Securities
Disputes’ as dispute resolution mechanism.

Conclusion
This chapter shows that Saudi Arabia’s financial To achieve the objectives outlined in the Vision
system has been changing at a remarkable pace. 2030, the Financial Sector Development Program
Saudi Arabia is the largest Islamic finance market aims to increase the financial sector’s size relative
globally in economies with dual financial systems to the GDP by 280% by developing the financial sec-
(i.e. comprising both conventional and Islamic fi- tor and enhancing its effectiveness. The program
nancial sectors). Saudi Arabia therefore plays a key also aims to create a deep, diversified, digitized and
role in shaping the development of the Islamic finan- stable financial sector capable of attracting financi-
ce services sector worldwide. al technology companies and focusing on financial
literacy to bring the savings rates in line with leading
The contribution of the capital market to the growth international rates. It is expected that the more di-
of the Saudi economy has been no less significant. versified and effective financial services sector will
The Saudi Arabia stock market is one of the most better support the development of the Saudi econo-
active markets in the Middle East region and is the my, diversify its sources of income, and stimulate
largest market in the Arab world in terms of market savings, finance, and investment.
capitalization.

20
Chapter I: Economic And Financial Landscape

Saudi Arabia is the largest


Islamic finance market globally in
economies with dual financial systems
(i.e. comprising both conventional
and Islamic financial sectors).

21
BOX 1.1

COVID-19 AND SAUDI ARABIA’S RESPONSE


The world has undeniably changed drastically in More specifically,
recent months due to the global spread of the co-
ronavirus disease (Covid-19) that shows no sign of 1. The SAR 70 billion ($18.66 billion) set of initiati-
abating. The Covid-19 pandemic is inflicting high ves aim for
and rising human costs across the globe. Protec- • Extension of Iqamas (residency permits) for
ting lives and allowing health care systems to cope expats whose permits have expired until 20
have required isolation, lockdowns, and widespread June 2020. These residents will be exempted
closures to slow the spread of the virus. The health from paying an expat levy.
crisis is therefore having a severe impact on econo- • Employers may refund the fees of work visas
mic activity. As a result of the pandemic, the global which were issued during the travel ban on
economy is projected to contract sharply by minus entry and exit or extend them for a period of
3% in 2020, much worse than during the 2008–09 three months without charge.
financial crisis.23 • Employers may extend exit and re-entry visas
which were not used during the travel ban for
With the unprecedented global spread of Covid-19, three months without charge.
from East to West, all GCC countries swiftly enac- • Business owners may postpone the payment
ted a range of measures to control the spread of of value-added tax, income tax, excise tax,
the disease. Saudi Arabia, among several countries and the submission of zakat declarations
around the world, has measurably taken several and payment obligations due therefrom, for
precautionary steps to curb the outbreak. These a period of three months. The initiative fu-
measurements24 are tough but necessary to safe- rther allows zakat certificates to be granted
guard the lives of people in the Kingdom. without restrictions for the 2019 fiscal year
while also accepting installment requests to
At the same time the government announced eco- the General Authority of Zakat and Income
nomic band-aids to quickly mend impacts from the Tax without applying the condition of advan-
temporary break to non-essential trade and servi- ce payment.
ces. The government announced several financial • Postponing the collection of customs duties
incentives to soften immediate impacts both for in- on imports for a period of 30 days against
dividuals and businesses alike from these precau- the submission of a bank guarantee2, for the
tionary measures. On 20 March 2020, the govern- next three months and setting the necessary
ment announced a SAR 120 billion (US$32 billion) criteria for extending the postponement peri-
emergency fund to address the economic effects od for the most affected activities as needed.
of Covid-19.25 The package includes a SAR70 billion • Postponing the payment of some govern-
(US$18.66 billion) set of initiatives which exempt ment services fees and municipal fees due on
and postpone government dues, and a SAR50 billi- private sector, for a period of three months.
on (US$13.33 billion) package by the SAMA to sup- • Lending approval and other forms of finan-
port the banking sector, other financial institutes, cing to be authorized by the Minister of Finan-
and SMEs. A further SAR12 billion (US$3.2 billion) ce, in addition to an exemption from payment
package was announced by the Saudi Social De- of fees and returns on loans granted until the
velopment Bank to support owners of small and end of 2020.
emerging enterprises in priority sectors, in addition
to low-income families.

22
2. The SAR50 billion (US$13.33 billion) package Saudi’s economic growth will be surely affected by
will focus heavily on providing financial support the Covid-19 outbreak. But it is too hard to predict
for SMEs impacted by the epidemic. the level of the impact of this virus outbreak on the
• Up to SAR30 billion (US$8 billion) will be ear- Kingdom’s economic growth moving forward.
marked for banks and financial institutions
for deferred loan payments by SMEs for six The good part is that many sectors of the economy
months. continue their daily routine works by taking full ad-
• Up to SAR13.2 billion (US $3.5 billion) to vantage of teleconferencing technology. This also
SMEs will also be granted concessional from indicates that increased technology adoption is ne-
banks and financial institutions to maintain cessary in case a prolonged or a repeated outbreak
operations, contribute to economic growth occurs.
and maintain employment rates.
• Banks and financial institutions will further However, if the second wave of the outbreak is ever
use a fund of SAR6 billion to (US$1.6 billion) to take place, then the situation may become com-
exempt SMEs from the costs of loan guaran- plicated. Given the scale of this pandemic, there
tee programs. have been significant impacts on social mobility
• SAR800 million (US$213.33 million) will be and in turn there will be far-reaching impacts on
used to cover payment fees for all private global and regional economic growth. For a coun-
sector stores and facilities registered in the try like Saudi Arabia that heavily depends on the oil
national system for a period of three months. sector, this global decline of economic growth has
a significant implication. The declining demand of
3. The remaining SAR12 billion (US$3.2 billion) oil and decrease of oil price due to global economic
fund allocated by the Saudi Social Development slowdown will reduce Saudi revenue and hence its
Bank, with support of the National Development fiscal strength in stimulating the economy.
Fund, includes five tracks designed to mitigate
the expected financial impact of Covid-19: It is worth noting that while Europe and America
• The first track consists of $1.06 billion (SR4 still struggled with the coronavirus outbreak into
billion) to support low income families in the third quarter of 2020, China has somewhat suc-
2020. cessfully controlled the spread of the coronavirus.
• The second track consists of $533 million China, the world’s second largest economy and the
(SR2 billion) to support 6,000 entrepreneurs ‘global factory’ for the world is resuming their busi-
launch their development projects within mi- ness. China is also Saudi’s largest destination of
cro and small enterprises. exports and largest origin of imports. China's ex-
• The third track consists of $533 million (SR2 perience so far has shown that the right policies
billion) to support 1,000 small and medium make a difference in fighting the Covid-19 pande-
health facilities. mic and mitigating its impact, though some of the-
• The fourth track consists of $533 million se policies come with difficult economic tradeoffs.
(SR2 billion) to contribute to the financing of
50,000 small local facilities.
• The fifth track extends the deadline for all
entrepreneur projects which were financed in
2019 and 2020 by six months, and will alloca-
te $533 million (SR2 billion) for all deferred
payments.

23
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

An Interview with
Dr. Al-Kholifey –
Saudi Arabian Monetary
Authority (SAMA)26
Q 1. How do you want the global community to Q 2. From the perspective of regulator, how would
recognize the Islamic financial industry in KSA? you describe the role of SAMA in making Islamic
What do you think is the most distinct feature of finance supportive of sustainable economic deve-
Islamic financial services industry in KSA? lopment and job creation?

Saudi Arabian Monetary Authority (SAMA) believes SAMA plays an important role in incentivizing the
that Saudi Arabia is an influencing actor of the Glo- contribution of the Islamic finance segment to sus-
bal Financial System considering the strength of its tainable economic development and job creation.
financial sector. Islamic Finance is an integral part The following reasons supports this argument:
of the local financial sector. We believe that impor- • In fulfilling its mandate, SAMA provides the Saudi
tant aspects characterize the Saudi Islamic Finan- ecosystem with the proper market enablers that
cing: are favorable for the development and growth of
• Islamic Finance in the Kingdom of Saudi Arabia the Islamic finance.
(KSA) contributes to meeting the economic and • SAMA prioritizes the innovation and use of finan-
social needs of the national economy, which af- cial technology to enable individuals and com-
fects positively sustainable value creation. panies to have easy access to financial services,
• It plays its part in reaching the economic and fi- which tends to improve financial inclusion at the
nancial aspirations of the Financial Sector Deve- national level.
lopment Program (FSDP) in terms of attractive- • SAMA pays particular attention to the promoti-
ness and competitiveness of the Saudi financial on of the growth of the (Micro, Small and Me-
sector. dium Enterprises (MSME) sector. This dynamic
• It is a growing area of finance that uses the sector can create jobs, contribute increasingly to
best international business practices in the field GDP, and enhance the diversity of the Saudi eco-
to provide the most adapted solutions to their nomy’s resources. In collaboration with several
clients and protect their rights. stakeholders (Capital Markets Authority (CMA),
• Eminent Saudi scholars who contributed to the Small and Medium Enterprise Authority (SMEA),
development and regulation of the industry and among others), SAMA plays an important role
its most popular products, services, and practi- in terms of establishing and implementing the
ces produced most of the financial literature on regulatory framework of Islamic banking opera-
fiqh transactions. tions to maintain the financial stability of the sec-
tor and promoting sustainable economic growth
The most salient feature of Islamic finance is dual: of Islamic finance.
• First: It contributes substantially to the stability,
resilience and development of the financial sec-
tor.
• Second: It is aligned with the government econo-
mic agenda, as reflected by Vision 2030.

24
Chapter I: Economic And Financial Landscape

Q 3. How would the “Sandbox regulatory environ-


ment” contribute to innovation in Islamic financial Dr. Al-Kholifey’s short biography
services industry in the Kingdom?
He has been the chairman of SAMA sin-
SAMA aims to move toward a cashless society by ce May 2016. He has been the Governor of
promoting electronic transactions. Some of SAMA’s SAMA since May 7, 2016. Dr. Al-Kholifey has
achievements in this regard are as follows: also served as the deputy governor of SA-
• Employing NFC technology to make contactless MA’s Research and International Affairs.
payments using MADA cards or smart phones
(the service is known as “MADA atheer”); Prior to his 15 years of experience in different
• Enabling payment through QR codes; and departments at SAMA, he worked as a legal
• Launching the “Esal” platform for B2B e-invoi- specialist at the Ministry of Petroleum and
cing and payments as well as “MADA Online” Mineral Resources. He joined SAMA as an
services. economist in 1995. Dr. Al-Kholifey obtained
The impact of these new technologies in the Sau- a law degree from King Saud University, an
di financial service market will be observed and MBA and a Ph.D. in Economics from Colora-
assessed, through the sandbox, which encoura- do State University, U.S.
ges the transformation of the Saudi market into
a smart financial center. The regulatory sandbox
welcomes local and international firms that are
willing to test new digital solutions in a ‘real’ en-
vironment with a view to deploying such soluti-
ons in Saudi Arabia in the future.
• For example, through the sandbox designed for
testing innovative financial products and servi-
ces, online account opening for retail customers
and online updating of Know Your Customer
(KYC) details have been introduced, with the par-
ticipation of 11 banks operating in Saudi Arabia.
• In addition, SAMA has licensed 21 companies
to operate within the sandbox and offer various
services in the field of digital payments.

Q 4. SAMA is leading initiatives in the application


of blockchain to the banking sector. What are the
main outcomes of these initiatives? What are the
expected benefits to the economy?

Regarding blockchain technology, SAMA works


with companies specialized in the field to establish
a digital platform. With this platform, many entities,
especially banks, will be able to make payments.
As for digital assets, SAMA is working with CMA on
studying and defining those assets.

25
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER II:
BANKING SECTOR

26
Chapter II: Banking Sector

Overview
Saudi Arabia’s banking system consists of com- dom’s financial sector. It also examines the steady
mercial banks, 12 domestic and 13 foreign. Four growth, robustness, sound performance and con-
of the 12 domestic banks are fully-fledged Islamic stant dominance of the banking sector in the overall
banks and the rest of them provide Islamic banking financial system of the Kingdom, even when com-
services through Islamic windows. Some domestic pared to its peers in the G20. The promising role of
banks have international branches operating outsi- the Islamic banking sector in the Kingdom cannot go
de the Kingdom. unnoticed. The banking sector, especially the Islamic
banking sector, has a vital role in the process of the
This chapter delves into the banking sector of Saudi implementation of Vision 2030 to achieve sustaina-
Arabia which has become the backbone of the King- ble development and a flourishing economy.

Figure 2.1: Top 4 Commercial Banks by Assets in 2018

CONVENTIONAL BANKS ISLAMIC BANKS


National SAR 453,390 million SAR 365,004 million
Commercial Bank (US$ 120,904 million) Al Rajhi Bank (US$ 97,334 million)

Year of establishment: 1953 Year of establishment: 1957


Number of branches: 401 Number of branches: 551
Number of ATMs: 3729 Number of ATMs: 5006

SAMBA SAR 229,938 million SAR 121,333 million


Financial Group (US$ 61,317 million) Alinma Bank (US$ 32,356 million)

Year of establishment: 1980 Year of establishment: 2006


Number of branches: 72 Number of branches: 90
Number of ATMs: 520 Number of ATMs: 1488

SAR 229,899 million SAR 73,636 million


Riyad Bank (US$ 61,306 million) Bank Al-Bilad (US$ 19,636 million)

Year of establishment: 1957 Year of establishment: 2004


Number of branches: 321 Number of branches: 111
Number of ATMs: 2588 Number of ATMs: 863

SAR 174,564 million SAR 73,003 million


SABB (US$ 46,550 million) Bank Aljazira (US$ 19,468 million)

Year of establishment: 1978 Year of establishment: 1975


Number of branches: 75 Number of branches: 79
Number of ATMs: 925 Number of ATMs: 618

Source: Banks’s Annual Reports

27
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Sector Size and Growth


The decline in oil prices in 2014 has led to slower Within this specific time period, it can be observed
economic growth in Saudi Arabia. The plunge in oil that year-on-year growth of the banking sector in
price started in the mid of 2014 and then started to Saudi Arabia declined from 12.6% in 2014 to 3.6% in
get stabilized in early 2017 (Figure 2.2). 2015. It continued witnessing low growth rates and
only in 2018 did this indicator start improving slight-
ly (Figure 2.3).

Figure 2.2: Crude Oil Price Per Barrel (US) for 2010-2019
$120.88
Feb ’12
$112.57
Dec ’11 $118.31
$130.22 Aug ’13
Apr ’11 $113.59
$108.8
Jun ’14
Jan ’13 $65.18
May ’15

$75.63 $61.06
$107.1 Jun ’18 Dec ’19
Dec ’10 $89.73 $67.13
Sept ’11 $52.54 Jan ’18
$95.16 May ’16
Jun ’12 $101,44
May ’13

$53.06
Jan ’14 $48.3 $46.45
$36.48 Jun ’17 Jan ’18
Feb ’16

Dec ’10 Dec ’11 Dec ’12 Dec ’13 Dec ’14 Dec ’15 Dec ’16 Dec ’17 Dec ’18 Dec ’19

Source: Macro Trend

Figure 2.3: Total Assets of Commercial Banks (SAR Billion), (YoY %) KSA 2010-2018

12.3% 12.6% 2,256 2,306 2,363


2,209
1,893
9.1% 2,133
1,734
1,415
1,544 9.2%
1.734

2.2% 2.2% 2.5%

3.6%

2010 2011 2012 2013 2014 2015 2016 2017 2018


Total Banking Sector Assets Growth Rate

Source: Estimated by IRTI based on SAMA 51st and 55th Annual Reports

28
Chapter II: Banking Sector

The banking penetration, measured as a ratio of continued increase in banking penetration remained
banking assets to GDP, grew faster than the GDP unhalted.
growth rate between 2013 and 2018, indicating a
further development of the banking sector in the Table 2.1 shows the banking assets as a percenta-
country. Figure 2.4 clearly shows that banking pe- ge of GDP from 2013 to 2018 for GCC countries. It
netration was primarily driven by Islamic banking shows that Saudi Arabia is the lowest among the
assets, outpacing the conventional banks. Despite GCC countries, which indicates the high potential of
various economic challenges during these years, a the growth of banking penetration in the Kingdom.

Figure 2.4: Banking Penetration in KSA (% of GDP) 2013-2018

56.59% 58.32%
54.85%
52.29%
50.77%
45.03% 45.70%

36.78%
35.33%
32.34% 33.18% 31.50%

2013 2014 2015 2016 2017 2018

Islamic Conventional
Sources: SAMA and IFSB

Table 2.1: GCC Banking Assets as % of GDP 2013- 2018

Country 2013 2014 2015 2016 2017 2018

Bahrain 670% 633% 621% 587% 588% 510%

UAE 192% 202% 209% 215% 166% 165%

Qatar 126% 134% 143% 158% NA 197%

Kuwait 130% 139% 144% 145% 175% 186%

Oman 91% 100% 112% 108% 109% 108%

Saudi Arabia 90.73% 87.55% 87.62% 87.19% 89.77% 89.83%

Note: NA: Not Available


Source: SAMA Annual Reports and Other GCC Country Central Banks Annual Reports

29
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Given the relatively low banking assets to GDP ratio and nurturing financial responsibility among its peo-
in Saudi Arabia compared to other GCC countries, ple, will contribute greatly towards the development
there is still some room to push up the banking pene- of the financial and banking sectors. The banking
tration ratio in the future. The ambitious Vision 2030, penetration is expected to continue increasing in the
which was unveiled in 2016, has three themes: a Vi- short term and medium term as the banking sector
brant Society, a Thriving Economy and an Ambitious has to play a vital role in the process of the imple-
Nation. The Vision 2030, which focuses on further mentation of Vision 2030 to achieve sustainable de-
revitalizing the financial sector by fostering private velopment and a flourishing economy.
sector growth, creating an advanced capital market,

Saudi Banks are Highly Concentrated


The banking sector is led by 3 largest banks in terms of total assets. Of these, Al Rajhi Bank is the only
of asset size, namely the National Commercial fully-fledged Islamic bank.27
Bank, Al Rajhi Bank, and SABB accounting for 47.8%

Figure 2.5: Market Share of Total Banking Assets, KSA, 2018

Others: 12.00% NCB: 19.18%

Alinma: 5.13%

ANB: 7.54%
Al Rajhi: 15.44%

Saudi Fransi: 8.05%

SAMBA: 9.73%
SABB: 13.20%
Riyad: 9.73%

Source: SAMA Annual Report 2019 & Banks’ Financial Statement.

30
Chapter II: Banking Sector

In addition to the fully-fledged Islamic banks,


all other conventional banks offer
Sharīʿah compliant products and services
through Islamic windows or branches.

The Development of Islamic Banks


The institutionalization of Islamic financial services and the ability to grow revenues compared to other
industry (IFSI) in Saudi Arabia commenced with the Saudi banks, the bank has grown substantially over
establishment of Al Rajhi Banking and Investment the past years and became the second-largest Isla-
Corporation in 1989, renamed later to Al Rajhi Bank. mic bank since 2012.
Being a fully-fledged Islamic bank, Al Rajhi is the se-
cond largest bank in Saudi Arabia in terms of assets Bank Al Bilad was established in 2004 as one of the
and the largest Islamic bank in the world by assets late entrants to the sector with a paid-up capital of
and market capitalization. The bank accounted for SAR 3 billion. Since then Al Bilad was able to expand
15.44% of total assets and 17.7% of total deposits substantially through deposits, financing and remit-
among banks in Saudi Arabia as of end-2018. The tances resulting in its elevated growth rate, which is
bank’s market capitalization as of 31 December however not commensurate with its market share.
2018 was SAR 142.2 billion. The bank’s total assets Bank Al Bilad is the third-largest Islamic bank with
of SAR 365 billion in 2018 was a substantial rise an asset of SAR 73.64 billion at the end of 2018.
from SAR 185 billion at the end of 2010. This repre-
sents 57.7% of Saudi Arabia’s total Islamic banking The fourth-largest Islamic bank, Bank Al Jazira, was
assets of SAR 633 billion in 2018 and 23.8% of the founded in 1975 and became fully Sharīʿah compli-
total Islamic assets of Islamic banking and Islamic ant in 2007, with assets of SAR 73 billion in 2018.
window assets of SAR 1,535 billion in 2018.28 In March 2011, the bank successfully issued ṣukūk
worth of US $267 million, which was one of the lar-
The other three full-fledged Islamic banks are Alin- gest in 2010 and 2011.
ma Bank, Bank Albilad and Bank Al Jazira. Alinma
Bank is the second-largest Islamic bank with assets In addition to the fully-fledged Islamic banks, all other
of SAR 121.33 billion in 2018. With sound financi- conventional banks offer Sharīʿah compliant products
al performance, rapid growth in business activities, and services through Islamic windows or branches.

Figure 2.6: Assets Size of Islamic Banks in KSA for 2010 and 2018 (SAR Billion).
365

182
121

73 74
33 26
21

Bank Aljazira Bank Albilad Alinma Bank Al Rajhi Bank

2010 2018
Source: Banks’ Annual Reports
31
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Islamic Banking Assets are On the Rise


After seeing double-digit growth rates of 16.8% in The share of overall Sharīʿah-compliant banking as-
2014, the growth of Islamic banking assets (inclu- sets has increased steadily over the past five years,
ding windows) dwindled in 2015. The growth rate growing by 9% from 56% in 2013 to 65% in 2018.
even dropped to 2.4% in 2017 before it bounced The growth in entire banking assets during this peri-
back to 5.6% in 2018. However, conventional banks’ od was primarily driven by strong growth in the Isla-
assets shrank by 0.6% in 2015 and further plumme- mic banking sector. Islamic banking assets grew at
ted by 6% in 2016 followed by 1.8% growth in 2017. a CAGR of 7.7% between 2013 and 2018 while the
Besides, the year 2018 witnessed another contrac- an increasing demand for Sharīʿah-compliant finan-
tion of 2.7%. In spite of the economic challenges, cial instruments.
it is evident that Saudi Arabia is embracing Islamic
finance value propositions, indicated by the incre-
asing trend of Islamic banking assets.

Figure 2.7 Year on Year (YoY) Growth by Type of Banking, KSA 2014-2018

16.8%

7.3% 7.7%
6.6%
5.6%

2.4%
1.8%

2014 2015 2016 2017 2018


-0.6%

-2.7%
Islamic Banks & Windows Assets
Conventional Banks Assets -6.0%

Source: Estimated by IRTI based on IFSB and SAMA’s 51st and 55th Annual Reports

32
Chapter II: Banking Sector

Figure 2.8: KSA Market Share by Type of Banking, (%) 2013-2018

44% 42% 40% 37% 37% 35%

63% 63% 65%


58% 60%
56%

2013 2014 2015 2016 2017 2018

Share of Islamic Banks & Windows Assets Share of Conventional Banks Assets

Source: Estimated by IRTI based on IFSB and SAMA’s 51st and 55th Annual Reports

Figure 2.9: KSA Banking Sector Assets by Types of Banking (SAR Billion), 2013-2018

2,363
2,256 2,306
2,209
2,133

1,893

1,535
1,419 1,454
1,318
1,237
1,058
896 891 852
835 837 829

2013 2014 2015 2016 2017 2018

Islamic Banks & Windows Assets Conventional Banks Assets Total Banking Sector Assets

Source: Estimated by IRTI based on IFSB and SAMA’s 51st and 55th Annual Reports

33
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 2.10: Saudi Arabia’s Banking Sector Growth (CAGR) by Type of Banking For 2013-2018, (%)

7.7%

4.5%

Conventional
Banks Assets
Islamic Banks & Total Banking
Windows Assets -0.1% Sector Assets

Source: Estimated by IRTI based on SAMA and IFSB reports.

The Lion’s Share of Banking Assets


The lion’s share of the banking assets is made up private sector claims is in line with the market ex-
of claims to the private sector, followed by claims pectations as government stimulus packages start
on the public sector and foreign assets. The other to unfold and are expected to further unfold in 2019
assets grew by a CAGR of 22% between 2013 and and 2020.
2018. This growth increased the share of other
banks’ assets from 9% in 2012 to 20% in 2018. In The details composition of banks’ assets and liabili-
the meantime, the claims to the private sector’s ties are presented in Figure 2.11 and 2.12
share increased from 59% to 61%. The increase in

Figure 2.11: Breakdown of Commercial Banks’ Assets (SAR Billion) in KSA for 2013-2018

135.75
156.45 126.59
246.02
310.48
262.09
1,434.89
1,405.47 1,393.70
1,371.93
1,256.21
1,123.65

124.98 227.43 301.14 352.06


93.76 98.95
225.84 242.36
210.69 251.61 316.71 221.09

200.37 146.24 236.70 239.37 218.57


213.07

2013 2014 2015 2016 2017 2018


Bank reserves Claims on the private sector
Foreign Assets Other assets
Claims on the public sector Claims on non-monetary Fin.Inst.
Source: SAMA

34
Chapter II: Banking Sector

Figure 2.12: Breakdown of Commercial Banks’ Liabilities (SAR Billion) In KSA for 2013-2018

254.60
219.93 230.92
199.18
176.45 43.68 48.35
42.68 40.36
155.35 40.16 317.60 303.89
298.90
248.11 270.96
35.69 95.48
80.13 94.50
225.86 92.28 91.17
74.41

1,661.08
1,617.01 1,619.06
1,401.98 1,575.58 1,604.77

2013 2014 2015 2016 2017 2018

Bank deposits Profits


Foreign liabilities Other liabilities
Capital and reserves
Source: SAMA

Sharīʿah-Compliant Banking Maintains Strong


Position in Operational Efficiency
The overall banking sector in Saudi Arabia has seen 54.8% in 2018. The cost-to-income ratio for Islamic
a slight decline in operating efficiency between 2014 banks, on the other hand, is relatively lower compa-
and 2018, as indicated by the cost-to-income ratio red to their conventional counterparts.
which gradually increased from 51.7% in 2014 to

Figure 2.13: Cost to Income Ratio for Saudi Arabian Banks (%) for 2014-2018

54.3% 54.8%
54.4%
53.4%
52.6%
51.7% 51.3% 51.5%
50.2%

46.3%

2014 2015 2016 2017 2018

Islamic banks Overall banking sector

Source: Banks’ Reports and IFSB Reports29.

35
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Over the years, the Islamic banking system experien- (ROE) too. The ROEs for Islamic banks in Saudi are
ced a higher average return on assets (ROA) compa- always better than their G20 peers and Malaysia,
red to the whole banking system. This is consistent except Turkey in 2018 which scored 18%. In Saudi
with previous analysis on efficiency. It also shows Arabia, the profitability of the Islamic banking sector
that Islamic banks in Saudi Arabia outperform their has always been appealing for bankers, shown by
peers in other OIC Member Countries such as In- ROA that consistently stood at above 2%, contrary
donesia and Turkey of the G20, as well as Malay- to conventional banks’ ROA which was below 2 %
sia, the leading country in Islamic finance industry for the period of 2013-2018.
development. This fact applies to return on equity

Figure 2.14: ROA of Islamic Banks and Windows Vs Conventional Banks Vs


Total Commercial Banks in KSA, (%) 2014-2018

2.3% 2.3% 2.2% 2.3%

2.1%
2.0%
1.9% 1.9% 1.9%
1.8%

1.6%
1.4% 1.4% 1.4%

1.2%

2014 2015 2016 2017 2018

Islamic Banks & Windows Total Commercial Banks Conventional Banks

Source: IRTI’s Calculation based on SAMA and IFSB Reports

Figure 2.15: Return on Average Assets (ROA) of Islamic Banks Across G20 Peers and Malaysia (%)

2.5
2.4
2.0 1.9 2.1 2.0
1.7
1.5
1.4 1.4 1.4
1.2 1.1 1.1 1.1
1.0 1.0 1.0
0.7 0.7
0.5 0.4 0.5 0.6

2013 2014 2015 2016 2017 2018

KSA Indonesia Turkey Malaysia

Source: IFSB PSIFI Reports by Country

36
Chapter II: Banking Sector

Figure 2.16: Return on Equity (ROE) of Islamic Banks Across G20 And Malaysia (%) 2013-2018

18.3 18.3
17.3 17.6
16.6 16.1 16.5
16.0
15.3 15.1
13.9 14.2 14.3
13.5 13.0 13.4
12.5 12.2

7.0 6.5 6.6


5.8 5.4
4.2

2013 2014 2015 2016 2017 2018

KSA Indonesia Turkey Malaysia

Source: IFSB PSIFI Reports by Country

Profit (Y-o-Y) rates of total banking sector in Saudi The total sector year-on-year growth rate improved
Arabia witnessed stable growth for 2013-2018. Total from -5.4% in 2016 to 8.2% in 2017, whereas Islamic
sector’s profit grew from SAR 35.69 billion in 2013 banks and windows improved from -0.5% in 2016
to SAR 48.35 billion in 2018. However, both Islamic to 6.6% in 2017 and for conventional banks, from
banking (including windows) and conventional ban- -16.8% in 2016 to 12.7% in 2017. The drop in pro-
king profits declined in 2016. While the y-o-y growth fits of Saudi Arabia’s banking sector for 2016 can be
rate of the total sector for 2016 dropped to -5.4% explained by lower oil price which immediately cau-
from 6.3% in 2015, Islamic banking profit dropped to sed a decrease in state oil revenues and spending,
-0.5%. At the same time, conventional banks profit which affected banks’ profitability indicators.
rate declined to -16.8% in 2016 compared to 6.6% in
the previous year. The situation improved in 2017.

Figure 2.17: Profit by Type of Banking (SAR Million), 2013-2018

48,349
42,683 43,677
40,159 40,363
35,692 34,710
29,644 31,597
28,074 29,796
26,735

12,085 12,887 13,639


10,719 12,080
8,957

2013 2014 2015 2016 2017 2018

Conventional Banks Islamic Banks & Windows Total Sector

Source: IRTI’s Calculation based on SAMA and IFSB Reports

37
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 2.18: Profit Growth Rate (YoY %) By Type of Banking, KSA 2014-2018

34.9%

12.5% 12.7% 12.9%


10.7% 9.9%
8.2%
6.3% 6.1% 6.6% 6.6%
5.0%

2016
2014 2015 2017 2018
-0.5%
-5.4%

-16.8%

Total Sector Conventional Banks Islamic Banks & Windows

Source: IRTI’s Calculation based on SAMA and IFSB Reports

Stable Capital Adequacy Ratio


Banks in Saudi Arabia have been required to comply IFRS 9, reflecting the retained earnings and reserves
with Basel III capital adequacy requirements sin- decline as at 1 January 2018 via creating tremen-
ce 2014. Their aggregate Tier 1 Capital Adequacy dously additional expected credit loss allowance.
Ratio (CAR), the proportion of Tier 1 capital to total The results above indicate that the eligible capital
risk-weighted assets remained stable at a healthy le- of both Islamic and overall banking grew faster than
vel above 10.5% of SAMA’s requirement. In general, their risk weighted assets. However, the pace of this
Islamic banks and windows, as well as total banking growth was higher for the Islamic banks in compari-
sector of KSA, continued to maintain a strong capi- son to the overall banking sector.
talization profile of capital adequacy ratios for 2018.
The fact that banks in Saudi Arabia exceeded the The ratio of non-performing loans (NPLs) to total
required level of Tier 1 capital is an indication that loans increased from 1.0% in 2014 to 2% at the end
liquidity in the banking sector remains strong, despi- of 2018. NPL ratios for Islamic banks, in contrast,
te the strain of lower deposit growth. Islamic banks are lower and remained stable during the same pe-
maintained a CAR slightly above their conventional riod. Overall, Islamic banks’ non-performing loans
counterparts during this period. Islamic banks were (or financing) accounted for 1.1% of total financing
better capitalized as compared to conventional in 2014, marginally increased to 1.2% in 2018. Such
banks, though the gap was reduced in 2018 due to a a quantitative profile is a demonstration that Saudi
slight decrease in Islamic banks’ CAR from 21.9% in Arabia banks are among the best in comparison to
2017 to 20.8% in 2018. Such a decrease is driven by its G20 peers and Malaysia.
major industrywide factors, namely the adoption of

38
Chapter II: Banking Sector

Figure 2.19: CAR, Islamic Vs Overall Banking Sector (%), 2014-2018

21.9%
21.1%
20,8%
20.1%
19.7%

20.4% 20.3%
19.5%

18.1%
17.9%
2014 2015 2016 2017 2018

Islamic Banks Total Banking Sector

Source: IFSB Data by Country & SAMA 55th Annual Report

Figure 2.20: NPL Ratio of Islamic Banks Vs Total Banking Sector (%) For 2014-2018
1.7%
1.5%
1.3% 1.3%
1.1% 1.1% 1.1% 1.2% 1.2%
0.9%

2014 2015 2016 2017 2018

Islamic banks Total banking sector


Source: Multiple Sources 30

Figure 2.21: NPL Ratio (%) of Islamic Banks Across G20 Peers and Malaysia, 2013-2018

4.99 5.14
4.84 4.76
4.34 4.41

3.66 3.86

3.21 3.26
3.05
2.71

1.42 1.42 1.30 1.27


1.13 1.20 1.21 1.15 1.24 1.18 1.30
0.89

2013 2014 2015 2016 2017 2018

KSA Indonesia Turkey Malaysia

Source: IFSB Report

39
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 2.22: NPL Coverage Ratio (%) of Islamic Banks Across G20 Peers and Malaysia, 2013-2018

262
249

212
192
175
152

63 62 62 71 63
59
51 46
34 40 38
33 29 32 27
26 24 25

2013 2014 2015 2016 2017 2018

KSA Indonesia Turkey Malaysia

Figure 2.23: NPL Coverage Ratio of Islamic Banks Vs Total Banking Sector (%) for 2014-2018

249% 262%
212%
192% 183% 175% 172% 178%
162% 167%

2014 2015 2016 2017 2018

Islamic banks Total banking sector

Source: Multiple Sources31

The above trend indicates that Saudi banks better than the overall banking sector. The coverage ratio
managed their credit risk during this period. This indicates provisions for non-performing financing
can be attributed to improved prudence measures (NPF); a higher coverage ratio indicates a better abi-
in lending activities, in addition to improved ma- lity to mitigate the credit risk of the bank. Noticeably,
nagement of asset quality by banks with the im- Alinma bank’s NPF coverage ratio improved to 200%
plementation of Basel III requirements in 2013. For from 159%; whereas, overall banking’s NPL cover-
instance, Al Rajhi, being the largest Islamic bank in age ratio decreased by 16 percentage points from
the world, had the lowest NPL ratio of 0.95%. In the 183% in 2014 to 167% at the end of 2018.
same period, the NPL coverage ratio is much better

40
Chapter II: Banking Sector

Saudi Islamic Asset


is leading in the GCC Region
The GCC region is the largest region in terms of 2) Advanced digitalization of services provided by
market share for global Islamic banking assets. It banks;
is considered as one of the main drivers for the glo- 3) SAMA’s effective regulatory and supervisory role
bal growth of Islamic banking industry. In the region, over the banking system with the aim of enhan-
the overall Islamic banking assets maintained con- cing its resiliency and stability; and
tinuous growth at CAGR of 7.9% over the last five 4) Macroeconomic stability.
years (2013-2018). The combined total worth of Is-
lamic bank’s assets recorded US$ 835 billion at the While Saudi Arabia is leading Islamic banking in
end of 2018 compared to US$ 799 billion in 2017. terms of assets size, in the aspects of growth,
In terms of top jurisdictions for Islamic banking as- Oman outpaced the GCC member countries with a
sets, Saudi Arabia is the market leader in the region CAGR of 39.6%. The assets’ growth increased more
which accounts for almost 50% of the total regional than five times from US$ 2.11 billion in 2013 to US$
Islamic banking industry assets for six consecutive 11.20 billion in 2018. Such a remarkable growth can
years from 2013-2018. The CAGR for Islamic ban- be attributed to 1) young age of the industry; 2) ro-
king assets in Saudi Arabia stood at 7.7%, which is bust regulatory framework; 3) resilience of Islamic
almost the same as CAGR for the total regional Isla- banks; and 4) strong demand for Islamic financial
mic banking industry. services. Looking at the capital structure of Islamic
banks and windows on the country level in Oman, it
Such steady growth of Islamic banking assets is dri- can be observed that the main sources of assets’
ven by: increase come from liability rather than equity.
1) Strong demand for Sharīʿah complaint products
in Saudi Arabia;

Figure 2.24: GCC’s Islamic Banks Assets’ Compound Annual Growth Rate (CAGR) by Country (%)
2013-2018

39.7%

9.9% 9.9%
7.7% 7.9%
4.1% 4.8%

KSA Bahrain Kuwait Oman UAE Qatar Total


Region

Source: IRTI’s Calculation Based on IFSB Reports

41
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 2.25: Market Share of GCC Islamic Banking and Windows Assets by Country, (%) 2014-2018

1% 1% 1% 1% 1%
8% 8% 7% 7% 7%
11% 12% 12% 12% 12%

13% 12% 12% 12% 12%

17% 18% 18% 19% 19%

50% 50% 50% 49% 49%

2014 2015 2016 2017 2018

Saudi Arabia UAE Kuwait Qatar Bahrain Oman

Source: IRTI’s Calculation Based on IFSB Reports.

Figure 2.26: GCC Islamic Banking and Windows Assets by Country, (US$ Billion) 2013-2018

835
799
757
709
655
572

409
388
378
351
330
282

150

159
138
126
110

101
97

96
88

96
99

88

87

84

89
72
80

59

59
56
60

55
53

10

11
48

8
6
2

2013 2014 2015 2016 2017 2018

KSA Bahrain Kuwait Oman UAE Qatar Total Region

Source: IRTI’s Calculation Based on IFSB Reports

42
Chapter II: Banking Sector

Liquidity
Saudi Arabia’s Islamic banks’ liquid assets ratio assets, continued to remain stable for Saudi Ara-
slightly improved from 24% in 2015 to 25% in 2018. bia’s Islamic banks. Though it dropped slightly from
163% in 2015 to 162% in 2018, these rates are still
The Liquidity Coverage Ratio (LCR), an indicator of well above the average. Saudi Islamic banks per-
the ability of the bank to cover net cash outflows formed well by maintaining a stable LCR over the
over the next 30 calendar days by high quality liquid years.

Figure 2.27: Liquid Assets Ratio of Islamic Banks Across GCC and G20 Peers, (%) 2015-2018

54%
53%
49%

44%

35%
34%

33%
32%

30%

29%
28%
29%
26%

25%
24%

20%
18%

17%
17%

16%
16%

16%
15%
16%

13%
14%

14%
14%

12%

12%
12%
11%

11%

1%
8%

2015 2016 2017 2018

KSA Indonesia Turkey Malaysia


Bahrain Kuwait UAE Oman Qatar
Source: IFSB Report

Figure 2.28: Liquidity Coverage Ratio (LCR) of Islamic Banks Across GCC and G20 Peers, (%) 2015-2018

222% 213%
212%
203% 196%
185%
177%
163% 167% 167%
162% 155%
154%
144% 142% 148% 146%

2015 2016 2017 2018


KSA Turkey Kuwait Oman Qatar

Source: IFSB Report; data for Kuwait on 2016 and 2017 is not available from IFSB.

43
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Another liquidity metric for banks is the net stable collected from IFSB report32. Across all countries,
funding ratio (NSFR) which measures the ability of NSFR showed a positive trend for the last two years
banks to cover the duration of their long-term as- 2017-2018. NSFR for Saudi Arabian Islamic banks
sets by having enough stable funding. According was maintained well above Basel III requirement by
to Basel III requirement, the minimum NSFR must standing at 122% in 2017 and 127% in 2018. This
be 100%. For Saudi Arabian Islamic banks, the cal- ratio indicates that the Islamic banking system in
culation is based on individual Islamic banks’ data. Saudi Arabia has ample sources of stable funding
As for Qatari and Omani Islamic banks, data was to meet their obligations.

Figure 2.29: Net Stable Funding Ratio (NSFR) of Islamic Banks by Country, (%) 2017-2018

122% 127%
103%
91% 90%
79%

Saudi Arabia Qatar Oman

2017 2018

Source: Islamic Banks’ Reports and IFSB reports33

E-Banking in Saudi Arabia


In a country with over 21 million citizens and 10.4 Considering the internet channel as a customer
million expats, banks in Saudi Arabia have expanded retention tool and a medium to acquire additional
the way business was done and have invested more clients, all banks have enhanced their electronic ser-
in alternative delivery channels. With the supervi- vices through a customer-centric and multi-channel
sion of SAMA, and the support of the government approach with more than half of the bank’s bran-
through its National Plan for Telecommunication ches on digital circuits. All banks recognized the im-
and IT approved in 200734 and the National Trans- portance of streamlining procedures and incremen-
formation Program under Vision 2030, Saudi banks tally making it easier for their customers.
have been able to transform their transactions to
make banking seamless and convenient for millions As the central bank, SAMA has been proactive in the
of people in their everyday lives. implementation of e-banking in Saudi Arabia over
the last decade. Beginning with the first ATM that
All banks in Saudi Arabia have already adopted di- was installed in 1980, SAMA enabled the industry
gital banking solutions as a core strategy to cater to endorse the e-banking solutions since the mid-
to constantly changing consumer behavior. With the 1980s.
wide use of internet over the years, customers are
driving banks in Saudi Arabia to invest more in their In April 1990, the Saudi Payments Network (SPAN),
online presence and increase the range of services a national ATMs network developed and operated by
offered on the internet. This is why investing in and SAMA went live. SPAN processes financial transac-
expanding services is of strategic importance, and tions by card users to the card issuers. The network
at the same time all this fits in nicely with the gover- connects all automated teller machines (ATMs) and
nment’s initiatives to promote e-commerce in Saudi point-of-sale (POS) terminals throughout the coun-
Arabia. try to a central payment switch that in turn re-rou-

44
Chapter II: Banking Sector

tes the financial transactions between a merchant’s Considering bank customers spend millions of hours
bank and the card issuer bank. SPAN also provides at the bank branches every year to pay their bills,
services outside Saudi Arabia via networks such as making it a heavy burden on both banks and custo-
GCC Net Member Switches. The Saudi banks are mers, SAMA launched the SADAD payment system
obliged to issue ATM cards compatible to the net- on 3 October 2004 whereby bills and payments due
work, and these cards are issued free of cost to the can be paid electronically through this new system,
customers. The purpose of this has been to encou- which saves time and effort for customers and re-
rage the customers to use the system. This techno- lieves the pressure on banks. SADAD has managed
logy has eased the banks dependence on notes as to shift consumers’ behavior by moving them from
means of transactions. physical channels (branches) to electronic channels
(ATM, Phone Banking, and Online Banking).
On 15 May 1997, the Saudi Arabian System for Fast
Money Transfers (SARIE) started to operate. SARIE With the advancement of technology, MADA ser-
is one of the most sophisticated systems in terms of vice for banking services started operating in 2014.
credit clearing. The system concludes two decades MADA is the new identity of SPAN that represents
of major achievements in the country with regard to the innovative generation of electronic payments in
the banking business. This system has been desig- Saudi Arabia and is intended to boost ATMs and POS
ned in accordance with the concept of total simul- growth with unprecedented dimensions of flexibili-
taneous clearing and is considered a revolutionary ty, speed, security, and acceptance. It is worth men-
invention in e-banking and commercial transactions tioning that 2015 witnessed an enormous growth
in the country. It constitutes the infrastructure for in the number of installed POS terminals by more
several advanced systems of payment and credit than 86,000 devices in that year alone. By the end of
clearance. These systems include automatic clea- 2018, there were 18,685 ATMs, 351,645 POS termi-
rance houses (ACH), systems for automatic clea- nals connected to the network, and the number of
rance of cheques, and Saudi Network for Payments issued ATM cards reached 28.6 million. More than
(SPAN) which links all cash machines and transfers 2 billion financial transactions were routed through
money electronically at the sale centers (EFTPOS). the network, with a total value of cash withdrawals
The technological step, coupled with the modern SAR 748.3 billion (US$ 199.6 billion) with an average
banking service associated with SARIE in relation to monthly transaction value of SAR 62.4 billion.
the banking sector in Saudi Arabia, is considered as
a landmark achievement in the history of payment Through a network of most advanced global tech-
systems in the country. nical payment systems, MADA connects all ATMs
and POS terminals offered by local banks throug-
SAMA continues its regulatory role through e-Trust hout the country to a central payment switch that
Center, performing electronic banking examinations, in turn re-routes the financial transactions between
and issuing specific guidelines regarding e-banking a merchant’s bank and the card issuer bank. The
such as Disaster Recovery Planning Guidelines, In- system also permits regional and global acceptan-
ternet Banking Security Guidelines, and SARIE Ope- ce through connecting with other payment systems
rating Rules and Regulations (CPSS 2003). Internet such as GCC Net, VISA, MasterCard, and American
Banking Security Guidelines, for instance, manda- Express to provide MADA cardholders with a wider
te the approval of any internet banking product or acceptance locally and overseas.
service prior to its launch (SAMA 2001). Although
SAMA makes all possible efforts for developing More recently, in continuation of the implementa-
e-banking products and services, there is a crucial tion of the Saudi Payment Systems Development
need for a legal framework that oversees not only Strategy, SAMA launched this new service called
e-banking transactions, but also all other e-business “SADAD Account” with the aim of providing a secu-
transactions. re online payment option without the need of using
bank cards or cash. The service works directly be-

45
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

tween SADAD account and the e-commerce client DAD account can easily be accessed via the e-ser-
and payments are deposited to the account of mer- vices of any member bank. SADAD account came
chant or service provider. SADAD has now entered to become a game changer for the online world and
a new stage wherein it provides innovative payment a great boost to the e-commerce industry in Saudi
solutions for e-commerce. It is all set to become the Arabia.
go-to mode for facilitating online payments. The SA-

Figure 2.30: Evolution of E-banking in Saudi


Evolution Arabia in Saudi Arabia
of E-banking

Estanlishment of Saudi Payment System


1990 (SPAN) to link all ATM’s nationwide
Launch of POS 1993
services through SPAN
1997 Launch of Saudi system for
fast money transfer (SARIE)
Launch of the SADAD 2004
payment system
2008 Launch of chip and PIN Smart
Debt Cards
Full compliance with
2011
ENV and PCI Standards
Launch of MADA as
2015
new identity to SPAN
Launch of MADA Naqd as
the cashback feature on POS 2015

2016
Launch of MADA Atheer as
the NFC capability on POS
Establishment of Internet payments 2018
through MADA debt cards
2018 Launch of MADA pay as the first
mobile payment solution in KSA
Launch of Apple Pay 2019

Source: Created by IRTI staff based on information available on SAMA website

Conclusion
Saudi Arabia’s overall banking sector saw positive Member Countries in many aspects. For instance,
results in 2018 with 2.5% growth in total assets the share of overall Sharīʿah-compliant banking as-
compared to 2.2% increase both in 2016 and 2017. sets has increased steadily over the past five years,
The NPL ratio for the banking sector has increased, growing by 9% from 56% in 2013 to 65% in 2018,
although it remains well below other economies, reflecting the wide acceptance of Islamic banking
indicating lower credit risk for the banking sector. in Saudi Arabia. As compared to its G20 peers and
Profitability and liquidity indicators show a highly Malaysia, Saudi banks outperformed well in terms
liquid and well-capitalized system that is resilient of quality of credit measured by NPL (NPF) ratio and
to withstand external shocks. It is expected that the financing coverage ratios.
banking system will continue to meet credit demand
as the economic growth continues. The Islamic banking sector has been rising over the
years. The share of Islamic banking assets of Sau-
In the meantime, the Islamic banking sector outper- di Arabia is 20.2% of global Islamic banking assets.
forms its conventional counterparts in other IsDB With SAMA’s continuous support and efforts, Saudi
46
Chapter II: Banking Sector

Arabia has been establishing itself as one of the ma- With strong economic fundamentals (see Chap-
jor Islamic finance hubs and indeed has become a ter 1), favorable regulatory framework (Chapter 1),
key driver in its growth globally. easily accessible yet powerful and cheaper transfor-
mation technologies (Chapter 7 on fintech) and in
To differentiate themselves in a competitive market line with Vision 2030, the banking sector will play a
and remain relevant, Saudi banks guided by SAMA are vital role continuously in the process of the imple-
showing greater support for the fintech sector, through mentation of Vision 2030 to achieve sustainable
various initiatives such as Fintech Saudi and the Sand- development and a flourishing economy for the
box regulatory environment. FinTech solutions have Kingdom.
the potential to lower barriers of entry to the financial
services market, and elevate the role of data as a key
commodity to enhance the customer experience.

Appendix
Table 2.2: Summary Financial Statements of Domestic Saudi Commercial Banks: 2017-2018

Operating
Net profit Loan to
Customers' expenses to Total Capital
Equity Assets Net Loans Net Profit avg. assets Deposit
Deposit operating Ratio (Basel)
(%) (%)
income (%)
National 2018 65.7 453.4 265.3 318.7 10.8 2.41 34.06 83.25 20.6
Commercial
Bank 2017 64.3 444.8 249.2 308.9 10.0 2.25 35.02 80.67 20

2018 48.6 365.0 234.1 293.9 10.3 2.91 31.71 79.64 20.2
Al Rajhi Bank
2017 55.8 343.1 233.5 273.1 9.1 2.67 32.92 85.53 23.3
Samba 2018 42.3 229.9 113.7 170.2 5.5 2.42 30.31 66.82 22.7
Financial
Group 2017 44.7 227.6 117.7 168.0 5.0 2.19 32.7 70.06 21.1

2018 36.8 229.9 151.0 169.8 4.7 2.4 37.33 88.93 18.1
Riyad Bank
2017 38.6 216.3 138.8 154.4 3.9 1.82 36.61 89.94 19.6

Saudi British 2018 32.5 174.6 110.3 130.5 4.9 2.72 34.1 84.54 21.3
Bank 2017 33.5 187.6 117.0 140.2 4.0 2.12 45.47 83.43 21

Banque 2018 30.8 190.2 120.6 148.4 3.3 1.73 33.7 81.31 19.8
Saudi Fransi 2017 31.7 192.9 121.9 151.0 3.5 1.78 36.3 80.78 19.4

Arab National 2018 26.5 178.3 121.0 140.9 3.3 1.89 49.5 85.9 18.1
Bank 2017 25.1 171.7 114.5 136.0 3.0 1.78 52.9 84.19 17.6
2018 21.3 121.3 83.7 90.1 2.5 2.13 47.93 92.85 21
Alinma Bank
2017 20.3 114.8 79.1 89.1 2.0 1.83 53.8 88.77 21

Saudi Invest- 2018 13.4 96.1 59.4 63.7 1.5 1.54 50.87 93.28 19.4
ment Bank 2017 14.3 93.8 59.6 66.9 1.4 1.5 51.9 89.01 20.4
2018 13.9 82.0 57.8 64.6 1.1 1.24 35.87 89.46 20.6
Alawwal
2017 13.6 99.9 63.6 78.3 1.3 1.3 34.1 81.3 20.3

Bank Al 2018 11.2 73.0 40.9 51.8 1.0 1.42 63 78.95 27.5
Jazira 2017 8.8 68.3 39.8 50.3 0.9 1.27 67 79.14 20.9
2018 7.8 73.6 50.6 57.2 1.1 1.62 67 88.49 17.3
Bank Al Bilad
2017 7.6 63.2 43.4 47.8 0.9 1.6 68 90.93 18.5

Sources: Banks’ Annual Reports


47
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER III:
CAPITAL MARKET
48
Chapter III: Capital Market

Saudi ṣukūk market has been driven by


mainly the issuance of the government ṣukūk.

Overview
The capital market represents a significant compo- Apart from the gradual reforms undertaken to un-
nent of the overall financial system. Capital markets leash the potential of Saudi capital markets, this
contribute towards developing a vibrant economy chapter presents an analytical overview of the per-
by facilitating the mobilization and channeling of formance of Saudi stock markets, funds, equity, and
funds into productive economic activities while pro- ṣukūk. With the ṣukūk market, in particular, its im-
viding return opportunities to investors. pending role as a major force in the Kingdom’s eco-
nomic development cannot be taken lightly. As the
The Saudi capital market has recorded significant data demonstrates, Saudi ṣukūk market is reported
achievements over the past years by expanding in to be the second largest ṣukūk in issuance globally.
breadth and in depth. This can be witnessed from (i) It is also worth noting that the recent development
the range of products and services, (ii) the number in the local ṣukūk market has been driven by mainly
and diversity of its stakeholders, and (iii) its infra- the issuance of the government Ṣukūk.
structure and capabilities. Figure 3.1 outlines the
key components of the Saudi capital market.

Figure 3.1: Components of Saudi Arabia Capital Market

SAUDI ARABIA CAPITAL MARKET

Equity Market Real Estate Exchange Traded Unit Trust Funds Ṣukūk / Bond
Investment Trusts Funds
(REITS)
Source: Capital Market Authority

Capital Market Development


and Vision 2030
Following a series of reforms and enhancements • Reclassifying sectors according to Global Indus-
by the Capital Market Authority, the largest market try Classification Standard (GICS)
in the GCC has been promoted to emerging market • Launching the parallel market, NUMO, with less
status by FTSE Russell and MSCI. Among the nota- stringent listing requirements for companies to
ble reforms since 2015 are: go public (especially the SMEs)
• Opening up the market to foreign investors • Introducing real estate investment traded funds
through Qualified Financial Institutions (QFIs) • Enhancing price calculation mechanisms.
• Increasing the settlement cycle from T+0 to T+2

49
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Since 23 April 2017, Tadawul has extended the pe- Kingdom to achieve Vision 2030. One of the most
riod for settling to two working days instead of the recent developments in the Kingdom’s capital mar-
same day execution. This was an initiative aimed ket was the launch of derivatives trading in 2019 by
at helping the market to join international equity the Capital Market Authority to enhance its capital
indexes to attract billions of dollars of fresh invest- markets despite anxiety over slowing growth and
ment. Tadawul also introduced the short selling of slumping oil prices. From an Islamic finance princi-
stocks and borrowing and lending of securities. Fu- ples point of view, it is worth noting that aside from
rthermore, to mitigate the risk of destabilizing the the Sharīʿah non-compliance issue that can be very
market, Tadawul imposed strict rules governing concerning, derivatives can be risky instruments
short selling mechanism. which necessitates adequate regulations coupled
with an integrated system of reporting and monito-
These regulatory and operational improvements rai- ring to ensure the transparency.
sed the profile of the market and set the market to
lead the next phase of resource mobilization in the

The Stock Market: A Brief History


The roots of the Saudi capital market can be traced ped and operated by SAMA, was introduced in 1990.
to the 1930s. Share trading began in 1935 when It marked the beginning of the ‘floorless’ market in
the first joint stock company was floated. Over the Saudi Arabia which enabled investors in different lo-
years, the number of joint stock companies incre- cations to trade in the stock market simultaneously.
ased to 14 in 1975 with a total paid-up capital of Tadawul, the new securities trading, clearing and
SAR 1.66 billion. With the start of the oil boom, this settlement system was launched in October 2001.
number rose to 34. In 1978, there were more than
80 unregulated brokers in Saudi Arabia providing Tadawul added a T + 0 (same day transaction
stock brokerage services. However, the secondary guarantee) and is built to handle large amounts of
market remained unregulated till 1984. electronic activity. The new system also incorpora-
ted a much more sophisticated deposit structure
In 1984, a Ministerial Committee of the Ministry of and more efficient trading guidelines. In addition, it
Finance and National Economy, Ministry of Com- provides listing and trading of a greater number of
merce and the Saudi Arabian Monetary Authority different financial papers, including ṣukūk, Exchan-
(SAMA) was formed to regulate and develop the ge Traded Funds (ETFs), Real Estate Traded funds
market. SAMA was charged with the responsibility (REITs), investment enterprise units, corporate
of the daily operational activities of the stock mar- bonds, and treasury bonds. Tadawul also enables
ket and the supervision and regulation of the stock all listed companies to report their announcements
market. and their financial statements to the public banks.

Initially, share-trading intermediation was restric- On 31 July 2003, the Capital Market Law (CML) was
ted to commercial banks to improve the regulatory enacted, which is a milestone in Saudi Arabia for ca-
framework. In 1984, the Saudi Share Registration pital market development. This law is the umbrella
Company (SSRC) was established by the commerci- that covered multiple aspects of the capital market,
al banks. The company provided central registration including structures, regulatory, supervisory, and
facilities for joint stock companies and cleared and operational entities.
settled all equity transactions. Automated clearing
and settlement were introduced in 1989. The Elec- Shortly after the enactment of CML, the Capital Mar-
tronic Securities Information System (ESIS), develo- ket Authority (CMA) was established to regulate and

50
Chapter III: Capital Market

The Capital Market Law enacted in 2003


is a milestone for capital market development
serving multiple aspects including structures,
regulatory, supervisory, and operational entities.

supervise the capital market. Thus, SAMA is no lon- transfer of the economic benefits of Saudi compa-
ger responsible for regulating and monitoring capital nies listed on Tadawul while the authorized interme-
market activities. CMA is an autonomous govern- diaries retain the legal ownership of shares under
mental institution that regulates the stock market certain conditions and requirements. In July 2014,
and reports directly to the Saudi government. It is the the CMA announced that the Stock Exchange would
complete authoritative institute of the Saudi capital be opened to qualified foreign financial institutions
market and the enforcement agency of the CML.35 from the beginning of the first half of 2015.

The Saudi stock market used to be open to Saudi In Saudi Arabia, the demand for Sharīʿah-compli-
nationals only. In realization of the importance of ant stocks is growing vastly than non-compliant or
foreign institutional capital in boosting the ability of conventional stocks. The Sharīʿah-compliant index
Saudi capital market to finance economic growth, tracks all the companies that are abiding by Sharīʿah
foreign investors were also allowed to participate compliance principles and should pass the litmus
in the Saudi stock market in 1997 through a wide test to qualify themselves as a Sharīʿah-compliant
range of local mutual funds operated by the com- company from the relevant authorities and Sharīʿah
mercial banks. In 2007, the market was open to GCC scholars who screen the companies’ financial ratios
nationals as an initiative toward the establishment and industries. Tadawul Stock Exchange is made up
of a GCC common market. In August 2008, the mar- of around 80% Sharīʿah-compliant stocks which can
ket allowed non-resident foreign investors, whether potentially attract investors domiciling not only in
individuals or institutions, to participate in share the Kingdom, but also in the GCC whose preferen-
trading through swap agreements with local autho- ces are driven by Sharīʿah principles-based invest-
rized intermediaries. This agreement enables the ment.36

Market Indices
The Tadawul All Share Index (TASI) is the primary Kuwait, Lebanon, Morocco, Oman, Qatar, Tunisia, and
index of the market. The TASI is a value weighted the United Arab Emirates. Coinciding with the ope-
index which weights listed companies by their mar- ning of the Saudi Arabia equity market to foreign di-
ket capitalization. Another index, introduced in 2010, rect investment, the MSCI Saudi Arabia Indexes were
is the Dow Jones Saudi Titans 30 Index, which is launched effective 1 June 2015. These indexes are
calculated in US dollar and is weighted by float-ad- designed to measure the performance of the large
justed market capitalization for the 30 largest and and mid-cap segments of the Saudi Arabia market.
most liquid equity securities trading on the Saudi
Stock Exchange. Another significant achievement is that FTSE Rus-
sell will include Saudi Arabia into the FTSE Russell
The Dow Jones MENA Broad Stock Market Index Emerging Markets (EM) index. These inclusions
measures the stock performance of actively traded represent investor confidence in the Saudi capital
large-caps and mid-caps equity securities and is cal- market and highlights reforms achieved in tandem
culated in US dollars. The index includes the stock with Saudi Vision 2030 and Financial Sector Deve-
markets of Saudi Arabia, Bahrain, Egypt, Jordan, lopment Program.

51
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Table 3.1: Evolution of Saudi Arabia Capital Market

Pre-1984 Saudi Capital Market were highly informal

1984 Ministerial Committee was formed to regulate and develop the market

1990 First Electronic Share Trading system eSIS was introduced

2001 Tadawul was established to provide trading, clearing and settlement platform

2003 CMA was established to regulate and supervise the Capital Market

2006 First Sukuk issuance SaBIC

Upgraded of electronic trading platform

2007 Tadawul was re-introduced as joint stock company

2008 Market opened up to foreign investors thorough swap agreement

2010 Tadawul launched exchange-traded funds (ETF’s)

2011 Tadawulaty services was introduced

2012 Tadawul provided a breakdown of negotiated deals

2013 Tadawul set the daily fluctuation limit of new market entrants on debut at 10 percent

2014 The closing price was based on ordinary transactions only

Introduced regulations applying to companies with losses of over 50 percent of capital

2015 Tadawul offered the Independent Custody Member (ICM) service

Qualified foreign investors (QFIs) were allowed to invest directly in Tadawul-listed stocks

The equity market also launched the new X-stream INET trading platform

2016 Market trading hours were changed to begin from 10:00 am to 3:00 pm local time

Real Estate Investment Traded Funds (REITs) were launched

2017 Adoption of the IFRS accounting standard for all listed companies

The market structure was applied to include 20 sectors (Industry Groups), instead of 15 sectors

Nomu Parallel Market was launched in February

Implementation of T+2 settlement and introduction of short-selling in April 2017

Trading commissions for tradable rights and ETFs were set at 0,155 percent

2018 The Independent Custody Model (ICM) was updated to enhance QFIs access to the market

Saudi Nomu parallel market was opened to foreign investors

Government debt instruments started trading on Tadawul

The auction method for determining closing prices for Tadawul and Nomu was adopted (MT30)

2019 MSCI and Tadawul announced the launch of the tradable index, MSCI Tadawul 30 Index

The First phase of Inclusion in FTSE Russel and S&P DJI indice

Source: Compiled by IRTI staff37

52
Chapter III: Capital Market

Performance of the Stock Market


The Saudi stock market had an unprecedented The market had another significant up movement in
growth during the early 2000s and had not experien- the middle of 2015 due to allowing foreign investors
ced a major crash until 2006 (Figure 3.2). to trade in the market.

During 2004-2006, there was a bubble in the stock Tadawul’s market capitalization rocketed to SAR
market. After reaching 20,635 points on February 9,025 billion in 2019 from SAR 1,859 billion in 2018.
25, 2006, TASI started to fall dramatically, and by the The obvious reason for such a tremendous increase
end of 2006, TASI had lost approximately 65 percent is the record-breaking initial public offering (IPO) of
of its peak value.38 Saudi Arabia’s giant oil company Aramco’s shares in
Tadawul in December 2019. The Aramco IPO led the
Another serious period of turbulence in the stock Saudi stock market to enter the top 10 marketpla-
market occurred in 2008. Although not as severe ces in the world, by the value of listed companies39.
as the adjustment in 2006, TASI still shed 49% bet- The year 2019 would be reminiscent as a milestone
ween June and December of 2008, ending the year year for Saudi Arabia as the stock market succes-
at 4800. The Saudi stock market was exposed to a sfully oversaw the world’s largest IPO.
downturn in the global equity market, a global cre-
dit crunch and falling oil prices with severe negative
impacts.

Figure 3.2: Saudi Arabia’s TASI Index Performance

17500

15000

12500

10000

7500

5000

2500

2004 2008 2012 2016 2020

Source: Tadawul

53
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 3.3: Saudi Arabia’s Equity Market Capitalization (Tadawul) 2010-2019


9,025

1,929 1,753 2,147


1,813 1,682 1,859
1,325 1,271 1,400 1,370 1,579 1,661 1,690
1,099 1,157
759 836 871 880

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Market Capitalization (SAR billion) Value of Shares Traded (SAR billion)


Source: Tadawul Statistical Reports

Figure 3.4: Saudi Arabia’s Equity Market’s Number of Transaction and Traded Shares (Tadawul)
2010-2019
83

71
66 64

53
49
42 43
36 38
33 33
29 30
26 27 28
25
20 22

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Number of Shares Traded (billion) Number of transactions (million)

Source: Tadawul Statistical Reports

Figure 3.5 Top 10 Market Capitalizations by Countries for 201940 (US$ Trillion)

33.54

6.87 6.24 5.17


3.3 2.63 2.41 2.27 2.21 2.1

United China Japan Hong United France Saudi Canada Germany India
States Kong Kingdom Arabia

Source: https://economictimes.indiatimes.com/markets/stocks/news/41

54
Chapter III: Capital Market

A Leader in the Region


The Saudi Arabian market is one of the most active billion (SAR 9,025 billion), with 28 million transac-
markets in the Middle East and is the largest market tions executed during 2019. The Saudi market ac-
in the Arab world in terms of market capitalization. counts for about 80% of the Gulf Cooperation Coun-
By the end of 2019, the market value was US$ 2,407 cil (GCC) market capitalization (Figures 3.6 and 3.7).

Figure 3.6: GCC Equity Market Capitalization by Country (US$ Billion)

2,407

496
231 247
161 160 118
95 22 27 47 49

Saudi Arabia Qatar UAE Kuwait Bahrain Oman

2018 2019
Source: Stock Markets’ Reports

Figure 3.7: GCC Stock Market Performance 2018-2019

24%
20.8% 20%

11.7%
8.3% 9%
7%
5.2%
3%
1% 0.4%
Oman

Saudi Arabia Qatar Abu Dhabi Kuwait Dubai Bahrain

-8%

2018 2019
-15.2%

-24.9%

Source: Stock Markets’ Reports

55
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CMA Strategic Plan: Financial Leader-


ship Program (2019-2021)
As per the instruction of the Council of Economic and 5) Increasing market attractiveness to foreign inves-
Development Affairs of Saudi Arabia, and in line with tors.
CMA’s strategic plan established in 2015, the CMA 6) Diversifying investment products and mecha-
prepared and built a separate program to achieve the nisms available in the capital market.
Vision 2030, which emphasizes the importance of
the capital market in contributing to the growth of the Pillar Three - Promoting Confidence
national economy and becoming a major investment Objectives:
power, in addition to the responsibility to all related le- 7) Reinforcing the capital market’s regulatory struc-
gislative and follow-up entities in the upcoming period. ture.
This program aims to attract national and foreign in- 8) Promoting capital market stability.
vestment to the Saudi Capital Market, so it would be 9) Raising the governance level in the capital market.
an integral part of developing the economy and diver- 10) Raising the level of transparency and disclosure in
sifying its resources. the capital market.

Through the financial leadership program, the CMA Pillar Four - Building Capabilities
seeks to position the Saudi capital market as the main Objectives:
market in the Middle East and one of the leading finan- 11) Supporting the development of Authorized Per-
cial markets in the world. The program aims to achie- sons.
ve the objectives and initiatives of the second pillar of 12) Raising awareness of CMA’s role and investment
the Financial Sector Development Program (FSDP) by financial literacy in the capital market.
deepening the financial market, developing the ṣukūk 13) Building the capabilities of capital market partici-
and debt instruments markets, enhancing the role of pants.
funds in financing the national economy, supporting
the growth of asset management industry and en- Furthermore, the program is to enhance the role of the
hancing institutional investment, emphasizing market Saudi financial market in mobilizing resources, deve-
attractiveness, diversifying investment products, and loping infrastructure, enhancing market stability, rai-
encouraging investment and facilitating it to investors. sing the level of governance and transparency in the fi-
nancial market and raising awareness and investment
Within this program, 4 main pillars along with 13 stra- culture for market participants.
tegic objectives are stated as follows:
To ensure qualitative implementation of the strategic
Pillar One - Facilitating Funding plan, the Capital Market Authority developed integra-
Objectives: ted governance framework which would effectively
1) Deepening the capital market and promoting its facilitate coordination between concerned bodies.
role in raising the capital. To follow the quality standards and take corrective
2) Developing sukūk and debt instrument markets. actions in a timely manner, a methodology has been
3) Enhancing the role of funds in financing the natio- adopted to follow up periodically the implementation
nal economy. of strategic initiatives through the development of
detailed plans for each initiative. Moreover, the CMA
Pillar Two - Encouraging Investment continuously reviews the strategic plan with all its
Objectives: components to identify gaps and develop initiatives to
4) Supporting the growth of asset management and achieve the desired objectives.
promoting institutional investment.

56
Chapter III: Capital Market

Ṣukūk: A Global Market Overview


The emergence of ṣukūk has been among the most strument, which make them an important tool for
significant developments and became one of the fixed income financing a liquidity management. The
fast-developing components of Islamic financi- global ṣukūk market has grown tremendously from
al system. Ṣukūk42 provide investors with stable US$ 50 billion in 2007 to US$ 123 billion in 2018 with
earnings by offering partial ownership in an asset, Malaysia and the GGC region as the main hubs of
project business or investment. In practice, though, ṣukūk issuance (Figure 3.9).
ṣukūk are structured mostly to become a debt in-

Figure 3.8: Global Islamic Financial Asset Distribution 2018 (US$ Billion)

1571.3
Islamic Banking
71.7%

530.4
Outstanding Sukuk
24.2%

61.5
Islamic Fund
2.8%

27.7
Takaful
1.3% Size Percentage (%)

Source: IFSB Stability Report 2019

Figure 3.9: Ṣukūk Issuance 2006-2018 (US$ Millions)


117,330

112,565

90,152
84,489

80,570

79,069
56,574
48,877

45,938

37,648
36,182

32,998
31,210
30,904

26,730
22,992
22,127

21,880
20,269
14,002

8,684
7,023

4,248
2,210

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Domestic International
Source: IIFM Ṣukūk Database

57
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Ṣukūk Issuance in Saudi Arabia


The popularity of Saudi Arabia ṣukūk is relatively The issuance of SABIC ṣukūk generated tremen-
new compared to Malaysia and UAE. Ṣukūk issu- dous attention as it received SAR 4.3 billion in order,
ance in Saudi market started with infrequent issu- overshooting the SAR 3 billion (US$ 800m) cap set
ances in the middle of the 2000s. A single ṣukūk by the CMA. The second in the same year was by
issuance was performed in 2004 by HANCO Rent-A- Saudi Electricity Company which made headlines by
Car. The next ṣukūk issuance took place in 2006 by issuing ṣukūk worth SAR 5 billion (US$ 1.33 billion)
Saudi Arabian Basic Industries Corporation (SABIC). in July 2006, the largest ever by a Saudi corporation.

Figure 3.10: Saudi Arabia Ṣukūk Issuance 2010-2018 (US$ Billion)


28.51

25.47

15.21

12.09
11.14

6.99

4.74

2.86
1.46

2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Bloomberg

In August 2006, with the first listing of SABIC ṣukūk, during the same period. UAE, leading both ṣukūk
an over-the-counter market was launched. Under and conventional bond issuance within GCC, repre-
this system, trades are negotiated off the exchange sented about half of the total debt issuance in both
and there is no system to match buy and sell orders; 2007 and 2008. Saudi Arabia accounts for about
most trades were done through the treasury depart- 23% and 12% of the total GCC debt issuance in 2007
ments of local banks. Due to the lack of depth of the and 2008, respectively.
market, lack of transparency and the lack of histori-

The First Sovereign


cal trade information, the ṣukūk was, however, very
thinly traded.

The ṣukūk market in KSA saw some turmoil in 2008


Ṣukūk of Saudi Arabia
following the global financial crisis. Consequently,
The General Authority for Civil Aviation (GCA) in Ja-
ṣukūk issuance in KSA declined 67.2% YoY to US$
nuary 2012 issued ṣukūk worth SAR 15 billion (US
1.9 billion in 2008 before again increasing to US$
$4 billion), which was Saudi Arabia’s first and largest
3.1 billion in 2009.
government-backed ṣukūk at that time. In the year
of 2012 alone, total ṣukūk worth US$ 11.14 billion
It was worth noticing that the majority of the ṣukūk
was issued in Saudi Arabia. Such a huge amount
issuances in Saudi Arabia are denominated in Riyal.
of ṣukūk issuance was not intended to merely raise
In contrast, less than half of the ṣukūk were deno-
money; rather it was meant to stimulate the market
minated in local currency in other GCC countries
58
Chapter III: Capital Market

The year 2017 marks a significant milestone


for Saudi Arabia. It embarked on issuing
international ṣukūk worth US $9 billion
on 12 April 2017, pushing the market to a new level.

that would hopefully benefit banks endowed with a ṣukūk worth US $9 billion on 12 April 2017, pushing
massive amount of unused liquidity. Indeed, it was the market to a new level. This issuance was not
also beneficial in restoring the market confidence only the first dollar-denominated ṣukūk among the
among the market players. In tandem with ṣukūk GCC member countries, but it was also the largest
market expansion globally, 2013 marks another debt instrument issuance in emerging markets to
flourishing year for ṣukūk issuance in Saudi Arabia date, surpassing Kuwait’s US $8 billion conventional
with the total issuances of US$ 15.21 billion. bond issuance in March 2017.

Ṣukūk Structure in KSA


In 2014, Saudi Arabia became the second largest
issuer of ṣukūk by issuing a total of 15 issuances
with a total value of US$ 12.1 billion. In addition, the
Saudi Capital Market Authority simplified regulatory Different structures have been used over the years,
approvals for ṣukūk products, which also garnered with istithmār and murābaḥah being the most pro-
the ṣukūk market in Saudi Arabia. minent, accounting for slightly over 30% of ṣukūk
issued so far (Figure 3.12). Prior to 2011, istithmār
ṣukūk was the most popular structure among the
Pushing the Market issuers. Although the number of corporate ṣukūk

to A New Level issued has exceeded that of sovereign ṣukūk in the


recent years, the cumulative issuance amount of
sovereign ṣukūk is greater than that of corporate
The year 2017 marks a significant milestone for ṣukūk.
Saudi Arabia. It embarked on issuing international

Figure 3.11: Saudi Arabia Ṣukūk Structure by Islamic Financial Modes in 2018

Others: 36% Istithmār: 29%

Ijarah: 1%

Wakala Al-Istithmār: 1%
Mudarabah: 3%

Musharakah: 4%

Hybird: 12% Murabaha: 14%

Source: Bloomberg

59
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 3.12: Saudi Arabia Ṣukūk Structure by Sector in 2018

Banking: 12.5% Financial Others: 10.2%

Aerospace: 9.4%

Other: 17.3% Utilities: 4.3%

Other: 5.6%

Chemicals: 7.4%

Govermental: 50.7%

Source: Bloomberg

Saudi Arabia is the Second Largest Ṣukūk Issuer


Globally
According to IFSB (2019), while Malaysia retained is on the fourth rank. Turkey is the fifth-largest issu-
its position as the overall largest issuer of ṣukūk in er due to the increased activity in 2018. In terms of
terms of volume, Saudi Arabia is the second-largest the type of ṣukūk, the sovereign issuances prevailed
overall issuer. UAE is the third-largest issuer due to in Saudi Arabia in 2018 as it was in previous years.
its increase in corporate issuances, while Indonesia

Figure 3.13: Sovereign Ṣukūk Issuance by Jurisdiction in 2018

Others: 1.36%
Malaysia: 32.82%
Bahrain: 3.36%

Oman: 4.38%

UAE: 5.31%

Turkey: 7.45%

Saudi Arabia: 31.94%

Indonesia: 13.38%

Source: IFSB Stability Report 2019

60
Chapter III: Capital Market

Figure 3.14: Corporate Ṣukūk Issuance by Jurisdiction in 2018

Malaysia: 40.4%
Netherlands: 0.3%
Oman: 0.5%
Ireland: 1.2%
UK: 1.3%
Indonesia: 1.8%
Qatar: 3.1%

Saudi Arabia: 6.4%

UAE: 36.5%

Turkey: 8.5%

Source: IFSB Stability Report 2019

Capital Market Authority’s Initiatives to


Develop Ṣukūk Market
Recognizing the need to enhance the debt capital the investor base and support the liquidity of gover-
market, in June 2009, CMA and Tadawul launched nment securities.
a platform for ṣukūk trading to provide greater mar-
ket breadth and depth. The development of an ac- The potential of ṣukūk issuance out of Saudi Ara-
tive ṣukūk market would be of great value to Saudi bia is enormous given the size of the economy, the
investors. Given the typically lower risk associated infrastructure projects underway and the positive
with ṣukūk, a vibrant ṣukūk market will help to im- consumer appetite for Islamic finance in general,
prove asset allocation and portfolio diversification. as well as the increasing government enthusiasm
in issuing sovereign ṣukūk over the past few years.
The Primary Dealer Programme, established in June In the concluding chapter, we offer some suggesti-
2018 by appointing five financial institutions as pri- ons on how to use ṣukūk and other Islamic capital
mary dealers, was designed to increase the demand markets to enhance the leadership of the Kingdom
for the debt and widen the range of investors hol- in Islamic finance worldwide.
ding it. Under this program, the appointed primary
dealers purchase ṣukūk sold at auction directly from
the government, and later place these securities in
the secondary market for final investors, acting as
market makers for government securities. The pro-
gram is expected to contribute to the expansion of

61
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Among GCC countries, Saudi Arabia was the first


to invest in the mutual fund industry,
with National Commercial Bank establishing
and managing the first fund in 1979.

Islamic Funds
A mutual fund is an investment vehicle that offers mutual funds. The first regulations for investment
investors the opportunity to pool their funds for in- funds in Saudi Arabia were established in 1993 due
vesting in publicly traded instruments like stocks, to the high demand for local and global mutual and
bonds, money market instruments and other traded investment funds from investors. The regulations
securities. A mutual fund is managed by a professi- empowered the Saudi banks to offer open and clo-
onal manager and provides a high level of diversifi- se-ended funds and set rules to protect all investors
cation across many securities, which an individual through monitoring the operation and establish-
investor finds costly by direct purchase. Moreover, ment of mutual funds.
the minimum initial investment requirement for
most mutual funds is very affordable. Mutual funds Although relatively new, the Saudi mutual fund mar-
are an ideal choice for small investors seeking li- ket has grown significantly over the years. By the
quidity, portfolio diversification, and investment ex- end of 2018, there were 248 public funds managed
pertise. However, investors’ preference may vary in in Saudi Arabia.43 The total asset value increased
terms of return requirements, risk tolerance, liquidity from SAR 105 billion in 2007 to approximately SAR
needs, as well as religious and cultural concerns. 112 billion in 2018. The number of subscribers in
the mutual fund market reached more than 332,567
Among GCC countries, Saudi Arabia was the first by the end of 2018.
to invest in the mutual fund industry, with Natio-
nal Commercial Bank establishing and managing Funds are categorized based on the region that as-
the first fund in 1979. The success of this experi- sets belong to and the type of investment such as
ment drew more Saudi banks to develop a variety of stocks, money markets, REITs, Fund of Funds or

Figure 3.15: Open-ended Mutual Funds by Investment Type44

Others: 0.9% (14)


Money Markets: 55.8% (43)

REITs: 14.7% (16)

Fund of Funds: 2.6% (25)

Real Estate: 7.5% (10)

Equity: 18.5% (141)

Source: Capital Market Annual Report 2018

62
Chapter III: Capital Market

bonds. Table 3.2 presents the number of public in- the past years. For instance, in 2018, about 56% of
vestment funds by type of investment 2007-2018, funds managed in Saudi Arabia is invested in the
indicating that the largest number of funds are equi- money markets. The second-largest portion (about
ty funds. 19%) of funds is invested in the equity market. The
lion’s share of these funds is invested in the Saudi
Figure 3.14 summarizes the open-ended mutual equity market: Of the total equity funds of SAR 20.6
funds by the investment type which indicates that billion, SAR 15.6 billion (75%) is invested in domestic
the money markets funds sector is the largest over equities.45

Table 3.2: Investment Funds by Type of Investment 2007 -2018

Equity Fund of Funds Money Markets Others Total


2007 122 33 49 29 233
2008 135 34 57 36 262
2009 151 30 61 24 266
2010 154 27 56 33 270
2011 150 43 50 33 276
2012 138 43 47 31 259
2013 141 41 46 30 258
2014 150 41 46 29 266
2015 169 30 44 27 270
2016 168 32 44 31 275
2017 161 32 44 36 273
2018 141 25 43 40 249
Source: Capital Market Annual Report 2018

Of the 249 funds, 199 funds are Shari’ah compliant 80 are invested in international stocks. Twenty-one
while 50 funds are conventional. Around SAR 89 bil- equity funds are categorized as conventional while
lion assets under management (AuM) are Sharīʿah 108 funds are Sharīʿah compliant.
compliant, which equates 76% of the total value of
the asset under management, while SAR 28.8 billion According to Zawya, assets under management in
of assets under management are conventional. the Arabian fund markets are highly concentrated.
Saudi Arabia is the largest market, accounting for
Out of these 199 Sharīʿah-based funds managed by $26.9 billion, or 82.85%, of the overall assets under
37 fund managers, 97 funds are globally focused management in the GCC region. Meanwhile, Kuwait
and the remaining 102 funds are locally focused. accounts for $3.2 billion, or 9.82%, of the overall as-
SAR 74 billion assets under management are in lo- sets under management, and the UAE accounts for
cal market while SAR 15 billion assets are deployed US$ 1.7 billion, or 5.09 %, of the overall assets un-
internationally. der management. The other three countries—Qatar
($0.4 billion), Oman (US$ 0.3 billion), and Bahrain
Segregating further, 148 funds are invested in (US$ 0.1 billion)— together account for 2.23 per
stocks, representing an amount of SAR 20.6 billi- cent of the overall assets under management in the
on (18.5% of the total assets under management), Arabian fund markets46.
where 89 funds are invested in local stock while

63
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

The Islamic funds industry represents an essential compares favorably to the AuM of US$ 66.7 billion
sector of the overall Islamic finance industry. The recorded in 2017. Of the 34 jurisdictions where Isla-
industry has grown significantly since its emergen- mic funds are domiciled, Malaysia and Saudi Arabia
ce in the late 1980s, both in number of funds and remain the most prominent, collectively accounting
assets under management. A notable increase is for about 66% of total AuM. The two key domiciles
recorded in the number of Islamic funds in 2018 to for Islamic funds are Malaysia and Saudi Arabia,
1,292 funds, of which 860 are active, compared to which collectively account for about 66% of total
the 1,161 Islamic funds, of which 821 were active in AuM. Saudi Arabia still remains the largest domicile,
2017. The value of US$ 67.4 billion of AuM in 2018 holding 34% of the total Islamic funds AuM.

Figure 3.16: Islamic Fund Asset by Jurisdiction

Others: 2.83%
Saudi Arabia: 34.00%
Pakistan: 2.22%
South Africa: 2.29%
Kuwait: 2.95%

Indonesia: 4.40%

Luxembourg: 5.13%

Malaysia: 33.88%
United States: 5.01%

Ireland: 8.80%

Source: Bloomberg and IFSB 2019

Exchange-Traded Funds (ETFs)


Another component of Saudi capital market is Ex- and Islamic FTSE. As such, investors in an ETF be-
change-Traded Funds (ETFs). An ETF refers to an nefit from the holistic performance of the Shari ‘ah-
investment fund that holds assets such as stocks, screened companies constituting the Islamic index
bonds, commodities and funds and whose shares/ without the need to trade in their underlying stocks,
units are listed and traded on the stock exchange si- making ETFs a highly efficient and cost-effective in-
milar to the trading of company shares. Its trading vestment tool. However, Islamic ETFs still represent
on the stock exchange implies that its shares can be a nascent market. The first Islamic ETF was laun-
bought and sold at any time. An Islamic ETF operates ched in February 2006, called the Dow Jones Islamic
similar to its conventional counterpart, except that it Market Turkey ETF, that was listed and traded on the
operates in accordance with Sharīʿah. Most Islamic Istanbul Stock Exchange. In January 2008, Malaysia
ETFs are Islamic Index ETFs which track Islamic in- followed suit by launching the first Sharīʿah-compli-
dices such as the Islamic Dow Jones, Islamic MSCI ant ETF of Asia called MyETF.

64
Chapter III: Capital Market

Saudi Arabia’s first ETF was launched on 28 March the petrochemical sector that are Sharīʿah compli-
2010 by FALCOM Financial Services as “FALCOM ant, listed and traded on Tadawul.
30 Fund” and listed on Tadawul. The Falcom Saudi
Equity ETF (Falcom 30) comprises the highest-ca- The HSBC MT30 ETF is based on the MT30 index,
pitalization Sharīʿah-compliant stocks traded on the which is jointly operated by MSCI and Tadawul, but
exchange. the status of Sharīʿah compliance is not clearly men-
tioned.
At the end of 2019, there were three ETFs in Saudi
Arabia. In addition to FALCOM 30 Fund, FALCOM Fi- The decision of major index providers, S&P, Dow
nancial Services launched the “FALCOM Petroche- Jones, FTSE, Russell and MSCI, to include Saudi
micals Fund” as an effort to diversify investment op- stocks from the main Tadawul index across their
tions for investors. Both ETFs are Sharīʿah compliant major emerging market indices attracted great in-
according to the issuer. FALCOM 30 Fund invests in terest from international investors. It has also led to
the investment universe of the Benchmark Index, a greater interest in launching ETFs based on the
F30 Falxcom Saudi Equity Index, which consists same Saudi stocks. On 1 January 2020, the Capital
of 30 Sharīʿah complaint shares of big companies Market Authority approved the launch of the Alinma
in the Saudi market. The FALCOM Petrochemicals Investment Company’s Alinma Saudi Government
fund invests at least 95% of its assets in equities of Ṣukūk ETF fund on the Tadawul.

Table 3.3: ETFs Statistics 2019

ETFs Volume Traded Value Trade (SAR Million) Transactions


FALCOM 30 47,516,946 1,593 3,405

FALCOM PETROCHEMICAL 240,076 7.19 628

HSBC MT30 179,854 6.36 603

Source: Saudi Capital Market Authority Report 2018

Real Estate Investment Traded Funds


(REITs)
REITs are real estate funds that are traded as units billion in terms of market capitalization, compared
in the capital market. REITs enable all types of in- to just over US$ 2.3 billion in Q1 2018, representing
vestors to invest in income generating real estate a growth of 52%.
assets which are developed and ready for use. Mo-
reover, REITs are required to distribute a portion of From a regulatory perspective, the Saudi Arabian
their net income to unitholders in cash at least once Capital Market Authority (CMA) has recently ap-
a year. REITs were introduced in the Saudi Market in proved several amendments to initial regulations
2016 and listed in the Tadawul main market. Since governing REITs, including the increase in the mini-
then the number of listed REITs has grown to 17. As mum capital requirement for new funds from SAR
of June 2019, the REIT market surpasses US$ 3.5 100 million to SAR 500 million. A strong and evol-

65
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

ving regulatory framework, which has proven to be This inclusion will raise the level of Saudi REITs and
favorable in more mature jurisdictions, will remain a align them with the international best practices, in-
key objective in the development of the REIT market crease the level of disclosure and accessibility to
in Saudi Arabia. the capital market by foreign investors, and broaden
the investors base in the Saudi capital market. This
In June 2019, the inclusion of selected Saudi-based inclusion is happening in conjunction with the re-
REITs in the FTSE EPRA Nareit Emerging Market cent inclusion of the Saudi Stock Exchange in global
Index was announced after all required criteria for emerging market indices that will further support
the inclusion were met. The reclassification of Sau- the enhancements in the Saudi capital market, align
di Arabia as an eligible market for the FTSE EPRA its regulatory framework with the international best
Nareit series represents an important step in the de- practices, a key goal of the Financial Sector Deve-
velopment of the REIT market in the Kingdom and lopment Program (FSDP) Kingdom’s Vision 2030.
in the government’s drive to increase transparency
and visibility around real estate markets.

Conclusion
In a nutshell, the Kingdom has undergone a major The upgrading of the Saudi stock market as a major
economic overhaul, with capital markets being one emerging market status has undoubtedly paved the
of the core pillars. The objective is to diversify the way for further development of the capital market.
economy away from oil, bolster the private sector Given the unwavering support by the government
and improve employment opportunities for young over the past few years, it is perhaps worthy to con-
people. This chapter demonstrates that despite the sider building up a full-fledged Sharīʿah ecosystem
promising progress of the capital market, further de- as a benchmark for ethical investment targeting
velopment of this sector is very timely and requires sustainable development and inclusive prosperity.
further support from the government.

66
Chapter III: Capital Market

An Interview with
Mr. Ammar A. Shata
Founder and Executive Director,
Al-Khabeer Capital
1. In your opinion, what are the prospects of the now getting easy access to the sector. Furthermore,
KSA becoming the leader in Islamic finance? What the government’s resolve to build a fintech ecosys-
are the Kingdom’s strengths and challenges in this tem will drive financial inclusion, benefitting Saudi
regard? Arabia’s Islamic finance market.

Saudi Arabia is one of the most influential Islamic Meanwhile, the lack of liquidity and limited range of
finance markets globally and boasts of the world’s Sharīʿah-compliant products and services remain
largest Islamic finance market, with about $299 bil- key challenges for the sector on the whole, although
lion in Islamic finance assets, as of March 2019, as recent initiatives by the Kingdom to attract interna-
per Moody’s analysis. The Kingdom is home to the tional investors, along with the adoption of fintech
largest number of Islamic banks which operate al- services may have the potential to overcome these
ongside conventional banks and are regulated by the obstacles going forward.
same governing body - the Saudi Arabian Monetary
Authority (SAMA). The nation’s banking industry is 2. To what extent can Asset Management compa-
currently undergoing consolidation, which is antici- nies contribute to sustainable development in KSA?
pated to further aid the Islamic finance industry by Do they offer their share in social responsibility?
creating larger, stronger and more efficient Islamic
banks. Moody’s anticipates the penetration of Isla- The Kingdom’s capital market has witnessed unpre-
mic finance in Saudi Arabia to increase to 80% of sys- cedented reforms over the last few years, resulting in
tem-wide loans over the next 12-18 months, up from the opening-up of the Saudi financial markets to the
about 77% in 2018. world and making them more accessible to the glo-
bal investment community. Similarly, several reforms
One of the major comparative strengths that Saudi targeting the real estate sector have been initiated
Arabia possesses over other countries is that the and are expected to lead to a revival of the industry,
Kingdom offers a conducive environment for the while privatization initiatives are likely to boost invest-
development of Islamic finance. Regulatory and ment opportunities for private equity. Currently, Saudi
government bodies such as the SAMA, the Capital Arabia has the largest number of investment funds
Market Authority (CMA) and the Ministry of Finan- domiciled in the GCC region. The country’s asset ma-
ce work in tandem to provide a supportive regula- nagement industry, which according to Moody’s esti-
tory framework, a factor which provides significant mates accounted for almost half of the total regional
comfort to investors. SAMA’s move to join the Bah- assets under management (AUM) as of December
rain-based Accounting and Auditing Organization for 2018, is set to play a major role in attracting more
Islamic Financial Institutions (AAOIFI) as an institu- foreign investments to the Kingdom’s shores, en-
tional member is one of the milestones that will go courage private investment and expand the investor
a long way in standardizing industry practices and base, as part of the government’s long-term plan to
easing cross-border transactions. Moreover, gover- boost the non-oil sector and increase its contribution
nment-led economic transformation reforms such to economic growth.
as the opening up of Tadawul to foreign investors,
ṣukūk issuances denominated in both the Riyal and The Kingdom remains the largest investment funds
the US Dollar are expected to shore up investments market in the GCC, as it holds more than 80% of the
into the Islamic finance market, with global investors total regional AUMs according to a report by Refinitiv.

67
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Furthermore, the improved regulatory environment nance industry, including its asset-backed model and
has encouraged Saudi Asset Management compa- the risk-sharing agreement between the lender and
nies to expand their range of products from traditi- the borrower. Moreover, regulations related to riba,
onal asset classes to new and innovative products gharar and the prohibition of the sale of un-acquired
in the alternative investment space, including private and unproduced goods, reduce the risk even further.
equity, venture capital, real estate investment funds These factors have the potential to make this mode
and other multi-asset products. There has been a of financing more appealing to investors. The resili-
gradual diversification of the products being offered ence of the Islamic financing industry can be gauged
by Saudi Asset Managers, especially in the venture from the limited impact on Islamic banks during the
capital sectors, buoyed by support from the CMA, the 2008 global financial meltdown as compared to the
Public Investment Fund (PIF), the Ministry of Labor & adverse impact of the crisis on conventional banking
Social Development, the Small & Medium Enterprises institutions around the globe.
General Authority of Saudi Arabia (Monshaat) and
other government-related entities. These products Islamic finance has penetrated in various regions of
and investment funds are expected to boost invest- the world, from East Africa to Central Asia. Although
ment in various sectors such as healthcare, educa- the market is in the nascent stage of development,
tion, real estate, among others, thereby supporting it has now become one of the fastest growing seg-
the government’s economic transformation plan and ments of the global financial industry. According to
contributing to the Kingdom’s long-term sustainable S&P Global Ratings, the global market for Islamic
growth. finance stood at $2.1 trillion in 2018, expanding by
about 2% versus the pace of growth of 10% that was
Saudi Asset Managers have become more aware of witnessed in 2017. Opportunities for further growth
the business sustainability and are gradually adop- of this market are tremendous given the demography
ting corporate social responsibility (CSR) practices of the world population, which shows that 1 in 4 peo-
and integrating environmental concerns in their busi- ple in the world are followers of Islam. The prospects
ness conduct. Endowment and charity-focused in- of growth have become even brighter with players in
vestment funds to support social welfare initiatives, the sector taking initiatives to broaden their horizons
philanthropic works, charity programs and commu- to lure environmentally conscious investors by intro-
nity services have been introduced over the last few ducing new and innovative products such as green
years. The Kingdom also witnessed the launch of the ṣukūk. Moreover, fintech is being steadily adopted
first public waqf fund in 2018 which is expected to in Islamic finance and prominent examples include
help in the management and distribution of endow- the establishment of a Sharīʿah-compliant Robo-ad-
ments in a more efficient manner. In fact, Al-Khabeer visory firm and a Sharīʿah-compliant gold platform.
Capital has recently launched an open-ended public The adoption of fintech is expected to further aid the
waqf fund to extend its support to the Kingdom’s growth of the Islamic finance sector in the future.
community development programs, in addition to the
launch of two new private equity funds in Q4 2018 An area where the Islamic finance industry needs to
focused on the education sector and which will ena- put in further effort is ensuring high levels of corpo-
ble us to contribute to the development of this sec- rate governance and transparency. Products need to
tor in the Kingdom. It is worth mentioning that we, be tailored such that there is full confidence about
at Al-Khabeer Capital, have embraced global best their Sharīʿah compliance. These issues, if left un-
practices in all its ventures and partnerships by fo- checked, could continue to damage investor trust
cusing on corporate governance, proper disclosures, in the industry and thus hinder its growth prospects
fair treatment in dealing with all related parties, and going forward. In order to enhance governance and
enhancing the working environment, besides our role transparency, the industry needs more independent
as experts in the financial industry. companies (unrelated/not employed by the product
issuer) that provide Sharīʿah advisory in relation to
3. Can Islamic financial industry compete in open product approval and/or Sharīʿah audit services post
or global markets? development of the product. Accordingly, this will
bring more Sharīʿah scholars into the industry and
Islamic finance has some key characteristics that help ensure that only real Islamic products adhering
make it less risky as compared to the traditional fi- to the Sharīʿah principles and guidelines are intro-
68
Chapter III: Capital Market

duced in the market. A good example of such inde- ded impetus for the growth of Islamic financing in
pendent companies is the Shariyah Review Bureau, the SME sector in the coming years by speeding up
which provides Sharīʿah advisory and audit services processes and in turn reducing operational costs.
to clients seeking assistance on Sharīʿah-related mat- Platforms such as Big Data, Artificial Intelligence (AI),
ters. Machine Learning, and Blockchain technology are all
expected to bring a major revolution in SME finan-
4. How do you assess the awareness/education le- cing. Additionally, the creation of a common platform
vel of small and medium size businesses in Islamic for exchanging views between different stakeholders
finance? What measures would you recommend to will help in raising awareness among SMEs regarding
develop the level of awareness? Islamic finance.

Taking Saudi Arabia as an example, the Kingdom’s The adoption of fintech will help stimulate the Isla-
government recognizes the importance of the Small mic finance industry and expand its reach to tap
and Medium Enterprises (SMEs) in the transforma- customers that are currently not under the ambit of
tion of the Saudi economy and aims to boost its the traditional banking system. Fintech will also help
contribution to the GDP from 20% to 35% by 2030. in increasing the efficiency of the Islamic finance in-
However, SMEs continue to have limited access to dustry and enable it to serve larger number of clients,
Islamic financing to meet their capital needs, mostly provide better service, increase the number of Isla-
due to the limited number of licensed banks and high mic products offered in the market, and also help re-
demand for liquidity. In spite of SMEs representing duce operational costs.
more than 90% of the total registered firms in Saudi
Arabia and comprising about 99% of the Kingdom’s
private sector as per the Saudi National Entrepre- Biography of Mr. Ammar A. Shata
neurship Initiative, these businesses continue to face Mr. Ammar A. Shata is the Founder and the
serious challenges while seeking funding. One of the Executive Director of Al-Khabeer Capital, a
major obstacles for these SMEs is the limited liquidity company that has evolved since 2004 to a ful-
in the market as both the government and the private ly licensed investment company in 2008 under
sector are vying for the same funding from financing the aegis of the Capital Markets Authority with
institutions. Another critical challenge facing SMEs a paid-up capital of SAR 894 million and As-
that seek funding from Islamic institutions is the high sets Under Management of SAR 5.6 billion (as
cost of financing. Despite these factors, there is a end of 2018).
large opportunity to promote Islamic finance among
SMEs as it is more widely accepted when compared Ammar has been a pioneer in developing Isla-
to conventional finance, due to its Islamic principles mic strategic securities and financial products
and unique products such as mushārakah (partner- in the region such as the first asset-backed se-
ships), muḍārabah (profit sharing), among others. curities investment fund in Saudi Arabia, the
first multi-million real-estate development, the
The government and the Small & Medium Enterpri- first income investment funds; and the first Is-
ses General Authority of Saudi Arabia (Monshaat) lamic credit card. Ammar’s leading and unique
need to take concrete measures to increase the level efforts have earned him several prestigious
of awareness about Islamic financing among SMEs awards, including “Man of the Year” from Wor-
to help promote their growth. ld Finance in 2012. He also appears in the
Global Finance’s list of Who’s Who in Middle
Monshaat has introduced a support center model for Eastern Finance 2016.
SMEs, which is a positive step in increasing aware-
ness and is expected to provide training and advisory Ammar earned a bachelor’s degree of Science
services to these SMEs. Further, research and educa- in Electrical Engineering and a Master’s De-
tion institutes will need to develop and offer programs gree in Economic Planning from the University
providing insights into the Islamic finance sector to of Southern California, USA. He is a CFA® char-
increase awareness. Technology is expected to cre- ter holder, and an approved Arbitrator by the
ate a disruption in the market and provide much-nee- Saudi Ministry of Justice.

69
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER IV:
TAKĀFUL
(INSURANCE)
MARKET
70
Chapter IV: Takāful (Insurance) Market

Overview
Saudi Arabia is the second-largest insurance market MENA, and G20 Peers (Turkey and Indonesia). The
in the GCC region and has expanded at a faster rate insurance industry in Saudi Arabia has seen a signi-
than other GCC markets.47 Following the enactment ficant growth in the last few years owing to strong
of the Law on Supervision of Cooperative Insurance economic growth, favorable demographics, and an
Companies in 2003, all insurance companies have encouraging regulatory environment. While the in-
to be based on the principles of cooperative, and surance market is well-regulated, insurance pene-
thus Sharīʿah compliant business model. tration and density in the country are still relatively
low. This means that the insurance industry is yet to
This chapter examines the standing of the Saudi in- realize its potential.
surance market in comparison to its GCC neighbors,

Outlook of Global Insurance Market


Insurance has inevitably become an integral part
of modern life. American, European and Asian mar- The insurance industry in the Middle East and North
kets are leading the insurance markets by having a Africa (MENA) countries is still in its infancy, compa-
share of 28.3%, 30% and 32%, respectively, of the red to other developed economies as characterized
total global insurance market in 2018. China’s sha- by low penetration,48 and density,49 and relatively
re of the global insurance market is 11% in 2018 weak legal regulations. The growth in the Middle
up from 0% in 1980. Swiss Re (2019) shows that, East and Africa (MENA) premiums remained weak
globally, the growth in premiums for life insurance in 2018, amidst challenging economic conditions
was weak, but there was a solid performance in and a competitive environment. In the Middle East,
non-life insurance premiums. In advanced markets, weak economic growth and declining expatriate po-
non-life premium growth continues to closely track pulations led to slower premium growth. Non-life
the macroeconomic growth trajectory, while in the premiums contracted by 1.3% in 2018, reflecting the
emerging markets, insurance premiums continue to weak economic environment in many markets. The
outperform economic growth overall. For instance, two largest markets in the Middle East (Saudi Arabia
life and non-life insurance penetration in Malaysia and the UAE) contracted in 2018. Health insurance
is still below two percent, even though the insuran- still contributes positively, but increased competi-
ce premiums posted a solid growth of 4.6 percent tion and liberalization of motor rates have led to a
in 2018. The Turkish market is dominated by the decrease in overall premiums.50
non-life sector which accounts for more than 87
percent of premiums. The takāful premiums grew
by 54% in 2019 compared to 2018 after the Partici-
pation Insurance Regulation entered into effect on
20 December 2017 in Turkey.

71
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Saudi Arabia is the second-largest


insurance market after UAE in MENA.
In 2018, it accounted for 20.3% of the region’s GWPs,
while UAE accounts for 26.8%.

Table 4.1: Insurance Market– Gross Written Premiums (GWP) (US$ Billion)

2014 2015 2016 2017 2018 CAGR % (2014-2018)


United Arab Emirates 9.106 10.093 10.237 13.521 12.461 8.2%

Saudi Arabia 8.128 9.732 9.828 9.734 9.337 3.5%

Qatar 2.183 2.833 2.935 0.000 3.038 8.6%

Kuwait 1.007 1.048 1.115 0.821 1.307 6.7%

Oman 1.035 1.124 1.196 1.214 1.116 1.9%

Bahrain na 0.746 na 0.762 0.724 na

MENA 39.019 43.226 43.816 45.023 46.513 4.5%

Turkey 11.595 11.140 13.085 12.054 10.452 -2.6%

Malaysia 15.864 14.351 13.930 15.405 16.634 1.2%

Indonesia 15.307 14.930 20.038 23.960 20.383 7.4%

Source: Swiss Re 2019 and The Saudi Insurance Market Report 2018, SAMA.

Table 4.2: Insurance Market - Insurance Penetration (% of GDP)

2014 2015 2016 2017 2018


United Arab Emirates 2.2 2.35 2.87 3.65 2.92

Saud Arabia 1.08 1.49 1.54 1.42 1.19

Qatar 1 1.54 2 1.6

Kuwait 0.6 0.9 0.89 0.71 1

Oman 1.3 1.57 1.83 1.74 1.47

Bahrain 2.45 2.22 1.83

Turkey 1.4 1.55 1.55 1.42 1.33

Malaysia 4.8 5.05 4.77 4.77 4.77

Indonesia 1.7 1.73 2.15 2.36 2.77

Source: Swiss Re 2019 and The Saudi Insurance Market Report 2018, SAMA.

72
Chapter IV: Takāful (Insurance) Market

Takāful is an Essential Element


of Islamic Financial Ecosystem
Islamic insurance or takāful has been established about $ 11.71 billion, equivalent to 45% of the total
and considered a legitimate alternative to con- global takāful contributions. At just 1.3% at the end
ventional insurance. Takāful refers to a system of of 2017, it remains the smallest contributor to the
Sharīʿah-compliant cooperative insurance where Islamic finance services industry (IFSI) in terms of
members contribute a sum of money to support assets, which indicates tremendous potential for
each other in the case of loss, damage or theft. The the sector to grow. Malaysia, Saudi Arabia and the
objective of takāful is to cooperate, live in harmony UAE are the major Islamic insurance markets, ac-
with the community and protect one another from counting in total for more than 87% of total contri-
unforeseen accidents. Takāful policyholders contri- butions in 2017 (IFSB, 2019).
bute regularly on monetary basis overseen and ma-
naged by the takāful management company. Muslims now make up one-fifth of the global popu-
lation and this proportion is expected to continue to
Takāful forms an essential element of the Islamic grow in the future. Another key driver of the market
financial ecosystem, although takāful markets have is that, compared to Western countries, the majori-
not grown in tandem with the ṣukūk and Islamic ty of the world’s Muslim population, about 60%, is
banking markets. According to the Islamic Finan- under the age of 25. Recognized by rising levels of
ce Stability Report 2019 (IFSB), there are approxi- prosperity, this large young Muslim population has
mately 306 takāful institutions, including retakāful the potential to represent a long-term customer
and takāful windows, offering takāful products in at base of the insurance market if attracted them early.
least 45 countries globally, mostly in the GCC, Mid- The penetration of conventional insurance is rela-
dle East and North Africa (MENA) and South-East tively low in affluent Muslim regions like the GCC
Asia. The majority of the jurisdictions have deve- (world penetration ratio is 6% vs around 2% in GCC
loped specific takāful sector regulations. The total countries). Hence, there are huge opportunities for
contributions of takāful markets grew on average increasing awareness of the need for cooperative
by 4.3% and the global takāful industry reached $26 risk-sharing on one hand, and for innovative pro-
billion in 2017. Similar to 2016, GCC remains the lar- ducts and services on the other.
gest global takāful market with a contribution worth

Overview and Structure


of Saudi Arabia Market
Saudi Arabia is the second-largest insurance mar- The insurance services are classified into three
ket after UAE in MENA. In 2018, it accounted for branches: (1) general insurance, (2) preventive and
20.3% of the region’s GWPs, while UAE accounts for savings insurance and (3) health insurance. The
26.8%.51The Saudi Arabia insurance industry inclu- general insurance sector includes vehicles, marine,
des 33 licensed insurance and reinsurance compa- aviation, energy, engineering, general accidents and
nies operating at the end of 2018. There are also 88 premises insurance. In 2018, the three largest insu-
licensed insurance brokers and 70 insurance agents rance companies acquired 55.3% of GWPs in the
as well as 33 independent contractors.52 Kingdom, and the largest 8 insurance companies

73
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

acquired 74% of GWPs. Motor and health business market regulation where the legislative framework
lines contribute to more than 85% of the total non-li- provided SAMA the responsibility for regulating the
fe insurance GWP and more than 80% to the overall insurance sector.
sector GWP. The insurance sector grew tremen-
dously as measured by GWPs, from SAR 5.15 billi- Under the law, insurance contracts must adhere to a
on in 2005 to SAR 37.17 billion in 2016, at a CAGR cooperative model that provides a Sharīʿah-compli-
of 19.7% from 2005-2016, driven mainly by growth ant structure in which up to 10% of the insurer’s net
in compulsory insurance lines, especially medical surplus is returned to policyholders annually (either
and motors. Saudi Arabia is one of the fast-growing directly or in the form of a reduction in premiums for
countries in terms of GWPs compared to its G20 the following year). However, the law does not have
peers such as Turkey over the period of 2014 to clauses requiring individual companies to have their
2018 but lower than Indonesia (Table 4.2). Sharīʿah boards and Sharīʿah audit, and insurance
companies are not limited to investing in Sharīʿah
According to Article 2 of the Law on Supervision compliant financial instruments. All insurance com-
of Cooperative Insurance Companies, SAMA was panies in Saudi Arabia are listed in Tadawul, and the
assigned all powers necessary to ensure the imple- CMA ensures that all insurance companies comply
mentation of the Regulations. The law was designed with Saudi capital market laws.
to provide clarity on Sharīʿah issues and increase

Figure 4.1: Insurance Gross Premiums in KSA, 2005-2018 (SAR Billion)

36,.50 36.86 36.50


35.01

30.48

25.24

21.27

18.50

16.39
14.61

10.92

8.58
6.94
5.15

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: The Saudi Insurance Market Report 2018, SAMA.

74
Chapter IV: Takāful (Insurance) Market

Gross Written Premiums


The year 2018 marked another significant slow- tal business volume decreased to 40% in 2018 from
down of insurance premiums in Saudi Arabia. The 44.7% in the previous year.
overall insurance GWPs decreased to SAR 35 billi-
on in 2018, compared to SAR 36.5 billion in 2017, a The share of protection and savings insurance con-
reduction of 4.1%. Despite the contraction over the tinued to remain a miniscule part of the total GWP
past two years, the CAGR of total premiums bet- in 2017 and 2018, which represents just around 3%
ween 2005 and 2016 is about 19.7%. of overall GWP. The low market share for the protec-
tion and savings insurance is attributed to several
Health insurance remained the biggest line of factors, including the reliance on social protection
business since 2014. Its contribution to total GWP of family and community, poor savings culture, and
slightly increased from 52.1% in 2017 to 56.8% in religious concerns over the acceptability of life in-
2018, while General insurance’s contribution to to- surance.

Table 4.3: Gross Written Premiums in Saudi Arabia (SAR Million)

Line of Business 2014 2015 2016 2017 2018 CAGR % (2014-2018)


Health Insurance 15,721 18,967 18,630 19,036 19,883 6.05%

General Insurance 13,857 16,494 17,174 16,327 14,028 0.31%

Protection and Saving 904 1,035 1,051 1,140 1,103 5.10%

Total 30,482 36,496 36,855 36,503 35,015 3.53%

Source: The Saudi Insurance Market Report 2018, SAMA.

Table 4.4: Distribution of the Gross Premiums Written in the Main Insurance Sector

Line of Business 2014 2015 2016 2017 2018


Health Insurance 51.6% 52.0% 50.5% 52.1% 56.8%

General Insurance 45.5% 45.2% 46.6% 44.7% 40.1%

Protection and Saving 3.0% 2.8% 2.9% 3.1% 3.1%

Total 100% 100% 100% 100% 100%

Source: The Saudi Insurance Market Report 2018, SAMA.

75
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Insurance Market Penetration


During the five-year period from 2014-2018, insu- Due to low levels of awareness and cultural conside-
rance penetration increased at a CAGR of 2.5%. In rations, insurance penetration in Saudi Arabia is lo-
2018, insurance penetration further decreased to wer than in most of the GCC countries. However, as a
1.19%, down from 1.42% in 2017. Non-oil insurance result of government initiatives to implement certain
penetration is defined as Gross Written Premiums insurance products, there has been some growth in
divided by the total non-oil GDP. In 2018, insurance recent years in insurance penetration rates but still
penetration of non-oil GDP decreased to 1.8%, down much below the regional and global averages (Figu-
from 2.0% in 2017. re 4.2). As shown in Table 4.2, the insurance penetra-
tion rate of Saudi Arabia is also lower than Malaysia
(4.77%), Turkey (1.33%) and Indonesia (2.77%).

Table 4.5: Insurance Penetration in Saudi Arabia

Line of Business 2014 2015 2016 2017 2018


General Insurance 0.49% 0.67% 0.72% 0.64% 0.48%

Health Insurance 0.56% 0.77% 0.78% 0.74% 0.68%

Protection and Saving 0.03% 0.04% 0.04% 0.04% 0.04%

Total 1.08% 1.49% 1.54% 1.42% 1.19%

Source: The Saudi Insurance Market Report 2018, SAMA.

Figure 4.2: Insurance Penetration Ratio 2018

Global Average: 6.1%

4.8%

Emerging Market Average: 3.2%


2.9%

1.9% 2.0%
GCC Average: 1.7% 1.6%
1.4% 1.3%
1.2%
0.9%

Kuwait Saudi Arabia Oman Qatar Bahrain UAE Indonesia Turkey Malaysia

Source: Swiss Re, IMF and The Saudi Insurance Market Report 2018, SAMA

76
Chapter IV: Takāful (Insurance) Market

Insurance Density
Insurance density is defined as average expendi- absolute terms, and relative to General and Health
ture by an individual on insurance products (Gross insurance, at SAR 33 per capita in 2018. Figure 4.3
Written Premiums per Capita). Insurance density shows that insurance density in Saudi Arabia stood
decreased from SAR 1,121 per capita in 2017 to at SAR 1,048 (US$294) in 2018 which is lower than
SAR 1,048 per capita in 2018, which represents a Malaysia (US$518) but much higher than Turkey
6.6% decrease. Expenditures per capita on insu- (US$127) and Indonesia (US$76). It also shows that
rance products have slightly increased at a CAGR Saudi Arabia’s insurance density of US$294 is lower
of 1.4% between 2014 and 2018. The density of than GCC average of US$497 in 2018.
Protection and Savings insurance remained low in

Table 4.6: Insurance Density in Saudi Arabia (SAR)

Line of Business 2014 2015 2016 2017 2018 CAGR (2014-2018)


Health Insurance 450 536 540 502 420 -1.74%

General Insurance 510 616 586 585 595 3.93%

Protection and Saving 29 34 33 35 33 2.94%

Total 990 1186 1159 1121 1048 1.44%

Source: The Saudi Insurance Market Report 2018, SAMA.

Figure 4.3: Insurance Density 2018 (US$)

1305

1135

Global Average: US$ 682

520 518
GCC Average: US$ 497

Emerging 315 294


Market 234
Average:
US$ 170 127
76

Kuwait Saudi Arabia Oman Qatar Bahrain UAE Indonesia Turkey Malaysia

Source: Swiss Re, IMF and The Saudi Insurance Market Report 2018, SAMA

77
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Net Written Premium


Net Written Premium (NWP) is defined as the pre- or 16.3% of NWP. Around 94% of total NWP was
miums retained by the insurance company, after generated by Motor and Health insurance. Health
the subtraction of the premiums ceded to local or insurance remained the largest line of business ac-
international reinsurers from GWP by line of busi- counting for 64.3% of total NWP. Motor insurance’s
ness. Total premiums ceded to local and internati- share of total NWP remained in second place, which
onal reinsurers amounted to SAR 4.9 billion in 2018 accounted for 29.4% of NWP in 2018.

Figure 4.4: Retention Ratio by Line of Business

Weighted average excluding Weighted average including


Motor and Health Insurance all line of business
32% 85.5%

3% 2016
Energy 2%
2017
1%
2018
6%
Aviation 4%
4%

22%
Engineering 18%
17%

15%
Property / Fire 19%
18%

30%
Marine 28%
29%

50%
A&L and Other 48%
47%

88%
Motor 93%
94%

97%
Health 97%
97%

Source: The Saudi Insurance Market Report 2018

78
Chapter IV: Takāful (Insurance) Market

Retention Ratios
32.0% in 2018. The retention ratios are high because
of the requirement for licensed insurance compa-
nies to adhere to a minimum retention ratio of 30%.
The retention ratio is a measure of risks in written The increase in retention ratio is an indication that
premiums retained by an insurance company as insurance companies in the Kingdom are maturing
there is a correlation between the retention ratio and and shifting from relying mainly on reinsurance to
risks. The retention ratio measures the written pre- retention of the largest portion of insurance premi-
miums retained by the insurance company. It is cal- ums and investing them to pay off claims.
culated by dividing the NWP by the GWP. According
to Saudi Insurance Market Report 2018, the overall
retention ratio of insurance companies in the Saudi
market increased to 86% in 2018 from 80% in 2014.
This ratio is largely skewed due to the high retention Insurance Assets
ratio of Motor and Health insurance which collecti-
vely accounted for around 83.7% of the total GWP Total Insurance assets amounted to SR 58.5 billion
in 2018. In 2013, the retention ratios for Motor and (US$15.6 billion) in 2018 compared to SR 59.1 billi-
Health insurance were 94% and 97.2%, respectively. on (US$ 15.8 billion) in 2017. However, Saudi Arabia
The weighted average retention ratio of other Gene- is the largest Takaful market (with 38% of global Ta-
ral insurance lines of business (i.e., excluding Mo- kaful contributions), followed by Iran (34%), Malay-
tor and Health insurance) remained unchanged at sia (7%) and the UAE (6%). (Figure 4.3).

Figure 4.5: Top Countries in Takaful Assets (US$ Billion)

15.6

13

3 3

1 1

Saudi Arabia Iran Malaysia Indonesia UAE Qatar Turkey

Source: The Saudi Insurance Market Report 2018 and ICD Refinitiv Islamic Finance Development Indicator (IFDI), 2019

79
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

The Regulatory Environment


and Recent Developments
The year 2003 marked a significant turning point for sector, elevating the concept of insurance from a
the insurance industry in Saudi Arabia as the gover- distasteful business necessity to a useful and in-
nment introduced a new set of rules in the Law on creasingly popular financial instrument. It did so
Supervision of Cooperative Insurance Companies. by clearing away the numerous unlicensed pro-
The implementing Regulation for this Law was is- viders – which had set up offices in a previously
sued in the following year, which allowed the incor- loosely regulated environment – and establishing a
poration of companies that had a local activity or the Sharīʿah-compliant framework under which all insu-
licensed branches of foreign companies to practice rance in the country is offered.
cooperative insurance work in Saudi Arabia. Accor-
ding to Article 2 of the Law on Supervision of Coo- With consolidation and change in the industry un-
perative Insurance Companies, SAMA was assigned derway, the government opened up the insurance
all powers necessary to ensure the implementation market to foreigners (initially limited to 60% equity
of the Regulations. SAMA was appointed to act as in insurance businesses, now reduced to 49%) with
the regulator and overseer of the insurance industry the accession of Saudi Arabia to the World Trade
in the Kingdom. Organization on 11 December 2005. Foreign inves-
tors began seeking joint stock companies ready for
SAMA’s key functions and responsibilities as the re- IPOs.
gulator of the insurance industry include:
· Providing and establishing appropriate stan- In 2006, SAMA imposed compulsory health insuran-
dards for provision of insurance services; ce for non-Saudis provided new incentives for the
· Promoting stability in the insurance market; insurance sector in the Kingdom. In 2010, SAMA re-
· Protecting the rights of insured parties and in- vealed plans to prevent all foreign insurance compa-
vestors; nies operating in the Kingdom through local agents
· Encouraging fair and effective competition and from issuing and renewing insurance policies un-
providing better insurance services at competi- less they obtain licenses from SAMA.
tive prices and coverage;
· Regulating the relationship between insurers/ In December 2011, SAMA issued a specific regu-
reinsurers and service providers to ensure com- lation for insurance activities over the internet and
pliance with the laws and regulations governing stipulated that all companies shall use local coope-
the market; and rative model, which entitles the policyholder to get
· Training and localizing manpower (Saudization). 10% of the net surplus (losses shall not be turned to
policyholder).
The Insurance Regulations had great impact on
the entire insurance industry in Saudi Arabia which In June 2014, SAMA issued a draft of corporate
requires restructuration and reform. In December governance regulation for insurance companies in
2004, Tawuniya, the first cooperative insurance order to develop a unified high-level framework for
company obtained its license from SAMA and sub- the governance of companies operating in the insu-
sequently floated 60% of its equity to the public. rance sector in accordance with the best practices
recognized worldwide.
The promulgation of the new law signified a new
chapter in the history of Saudi Arabia’s insurance

80
Chapter IV: Takāful (Insurance) Market

The year 2003 marked a significant


turning point for the insurance industry
in Saudi Arabia as the government introduced
a new set of rules in the Law on Supervision
of Cooperative Insurance Companies.

On 21 October 2015, SAMA issued the Corporate Subsequently, Implementing Regulations were issued
Governance Regulations for insurance companies. by Ministerial Decree No (1/596) dated 1/3/1425 H
The Regulations stipulated that the insurance com- (20/4/2004) to regulate the insurance business in
panies shall establish specialized Board commit- Saudi Arabia. Some of the salient features of Coope-
tees to extend its oversight into particular areas of rative Insurance Companies Control Law and its Im-
the Company’s activities, such as nomination and plementing Regulations are as follows:
remuneration, audit, risk management, investment,
regulatory compliance, disclosure, governance, hu- • Insurance activities within Saudi Arabia shall be
man resource, strategic development, etc., and de- carried out by insurance companies established
legate the necessary powers to its committees and and registered in the Kingdom and operated in a
monitor their performance. “Cooperative” manner consistent with the princi-
ples of Islamic Law and Jurisprudence
The Saudi insurance market has been developing • Applicant insurer/reinsurer must be a joint stock
over the years. Numerous local and international company, established primarily to engage in in-
companies have established their presence in the surance and/or reinsurance activities with direct
market and have been providing innovative pro- insurers having a minimum capital of SAR 100
ducts specially designed to meet domestic demand, million and reinsurers having a minimum capital
taking into account cultural and religious factors for of SAR 200 million.
consumers. The large number of insurance com- • Gross premiums written should not exceed 10
panies licensed in the Kingdom has been a central times the paid capital and reserves of the com-
element for innovation and wide diversification of pany.
products and competitive prices. • Direct insurers to retain at least 30% of total
gross written premium and reinsure a minimum
of 30% of total gross written premium within the

The Cooperative
Kingdom of Saudi Arabia.
• 10% of the net surplus shall be distributed to the

Insurance Companies policyholders directly, or in the form of reducti-


on in premiums for the next year. The remaining
Control Law 90% of the net surplus shall be transferred to the
shareholders’ income statement.
The Cooperative Insurance Companies Control Law • Solvency requirement: using premium as well as
was approved by Royal Decree number (M/32) da- loss ratios parameters necessitating adjustment
ted 2/6/1424 H (31 July 2003) which set the stage of the shareholders equity wherever necessary
for the legal framework and supervision of the in- for the protection of the policyholders.
surance sector. SAMA was appointed to act as the • Investment policy guidelines were introduced to
regulator and responsible body for the supervision ensure the security of the operators’ assets.
of the insurance sector.

81
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Cooperative Health Insurance (CCHI)


Saudi Arabia has a separate law to regulate health CCHI has the overall authority over the regulation
insurance. The Cooperative Health Insurance Law of health insurance companies and health insuran-
passed in 1999 ensured that health insurance was ce products of general insurance companies in the
made mandatory not only for the local population country. CCHI is also made a self-financing entity
but also for expatriates and their families. According as it is vested with powers to collect 1% of the total
to the law, Council of Cooperative Health Insurance gross premiums received by the health insurance
(CCHI) is the independent authority for regulating firms. CCHI comes under the Ministry of Health but
health insurance in Saudi Arabia. The main role of it includes representatives from various other minis-
this Council is to introduce, regulate and supervise tries including interior, social affairs, finance, etc.
a health insurance strategy for the Saudi health care
market.

Conclusion
Saudi insurance market is well regulated and has However, strong demand for insurance of vehicles,
expanded at a faster rate than other GCC markets. property, health and other insurances across Saudi
Despite the regulator’s efforts to issue new products Arabia is driving the revenues of insurance compa-
such as in life or savings insurance, compared with nies in the country. Growing life expectancy, tax in-
markets worldwide, G20 peers (such as Turkey and centives on insurance products, favorable savings
Indonesia), Malaysia as well as the GCC, insurance associated with insurance are further encouraging
penetration and density in Saudi Arabia is relatively the customers across insurance segments. Econo-
low. mic growth, rising government spending, techno-
logical innovations and increased consumer awa-
In the meantime, health insurance is a rapidly gro- reness about insurance products are key market
wing sector driven by the trend towards obligatory drivers in Saudi Arabia. The government’s policy of
health insurance. Life insurance penetration, at pre- insuring the uninsured has progressively pushed the
sent, also lags far behind general and health insu- insurance penetration in Saudi Arabia and the proli-
rance. However, if the insurance companies can feration of insurance schemes.
develop innovative and Sharīʿah-compliant family
takāful products, it is reasonable to assume that life The increasing number of digital distribution chan-
takāful could grow even more substantially. nels is favoring the insurers to easily obtain insuran-
ce policies. Insurtech, messaging platforms, and
Saudi insurance sector is still in a nascent stage and online sales channels are contributing to the insu-
thus there is a great growth potential being untap- rance landscape in the country. Through different
ped. Although the recent performance of insuran- distribution channels, insurance companies in Sau-
ce firms has been rather tame, the sector presents di Arabia are providing a wide variety of products
long-term investment opportunities. Lastly, there is with varying levels of complexity that are designed
a shortage of re-takāful capacity, which might ex- for different groups of businesses, individuals and
plain as to why the takāful sector has not grown to other organizations. This will provide ways to meet
the level one would initially hope for. the emerging demands of every end-use customer
and propel net sales.

82
Chapter IV: Takāful (Insurance) Market

83
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER V:
SOCIAL
AND DEVELOPMENT
FINANCE

84
Chapter V: Social and Development Finance

Overview
The alignment of vision 2030 with the UN-endorsed 2) The formation of the National Development
Sustainable Development Goals (SDGs) has indeed Fund (NDF), which aims to raise the level of per-
shaped up considerably the concerted efforts un- formance of the funds and development banks
dertaken by various stakeholders in the Kingdom of in the Kingdom and to enhance the sustainability
Saudi Arabia. of these funds to achieve the desired objectives.
The NDF supervises six national development
The aim of Vision 2030 is to position the economy finance institutions, namely the Social Develop-
on a sustainable and inclusive growth trajectory. ment Bank (SDB), the Saudi Fund for Develop-
This is expected to be done through diversification ment (SFD), the Saudi Industrial Development
of the economy by unraveling the economic poten- Fund (SIDF), the Real Estate Development Fund
tial of non-oil sectors through a private sector led (REDF), the Human Resources Development
development process. Fund (HRDF) and the Agricultural Development
Fund (ADF).
In view of this, the Saudi government has introdu-
ced two breakthrough initiatives: These two initiatives are expected to position social
and development finance in Saudi Arabia in a more
1) Extensive revamp of the social finance sector (in- profound role in the Kingdom’s economic progress
cluding zakāh, awqāf and philanthropies) by revi- and development.
sing Saudi philanthropic law as part of a broader
program of socio-economic policy reform that This chapter discusses the enabling environment for
aims not only to shift the economy away from its the social finance sector, followed by a section that
heavy dependence on oil, but also to create job describes the chronological events leading to the
opportunities for Saudi youth. formation of the General Authority for Awqāf (GAA).
The subsequent section deliberates upon some key
In 2015, the Ministry of Social Affairs (MoSA) and initiatives in social finance sector. The progress and
the Ministry of Labor launched the joint “From recent initiatives in the area of development finance
Guardianship to Sustainable Development” cam- are presented in the last section coupled with some
paign, which promoted the idea that non-profit interviews from prominent figures in the field.
organizations (NPOs) should not limit their work
to aid and charity but should also focus on sus-
tainable development, mainly by helping benefi-
ciaries become financially independent.

National Laws and Regulations Affecting


Social Finance in Saudi Arabia
In 2016, with an objective of broadening the scope ter of MoLASD has emphasized policies geared to-
and streamlining the government’s works in the wards realizing the 2030 Vision’s plan for social de-
area of social finance, the Ministry of Social Affairs velopment. In the year preceding this merger, waqf
(MoSA) and the Ministry of Labor and Social Deve- authority was established to monitor and promote
lopment were merged into the Ministry for Labor waqf donations. Family Fund Rules, which provide
and Social Development (MoLASD). The new minis- for the establishment of an Associations Aid Fund,

85
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030


The waqf activity in Saudi Arabia
is a deeply rooted societal practice,
which has played a pivotal role in serving
the community and catering for its needs
in various fields.

and a Non-profit Companies (NPC) Draft Regulation, tors, members of associations’ general assemblies,
which allows for the registration of social enterpri- and workers at philanthropic associations, among
ses, was issued in 2016.54 others, with comprehensive and user-friendly access
to the regulations and requirements affecting them.55
In November 2017, MoLASD launched Makeen web-
site, which aims to monitor the transparency and go- The following table depicts a list of selected regula-
vernance of the Saudi Arabian philanthropic sector. tions, bylaws, and standard documents that shape
The website seeks to promote transparency, accoun- the registration and day-to-day work of NPOs in
tability, and awareness by providing external audi- Saudi Arabia.56

Table 5.1: List of Selected Regulations, Bylaws, and Standard Documents

Regulation Title Description Year of Enactment

Executive Bylaw for the Collection of zakāh, issued pursuant to Ministe- Transposes zakāh into a binding 1950
rial Resolution No. 393, Dated 6.8.1370 H, equivalent to May 13, 1950 regulation

Social Insurance Regulation, issued pursuant to Royal Decree No. Imposes on NPOs and other entities 1969
M/22, Dated 6.9.1389 H, equivalent to November 15, 1969, and Its the obligation to pay social insurance
Bylaw subscriptions for employee annuities
and accidents or vocational illnesses

Basic Law of Governance, issued pursuant to Royal Order No. (A/90), Serves as the Saudi constitution or bill 1992
Dated 27.8.1412 H, Corresponding to March 1, 1992 of rights

Bylaw on the Collection of Donations, issued pursuant to Ministerial Applies to the collection of donations 1996
Resolution No. 547, Dated March 30, 1996

Regulation on the Acquisition and Temporary Possession of Real Applies to NPOs that meet public 2003
Estate for Public Benefit, issued pursuant to Royal Decree No. (M/15), benefit criteria and sets out rules and
Dated 11.3.1424 H, equivalent to May 13, 2003 requirements for acquiring land

Income Tax Regulation, issued pursuant to Royal Decree No. (M/1), Exempts donations from the tax base 2004
Dated 15.1.1435 H, equivalent to March 6, 2004

Zakāh and Income Tax Circular No. (9/2574), Dated 14.5.1426 H, equi- Transposes zakāh into a binding 2005
valent to June 21, 2005 regulation

Social Development Centers Bylaw, issued by Council Of Ministers Regulates government-run social de- 2007
Resolution No. (161), Dated 11.5.1428 H, equivalent to May 28, 2007 velopment centers, which are similar
to foundations and associations

Regulation on The Charitable Social Fund, Issued Pursuant to Council Regulates the Charitable Social Fund, 2010
of Ministers Resolution No. (85), Dated 22.3.1431 H, equivalent to May which is expected to support NPOs
8, 2010 financially

General Authority for Waqf Regulation, issued pursuant to Royal Decree Sets out rules for endowments and 2015
No. (M/11), Dated 26.2.437h, equivalent to November 24, 2015 awqāf as well as the new waqf Autho-
rity, which has yet to be activated

First Draft of the Nonprofit Corporate Regulation (Supplemented With Regulates nonprofit companies 2016
Explanatory Notes), Issued by the Saudi Ministry of Commerce and (NPCs), including waqf NPCs
Industry on April 11, 2016

86
Chapter V: Social and Development Finance

Setting Up Regulatory Body


for the Waqf Sector
The waqf activity in Saudi Arabia is a deeply rooted c) Awqāf Properties Inventory Project: It is one of
societal practice. Waqf has played an undeniable the important initiatives and strategic projects
role in serving the community and catering for its that will have a great impact on the different
needs in various fields. Over the years, the sector areas of work of the Authority. The project is im-
went through several changes that culminated, in plemented in three stages, where the output of
1437H, 2015 G, in the establishment of the Gene- the project resulting from surveying information,
ral Authority for Awqāf, to oversee the awqāf sector geographical data and ownership data are sto-
in the Kingdom. The Authority aims at organizing, red in an integrated electronic database, in order
maintaining, developing and promoting awqāf in to preserve the endowments, control and pre-
order to fulfill the conditions of its founders and en- vent infringement on waqf assets, as well as to
hance its role in economic and social development expedite good utilization of waqf asset in a way
and social solidarity, in accordance with the objecti- that meets the conditions of the founders and
ves of Sharīʿah and regulations. the needs of beneficiaries.
d) Launching an online platform for collecting cash
The General Authority for Awqāf has established and in-kind donations online in a crowdfunding
“Awqāf Company” as an investing arm directly linked way to facilitate the financing of projects and
to the Authority’s Governor. Awqāf Co. is working to programs. It also contributes to the sustainabi-
develop investment mechanisms for endowments lity of the non-profit sector and its programs and
managed by the Authority, diversify the investment projects by creating additional sources of inco-
portfolio, and develop an investment strategy to en- me that contribute to the enhancement of its de-
sure acceptable investment returns. velopment role.
e) Enhancing the role of awqāf in the development
of the non-profit sector: The General Authority of

Initiatives by General
Awqāf is currently working on a study to develop
a framework and vision for the endowments of

Authority for Awqāf non-profit organizations. It also aims to:


a. reformulate related relevant laws (awqāf and
non-profit sector laws),
As part of its development efforts, the Authority is
b. design of incentives to stimulate the non-pro-
undertaking a number of initiatives that can be hig-
fit sector to establish endowments in order to
hlighted as follows:
increase their financial revenues, and
a) Establishing a Waqf Fund aimed at reducing
c. the establishment of innovative awqāf pro-
the large operating financial expenses incurred
ducts, where mechanisms can be put in place
by the State for services provided to pilgrims
to take advantage of these awqāf as funding
and replacing them with revenues and services
opportunities to support the social projects
provided by the Awqāf; to sponsor and finance
and serve public needs.
a number of initiatives, programs and projects
f) Establishing the National Center for Awqāf Stu-
allocated to pilgrims.
dies and Research: A center specialized in the
b) Establishing a network of donors interested in the
field of studies and researches, organizing even-
service of pilgrims to coordinate efforts among
ts and developing the capacities and skills of
its members to finance projects and services to
workers in the non-profit sector, and working in
serve pilgrims and to achieve the goals in this re-
accordance with the latest methodologies used
gard and the objectives of donor institutions.
in these areas.

87
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Waqf Investment Funds


In collaboration with the General Authority of Awqāf, tal, a prominent asset management company spe-
the Capital Market Authority authorized in Novem- cializing in alternative investments, announced the
ber 2018 the launch of the first waqf investment offering of Alkhabeer Waqf Fund I units commen-
fund in the Kingdom: Alinma Wareef Endowment cing on October 1.
Fund. This was preceded by the license issuance by
GAA in June 2018 with an objective to maintain the Alkhabeer Waqf Fund I is an open-ended publicly li-
financial sustainability of waqf entities and non-pro- sted Waqf investment fund approved by the Capital
fit organizations as well as enhancing the contribu- Market Authority and the General Authority for Aw-
tion of the waqf sector in addressing the develop- qāf. It intends to distribute a dividend income of at
ment requirements. least 75 percent to fund the programs of the Majid
bin Abdul Aziz Society for Development and Social
Following this development, the Alinma Bank an- Services.
nounced the launch of four waqf funds as open-
ended public funds for investing the fund assets The fund provides a sustainable source of income to
and growing the waqf capital (see Table 5.2). Hence, financially support many of Majid Society’s programs
a portion of the returns is distributed annually and and initiatives, in collaboration and partnership with
continuously on specific waqf channels. various stakeholders. It also aims to empower indi-
viduals and households with particular emphasis on
Another promising development took place in the youths and entrepreneurs, to help develop their com-
last quarter of 2019, during which Al-Khabeer Capi- petencies and nurture their enterprises.

Table 5.2: Statistics of Waqf Funds

No Fund Date of AuM Beneficiary Utilization


Establishment (SAR Million)
1 Alinma Wareef Endowment Fund 1 November 2018 54.5 King Faisal Specialist Hospi- Healthcare
tal Foundation
(Wareef Charity)
2 Alinma Orphan Care Endowment 21 July 2019 10.3 EKHAA Charitable Foundati- Orphan care
Fund on for Orphan Care
3 Alinma Enayah Endowment Fund 15 September 10 Charitable Health Society for Healthcare
2019 Patients Care (Enayah)
4 Alinma Endowment Fund for 1 September 2019 10 Road Mosques Care Society Road mosques
Mosques
Source: Adapted from www.alinmainvestment.com57

Role of Islamic Development Bank


(IsDB) in Awqāf Sector in KSA
At the level of the Islamic Development Bank (IsDB) in Madinah, which seeks to build a global umbrella
Group, there was a realization as to the essential for the waqf sector, linking and coordinating all re-
role of waqf in supporting sustainable development levant stakeholders in this sector. The WWCE shall
of Member Countries. In addition to its initiatives in use the latest technology to provide information and
supporting waqf activities across the globe, the Is- facilitate its access and exchange to develop ideas
lamic Development Bank has embarked on establis- in the waqf sector.
hing the World Waqf Center of Excellence (WWCE)
88
Chapter V: Social and Development Finance

The Islamic Development Bank has embarked on establishing


the World Waqf Center of Excellence (WWCE) in Madinah,
which seeks to build a global umbrella for the waqf sector,
linking and coordinating all relevant stakeholders in this sector.

WWCE’s business model is based on a multi-linking With a total paid-up capital of US$79.92 million
and coordination between awqāf institutions and supplemented by a line of financing from IsDB of
beneficiaries from all countries, which will contri- US$100 million, APIF’s portfolio includes 55 projects
bute to creating a broad network of development in 29 Member Countries and Non-Member Countries
practitioners in line with the IsDB’s new approach to of IsDB worth a total of US$ 1.1 Billion.59
transforming from a “development bank” to a “bank
for development and developmentalists”. As far as the contribution in the paid-up capital is
concerned, three prominent Saudi-based institutions
WWCE will carry out a number of innovative projects make up the big chunk of contributions, namely Isla-
aimed at marketing awqāf institutions, including the mic Development Bank which contributes US$ 29.50
World Waqf Forum. WWCE will also launch an Aw- million, equivalent to 36.91% of the total capital;
qāf Digital Platform based on the latest technology OIC-Islamic Solidarity Fund with US$15.51 million
to collect all awqāf information scattered in other in- (19.41%); and the General Authority for Awqāf which
formation vessels and make them available through contributes US$ 7.50 million representing 8.99% of
a single database to provide the decision makers in the paid-up capital of the fund. Currently, APIF is
waqf field with the correct and accurate information engaged in five multiple projects in the Kingdom of
on various aspects of the waqf (research, studies, Saudi Arabia, namely Madinah Research Center, WA-
marketing awqāf projects, and mobilizing financial MY-Makkah Project, Construction of a Commercial
resources). & Furnished Apartments Complex (IUMS Project),
Jeddah, Purchase of a Residential and Commercial

Operationalization of Awqāf Complex in Riyadh to be used as waqf, Construction


of Zamzam Health Waqf in Makkah Al-Mukaramah,
Support within IsDB58 and Construction of a Hotel in the Central Region of
Al Madinah Al Munawarah, Saudi Arabia.60
Through its unique Awqāf Properties Development
Fund (APIF), IsDB is seeking to promote and support Very recently at APIF, a new fund dedicated to the
the role of awqāf in development. With its mandate development of awqāf in Saudi Arabia was establis-
to finance the establishment and/or development hed with an authorized capital of SAR one billion,
of Islamic real estate endowments, APIF is a unique including seed capital from IsDB, worth SAR 100
fund among MDBs with a strong focus on long-term million. Indeed, this is a commendable develop-
social financial sustainability. ment which may pave the way for the sector to be
the mainstream sector in the Kingdom’s economy.
APIF operates by financing (via Sharīʿah-compliant Coincidentally, such an undertaking fits perfectly
modes of finance) the construction or purchase of well with the KSA’s Vision 2030 and the KSA National
physical real estate assets that would generate re- Transformation Program 2020 which include expan-
turns. These returns will then be used to make re- ding the scope and impact of the third sector (civil
payments to the fund, with residual amounts used society institutions) by supporting non-governmen-
to support the activities of the beneficiary during the tal institutions and associations and encouraging
repayment period. After this period, the asset is re- endowments to enable this sector to obtain sustai-
gistered as a waqf and all income generated accrues nable financial resources so that the non-profit sec-
to the beneficiary, helping to provide a sustainable tor has greater effectiveness in sectors like health,
source of income for the beneficiary’s socially desi- education, housing, research, social programs and
rable activities. cultural events.
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Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

BOX 5.1

SOCIAL SAFETY NET AMIDST


COVID-19 PANDEMIC
The social finance sector has re-emerged as the 2. The Saudi Ministry of Human Resources and So-
unparalleled source of social safety net to curb the cial Development has also launched the “Com-
adverse impact of the pandemic. The following are munity Fund” to activate endowments and the
some of the initiatives made in KSA in response to non-profit sector to counter the effects of Co-
the Covid-19 crisis: ronavirus. The capital of the Fund is SAR 500 mil-
lion, including SAR 100 million from the General
1. The Health Endowment Fund, established in Fe- Authority for Awqaf; SAR 50 million from the Mi-
bruary 2008,61 has been able to mobilize sizable nistry of Human Resources and Social Develop-
financial resources to combat Corona from va- ment, and SAR 50 million from the endowment
rious donors, including: and civil institutions and some companies.68

• Aramco (SAR 200 million)62, Bupa Arab Com- 3. The allocation of equipped hotels and residential
pany (SAR 20 million)63, Sheikh Suleiman Al buildings for those whose condition required to
Rajhi Charitable Foundation (SAR 9 million) 64, be placed under surveillance either as a perma-
Southern Region Cement Company (SAR 2.5 nent or temporary stay, which are recovered by
million)65, and Mediterranean Insurance Com- the owners after the end of the crisis, which re-
pany (SAR 3 million)66. present significant financial values69.

• Saudi banks also contributed sizable 4. Support to the families whose daily or weekly
amounts to the Fund. The National Commer- income has been affected by the lockdown/cur-
cial Bank came in first with a donation of SAR few.
33 million, followed by Al-Rajhi Bank with SAR 5. The charitable sector allocates grants and subsi-
25 million, the Riyadh Bank with SAR 17 mil- dies to families whose salaries have been greatly
lion, Saudi Arabian British Bank put forward affected by the suspension of work.
SAR17 million, Samba Bank donated SAR
16.5 million, Arab National Bank SAR 12 milli-
on, Banque Saudi Fransi SAR 12 million, Sau-
di Investment Bank SAR 6.5 million, al-Jazira
Bank with SAR 5.6 million, Al Bilad Bank SAR
5.6 million, and Gulf International Bank gave
SAR 2 million 67.

90
Swift Response of Islamic Development and education, disease surveillance, data collection
Bank Group during Covid-19 Outbreak and analysis, sustained provision of essential social
services, provision of social safety nets, and sup-
The IsDB Group has launched a US$2.3 billion aid port private sector activity.
package for Member Countries and Muslim com-
munities in non-Member Countries. This includes As part of the Islamic Development Bank’s eager-
three tracks: a) addressing the pandemic, b) recove- ness to support its member countries in addressing
ring from it, and c) resuming normal life, with aid the challenges of the Covid-19 pandemic, recently
covering the immediate short, medium, and long the IsDB Group President held virtual meetings with
terms. member countries to discuss their needs to con-
front the pandemic and its implications, in addition
In order to support its member countries in this time to providing them with the necessary assistance to
of need, IsDB Group is setting-up a special ‘Strate- support their efforts to contain Covid-19 pandemic.
gic Preparedness and Response Facility’ (SPRF) of Some commitment that were made include: 1) US$
US$730 million to mitigate the negative health and 11 million funding for Kyrgyzstan to contain the
socio-economic impact of the Covid -19 pandemic. pandemic, noting that the IsDB Group Corporations
This will include US$280 million from the Bank and are discussing how to provide more assistance to
Islamic Solidarity Fund for Development for sover- achieve food security and support small enterpri-
eign projects and programs, US$300 million from ses in the country; 2) US$ 279 million for Tunisia to
the International Islamic Trade finance Corporation face the crisis; 3) US$ 143 million for Uzbekistan to
(ITFC) for trade finance and US$150 million from support its efforts to face the pandemic; 3) US$ 35
ICIEC for insurance coverage. The facility will extend million to assist Sudan in overcoming the pandemic;
financing to both the public and private sectors in 4) US$ 162 million to help Senegal to overcome the
minimizing the spread and impact of the pandemic pandemic; and 5) US$ 33 million for Mauritania to
in IsDB member countries and to build their resilien- curb the repercussions of the pandemic crisis and
ce. Financing will be extended in the form of grants, to provide medical and economical needs of Mauri-
concessional resources, trade finance, private sec- tania to fight the disease.
tor lending and political and risk insurance cover-
age. The IsDB Group will deploy all the available fi-
nancing instruments to channel the funds in a fast
track manner to support its member countries.

The SPRF funding will target interventions that fo-


cus on emergency preparedness and response to
curb and contain the spread of the Covid-19, mini-
mize socio-economic impact of the pandemic espe-
cially on the poor, and to build resilience of member
countries in responding to outbreaks and pande-
mics. The facility will support strengthening of the
health systems, funding of national epidemic prepa-
redness and response plans, community awareness

91
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

An Interview with
the General Authority
for Awqaf70

1. How can the endowment sector optimally con- conditions of waqf donors, and enhances endow-
tribute to economic development? ments role in socio-economic development and so-
cial solidarity in accordance with the principles of
The topic is no doubt broad and might not be ful- Islamic Sharīʿah and regulations in accordance with
ly covered within the available space in this report. Article (3) of the Authority’s statute.
I will, therefore, skip talking about basic of waqf
fiqh and also its social impact. Regardless of the The strategy of the GAA aims to achieve a chain of
precise difference between the two terms of (de- economic added values for endowments in terms
velopment) and (growth), based on practical and of organizational aspect and reform of regulations
realistic experiences from the history of our coun- that stimulate waqf sector and highlight the opera-
try and other Muslim countries, waqf was the main tional role in the management and development of
factor in economic development. This was proven public endowments. This would lead to addressing
by evidence and figures. However, many factors problems that hindering endowments from playing
today have crippled waqf and led to its failure. The their role in the economic development, taking into
evidence that waqf was carrying out economic de- account, what is stipulated in many articles of the
velopment is obvious in the Islamic civilization as statute, the importance of the stipulations of waqf
many awqāf were allocated for academic research donor (waqif) regarding its income, expenditure,
and innovative works. People today are fascinated waqf manager (nazir), and recipients.
by contemporary endowment institutions such as
Harvard University, Nobel Prize, Ford Foundation The restoration of the role of institutional endow-
and al-Furqan Foundation, etc. These indeed reflect ment charitable work in economic development re-
a limited range if compared to Islamic waqf, which presented in the development of resources of chari-
was achieving sustainable development in a com- table and waqf intuitions mean resection of a major
prehensive manner. role of institutional charitable work to serve the Isla-
mic civilization and serve and develop the society.
However, the contemporary time has witnessed a
decline and regression of institutional awqāf, cau- 2. What is the role of the Awqāf sector in the King-
sing many people to stop performing the ritual of dom of Saudi Arabia in achieving the Kingdom’s
waqf. Therefore, in order for the institutional en- 2030 vision?
dowment to be able to support economic develop-
ment and contribute effectively in the gross national The Kingdom of Saudi Arabia is distinguished by ad-
product of the Kingdom, it is important to address hering to the religious and social values that Saudi
shortcomings, and return waqf to its previous sta- society was brought up with. Among the most im-
tus. This is one of the roles entrusted to the General portant of these values are charity giving, genero-
Authority for Awqāf (GAA) to perform upon its esta- sity, support, assistance and relief individually and
blishment under the Royal Decree No. (M / 11) da- collectively through the endowment and charitable
ted 2/26/1437 AH. It aims to organize, maintain and institutions of civil society since a long time ago
develop endowments in a manner that achieves the when waqf existed. Prophet Ibrahim “PBUH” esta-

92
Chapter V: Social and Development Finance

blished the oldest and most honorable endowment, lunteers to work in this sector; provide sustainable
the great house of God, which is the Qibla of all be- sources of funding, encourage endowments, review
lievers, and the destination of all Muslim pilgrims. the relevant regulations. A taskforce from the GAA
The Sharīʿah of Islam received this method with currently works on reviewing the regulations, especi-
acceptance from our prophet Muhammad “PBUH”. ally the systems that allow the authority to grant the
Endowments continued with caliphs and kings, in- necessary licenses to establish modern developed
cluding the founder King Abdul Aziz Al Saud (may endowment products by taking advantage of Wes-
God have mercy on him) and his sons who excee- tern experiences and other international experien-
ded their predecessors in abundance of goodness ces that do not contradict the special nature of the
and public endowments. institutional Islamic endowment. These regulations
give an international dimension to the Saudi institu-
The Kingdom has paid great attention to the tional endowment that works to establish Leading
non-profit sector. The Seventh Development Plan large endowment companies and entities owned by
stipulated: “The necessity of establishing voluntary the riches; activate their role in social responsibility;
services; strengthening its concept and importance expand the non-profit sector; enable charitable and
among individuals to actively contribute to voluntary endowment institutions and societies to attract best
and charitable endowments in the development are- talents capable of transferring international know-
as of social, health and educational. The ninth de- ledge and applying best professional, investment
velopment plan stipulated the main implementation and administrative practices; and management of
mechanism which stated: “Giving importance to endowment family wealth (Endowment Wealthy
the social dimension (Social Responsibility Invest- Management-EWM), which contributes to creating
ment-SRI) of the development process; promotion a specialized endowment financial industry and pro-
of community-based social participation in the de- viding an innovative endowment financial market in
velopment process, attention to youth groups; and cooperation with the relevant authorities.
empowerment of women and people with speci-
al needs. Article (10 / a) of the statute of the GAA Article (7/1) appears to allow the Board of Directors
stipulated that: “one of the tasks of the Authority is of the GAA, in the limits of provisions of the statute,
to advocate for facilitating the endowment and its to propose regulations related to awqāf activities
procedures; and to provide information, advice and and submit them to the concerned authorities for
possible support to waqf donors”. Article (10 / c) approval in accordance with the procedures. The
stated: “Contribution to the establishment of endow- statute also stipulated that it is the responsibility of
ment projects; academic and research activities in a the Authority to set, review, evaluate, develop and
manner that enhances the development of society; modernize strategies, plans and policies related to
and fulfills the conditions of waqf donors; the purpo- endowment activity. The Authority is currently wor-
ses of waqf, in coordination with governmental and king on this in accordance with the Kingdom’s stra-
non-governmental agencies”. tegy:

This social impact includes sustainable invest- 1. Cohesive society preserving its identity;
ment, continuity and the perpetuation of charitable 2. Competitive knowledge economy.
endowment work for future generations. The King- 3. Sustainable environment and integrated infra-
dom’s 2030 vision emphasized on the effective role structure;
of community in local and regional endowment cha- 4. Distinguished global position.
ritable work in institutional framework by focusing
on maximizing results. The number of charitable By improving financial and administrative efficiency
institutions and associations is still in the range of and raising revenues, the stereotype of the awqāf
1,000 organizations. For development and advance- sector should be changed. The stakeholders in the
ment of endowment sector particularly, necessary sector need to be aware of the GAA role through
regulations need to be developed to encourage vo- raising awareness of the importance of the endow-

93
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

ment sector in sustainable socio-economic deve- bassies and reception offices in Saudi airports that
lopment as one of the important sectors contribu- provide all the necessary information to investors
ting to meeting development needs and priorities in and provide support to overcome obstacles they
the short, medium and long term. The importance may encounter. New Capital Market Act (CMA) was
of the sector’s role will become clear by directing approved in mid-2003 to enhance the effectiveness
banks to high-impact programs. GAA will work to of the operations and management of the equity
identify and define development needs and priori- market funds. Tax regulation for 2004 reduced the
ties in coordination with the relevant authorities, to income tax imposed on foreign companies from
expand spending channels to include programs that 45% to 20% and the government eliminated the re-
meet the needs of Saudi society according to the quirement for the minimum invested capital requi-
Kingdom’s 2030 vision, and to implement policies, red on foreign investors in 2005. The government
controls and standards that take into account con- procurement regulation was also approved, which
ditions of waqf donors and encourage them, and to made it possible for companies wholly owned by
build development partnerships with various sec- foreigners to compete with local companies for go-
tors to enhance this role. Given the importance of vernment contracts. Moreover, a new act for the Ca-
non-profit organizations in the endowment charita- pital Market Authority was approved in mid of 2003
ble institutional work, the GAA will strive to achieve to enhance the effectiveness of the operations and
the financial sustainability of non-profits by suppor- management of the equity market funds. The tax
ting the process of transferring nonprofit entities system for 2004 reduced the income tax imposed
from traditional investment trends to investment on foreign companies from 45% to 20%. The go-
in developmental projects and income-generating vernment eliminated the requirement for the mini-
assets, in addition to developing the capabilities of mum invested capital required on foreign investors
workers in this field and issuing guidelines and stan- in 2005. The government procurement regulations
dards in these areas. were also approved, by which companies wholly
owned by foreigners can compete with local com-
3. With the Kingdom of Saudi Arabia encouraging panies on government contracts.
foreign investment, will this increase the size of
endowments in the Kingdom? The government has also recently granted a num-
ber of licenses to foreign and Gulf banks alike to
Regulations of foreign investment and other rele- conduct business in the Kingdom. Most of these
vant regulations related to investment issued by the international financial and banking institutions own
Kingdom of Saudi Arabia seek to expand investment endowment companies that provide charitable
fields for private sector, in addition to encouraging work in their home countries, such as Lloyds Bank,
foreign direct investment. The foreign investment which owns the Lloyds Trust Charity; and Barclays
regulation issued by Royal Decree No. M / 1 dated Bank and JP Morgan, which owns a company that
5/1/1421 AH, and its subsequent amendments, gi- operates in the Saudi market. Most of these institu-
ves foreigners complete right of ownership of 100% tions can transfer their administrative and technical
in most sectors. Previously, the maximum foreign experience to benefit from local banks in the endow-
ownership was not exceeding 49%. It also gives the ment professional field. This applies also to foreign
right to enjoy all the advantages, benefits and incen- information technology companies, food and soft
tives, including the right to obtain credit loans. The drinks industrial companies, and other companies
regulation previously required participation of Saudi that have international experiences in the field of
capital in the investment projects with no less than charitable giving such as Amazon and e-commerce
25% of the capital of the project in order to enjoy companies.
these advantages. The new regulation approved the
establishment of the General Investment Authori- In general, the foreign investment regulation and
ty, which has branches in the eastern and western its successive amendments and the openness
provinces, representative offices in many Saudi em- of the Kingdom of Saudi Arabia to foreign invest-

94
Chapter V: Social and Development Finance

ment will increase the size of endowments in the • Globalization of Awqāf (Sadaqa Global)
Kingdom, but neither this regulation nor other in- The establishment of an international endow-
vestment regulations are sufficient to increase the ment center encourages the so-called global
size of endowments in the Kingdom. It is required Waqf, which is the result of collective endow-
that endowment regulation keep pace with invest- ments and culmination of all types of endow-
ment regulations by developing frameworks of en- ments in all fields. The global Waqf is the culmi-
dowment legislation in the country to keep pace nation and outcome of endowment work of all
with international legislations and laws in the field types and various fields. It is considered specifi-
of charitable and humanitarian endowment. Most cally one of the aspects and forms of the collec-
of the international endowments are innovative tive endowment. It is rather the most prestigious
investment monetary endowment, specialized in and greatest of these aspects and images, due
technology, medical and scientific research, digital to of broad scope of participation, the greatness
knowledge technology, community service and in- of benefits and a large number of returns. It also
dustry. The GAA seeks under its mandate to keep has a major role in preserving the strength of the
pace with international regulations and laws in the Islamic nation and preserving its sanctity, immu-
field of institutional charitable endowment that re- nity, identity and development of resources, eco-
presents a global human heritage in whole from a nomies, and resilience to the challenges and ris-
purely technical, legal and regulatory point of view, ks necessitated by various global developments,
which is related to the purposes of this activity, whi- such as globalization, informatics, biological re-
le its justifications are not against the principles of volution, and weakness of ethics and values.
Islamic Sharīʿah. The wisdom is the lost property of
the believer, so wherever he finds it, then he is most The global waqf is where donors are global and
worthy of it. It can also benefit in this field from the multiple, meaning that this endowment is sha-
Singaporean, Malaysian, South African, and other red by several countries, group of international or
relevant international experiences. regional organizations from different countries,
to confine the money they own, with terms and
4. The Kingdom has great potentials; how in your conditions of endowment considered, taking into
opinion can it become an international center for consideration the quality of international stan-
Awqāf? dards and its requirements. The word “global”
attributed to the endowment is a characteristic
The Kingdom of Saudi Arabia is blessed with enor- that indicates a clear and specific meaning and
mous economic potentials and resources. It is the distinguished from others. It is a sign of the do-
qibla of all Muslims and has the two holy mosques. nors being multiple global parties, and the waqf
KSA is the biggest supporter of charitable and en- is as well. This endowment is distinguished from
dowment work in the Islamic world and the whole the collective endowment with the element of
world. It is the headquarters of many Islamic in- universality that exceeds the group’s element by
ternational organizations such as the Organization geographical extension and breadth of dealing,
of Islamic Cooperation. It has the largest Islamic multiple benefits and returns. It should establish
bank in the world, i.e. the Islamic Development Bank for endowment performance on international
(IsDB) in Jeddah. IsDB has Islamic waqf funds, such institutional legal and cooperative work and any
as the Islamic Solidarity Fund, which is one of its major global characteristic of global endowment
most important activities. IsDB is the owner of the charity work. These can be done under the um-
initiative of establishing the World Waqf Authority. brella of the International Awqāf Center.

95
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

• Justifications for the establishment of an Inter-


national Awqāf Center in the Kingdom of Saudi Mr. Emad bin Saleh Al-Kharashi’s
Arabia: short biography
The emergence of globalization and the wide-
ning circle of its economic, political, cultural and Mr. Emad bin Saleh Al-Kharashi obtained his
social influence; are perhaps the most promi- Bachelor’s degree in Law in 1992 from King
nent related to the International Awqāf Center Saud University. He went on to work in se-
in terms of the internationalization of financial veral financial and legal sectors, and founded
and economic business at the level of financing, the Mohammed Al-Zamil and Emad Al-Kha-
support and assistance; the level of technical rashi law firm. He served in various commit-
and digital application; the level of legalization, tees and boards including: Membership of
legislation and internationalization; and at the the Advisory Committee in the Capital Mar-
level of contractual employment and instituti- ket Authority, and membership of the Board
onal investment. This calls for the endowment of Directors of Jabal Omar Development
work to be marked with the same global nature, Company. He held many positions in Riyadh
in order to face globalization in its financial and Chamber, including: Director of the Arbitrati-
developmental aspect in particular and taking on and Settlement Center, Vice Chairman of
advantage of the tremendous and rapid develop- the Family Companies Committee, Legal Ad-
ment in the field of communication technologies viser in the Chamber, and a member of the
and the information system. This would help a team from the Awqāf Committee to review
lot in facilitating endowment work at the global and submit proposals on the projects of a
level through the International Awqāf Center, by number of agencies.
accelerating, intensifying and maximization of
its roles and impacts. In 2017, he was appointed as Deputy Chair-
man and Governor of the General Authority
This International Awqāf Center may pave the of Awqāf, Kingdom of Saudi Arabia.
way for the remarkable emergence of private
institutions of a global nature. Our current era
has witnessed a growing interest in such kind of
entities in many places located in many Islamic
and international countries. This interest, even if
it did not reach to the desired level, constitutes a
necessary prelude and a basis for the successful
implementation and perpetuation of the project
of the International Awqāf Center.

96
Chapter V: Social and Development Finance

Outlook on Development Finance in KSA


With the aim of supporting and promoting econo- d) Real Estate Development Fund (REDF) formed in
mic development, the Saudi government establis- 1974 to finance real estate projects undertaken
hed several Specialized Credit institutions (SCIs) to by individuals for personal housing or for com-
facilitate the expansion of the private sector’s role in mercial purposes.
the national economy. SCIs are essentially non-de-
posit taking specialized credit institutions that are Specialized Credit Institution assets have been
owned by the state to facilitate the development of continually expanding, supporting the growth of
specific domestic sectors by extending interest-free the non-oil private sector. SCIs continue to provide
credit to viable projects in these sectors. loans that contribute to the achievement of the de-
velopment objectives in Saudi Arabia. Actual loans
There are four government-owned specialized cre- disbursed by SCIs in 2018 totaled SAR 15.2 billion,
dit institutions that play a significant role in the fi- decreasing by 17.5 percent compared to SAR 18.4
nancial sector. billion in the preceding year. Total loan repayments
a) Agriculture Development Fund (ADF) establis- amounted to SAR 20.7 billion, decreasing by 2.3 per-
hed in 1962 to provide short- and medium-term cent from the preceding year. The balance of out-
credit to support agricultural investments and standing loans went down by 2.6 percent at the end
related projects; of 2018 to SAR 230.7 billion compared to the end of
b) Social Development Bank (SDB) established in the preceding year.
1971 to provide interest-free loans to low-inco-
me Saudi nationals to meet various personal ex- The SCIs represent a significantly large supplier of
penses in respect of marriages, and maintenan- credit to Saudi Arabia’s private sector and quasi-go-
ce of houses; vernment companies compared to Saudi Arabia’s
c) Saudi Industrial Development Fund (SIDF) esta- commercial banks. However, the influence of the
blished in 1974 to provide loans to Saudi busi- SCIs is starting to wane in several important res-
ness entities to establish industrial projects; and pects, due mainly to the increasing role of the pri-
vate sector, and the increasing size of the economy.

Figure 5.1: SCIs Loan and Investment (SAR Billion)

239.7 236.9
233.4 230.7
206.0
179.7
162.6

126.3 136.7

46.2 38.3
28.7
11.2 11.9 9.9 10.1 15.4
9.3

2010 2011 2012 2013 2014 2015 2016 2017 2018

Loan Investment

Source: SAMA 55th Annual Report

97
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

NDF, which plays a quasi-fiscal role


since it sits between the State and the market,
is a perfect match for GAA in unleashing the untapped potential
of social and development finance sector.

Establishment of
the National Development Fund
In 2017, the government of Saudi Arabia establis- ers in their respective sectors. They had been set
hed the National Development Fund (NDF) with an up in a fiscal surplus environment to support social
objective to help achieve the goals of Vision 2030 by transfers (HRDF), external funding (SDF), and invest
contributing to the Kingdom’s economic and social in different sectors to earn positive returns.
transformation. NDF currently supervises six funds
(collectively, the Funds): Like other development finance institutions (DFIs) in
1. The Social Development Bank (SDB), G-20 countries, NDF is positioned to provide long-
2. The Saudi Fund for Development (SFD), term financing, advocate critical changes to policy
3. The Saudi Industrial Development Fund (SIDF), and regulatory environment, and provide knowledge
4. The Real Estate Development Fund (REDF), to improve efficiency and impact of projects. In clo-
5. The Human Resources Development Fund se coordination with the Public Investment Fund
(HRDF) and (PIF), which focuses mainly on the private sector,
6. The Agricultural Development Fund (ADF). NDF and PIF are expected to complement each
other and create synergy between their respective
These funds, which are owned by the government, activities, thus yielding benefits greater than their
are financially independent and are significant play- individual contributions.72

Conclusion
Job creation, inclusive growth and private sector de- geared towards profit motive—is a perfect match for
velopment have recently been the most-cited policy GAA in unleashing the untapped potential of social
goals for governments around the world, Saudi Ara- and development finance sector.
bia is no exception. Climate change, poverty reducti-
on, and access to finance have also been considered In the synergy between the two sectors, three key
as no less important than the goals aforementioned. components shall not be overlooked; a) sustainability
And in the spirit of diminishing a heavy reliance on oil, path: which aims to meet the developmental needs
social and development finance are becoming incre- of the community, through the launch of a number
asingly important to play a prominent role in intercon- of products and the creation of sustainable financi-
necting the private sector and policy makers. al resources to achieve more than SAR 12 billion for
the non-profit sector through several products; b)
For Saudi Arabia, given its economic and more im- empowerment path: aims to enable the non-profit
portantly being one of the largest economies in the sector to achieve a deeper impact by developing the
world, the gigantic potential of its social and deve- capabilities of non-profit entities and their person-
lopment finance cannot surely be taken lightly. In nel in various fields; and c) integration path: aims at
this regard, therefore, NDF which plays a quasi-fiscal strengthening partnerships with relevant authorities
role since it sits between the State—which seeks to in order to guide efforts towards development needs
maximize social benefits—and the market—which is and priorities.
98
Chapter V: Social and Development Finance

Interview with
Mr. Stephen Groff
Governor, National Development Fund

1. What is your view on the state of development of environmental sustainability and waste manage-
finance institutions in KSA? Is the current ecosys- ment. It is recognized however that private financi-
tem in KSA adequate enough to garner its potential al markets alone are unlikely to provide sufficient
to play its strategic role in bolstering the economic long-term resources to undertake these activities
development in KSA? on a scale necessary to achieve rapid progress and
hence the critical role of development finance insti-
Saudi Arabia is a high-income country with a per ca- tutions in the country.
pita income of about US$ 22,500 in current dollars
(equivalent to about US$ 56,800 PPP). But heavy The efficiency levels in non-oil sectors—particularly
dependence on oil makes its growth path far from agriculture, construction, energy activities and servi-
sustainable. This is evident from the slowdown in ces—appear to be low due to their high dependence
growth to about 1.8% since 2015 due to the sof- on public subsidies. Successful and sustainable di-
tening of oil prices. The large fiscal surpluses the versification in such subsidized sectors require sig-
Government had enjoyed during 2000-2014 have nificant policy and regulatory reforms to enhance
subsequently deteriorated to a deficit of about 7% productivity.
of GDP during 2015-2018. The prevalence of unem-
ployment among the growing educated young The transformation envisaged by Vision 2030 thus
population is also a major challenge the Kingdom requires implementation of measures to increase
faces. KSA thus must urgently address these moun- total factor productivity in the economy, reform the
ting challenges by mobilizing necessary resources financial sector to improve its efficiency, enhance
to promote sustained and inclusive growth in the access to long-term finance, and improve public re-
country. source management to create fiscal space for the
government to invest more in infrastructure and hu-
The aim of Vision 2030 is to put the economy on man resource development. The aggregate invest-
a sustainable and inclusive growth path. This is ex- ment requirement is much higher (of at least 35%
pected to be done through diversification of the eco- of GDP) than the current levels of 28% of GDP which
nomy by unlocking the economic potential of non- needs to be contributed by both public and private
oil sectors through a private sector led development sectors.
process.
NDF was established to help achieve the goals of
For this, the Vision envisages several thematic pri- Vision 2030 by contributing to the Kingdom’s econo-
orities such as building an appropriate education mic and social transformation. Like other develop-
system to develop the human capital of the country, ment finance institutions (DFIs) in G-20 countries,
promoting entrepreneurship and SMEs, and impro- we are planning to position NDF to provide long-
ving the business environment to create adequa- term financing, advocate critical changes to policy
te and appropriate job opportunities for the Saudi and regulatory environment, and provide knowledge
youth. The Vision also underscores the importance to improve efficiency and the impact of projects.

99
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Acting in tandem with the Public Investment Fund Second, the NDF will consolidate the financial posi-
(PIF), which focuses mainly on the private sector, tion of the funds by restoring their profitability. It will
these two institutions could complement and cre- also introduce a shared services model for the NDF
ate synergy between their respective activities, thus Family of Funds to reduce cost, enable greater over-
yielding benefits greater than their individual contri- all productivity and allow the Funds to focus fully on
butions. their core businesses.

NDF currently supervises six funds: the Social De- Third, the NDF together with the Funds, will consider
velopment Bank (SDB), the Saudi Fund for Develop- appropriate structures to (i) provide long-term finan-
ment (SFD), the Saudi Industrial Development Fund ce to infrastructure, (ii) become a major source of
(SIDF), the Real Estate Development Fund (REDF), support to SMEs and start-ups, (iii) encourage the
the Human Resources Development Fund (HRDF) development of new sectors, (iv) support the deve-
and the Agricultural Development Fund (ADF) (col- lopment of competitive industries, (v) provide coun-
lectively, the Funds). These funds, which are owned ter-cyclical support, (vii) develop human capital and
by the Government, are financially independent and new technologies, (viii) contribute to strengthening
are significant players in their respective sectors. and deepening the capital market, and (ix) comple-
They had been set up in a fiscal surplus environment ment PIF’s equity support to crowd-in private invest-
to support social transfers (HRDF), external funding ments.
(SDF), and invest in different sectors to earn positive
returns. As noted earlier, the fiscal situation of the 3.How could NDF play its role in the synergy be-
country has now changed. In a fiscally constrained tween social finance and commercial finance in
economy, they need to focus more on development achieving the development objectives in the King-
effectiveness of their operations and their own fi- dom of Saudi Arabia?
nancial sustainably. The immediate focus of NDF is
to address this challenge. Institutions like the NDF play a quasi-fiscal role as
their mandate sits between that of the State—which
2. The creation of the National Development Fund seeks to maximize social benefits—and the mar-
(NDF) is a landmark step towards Vision 2030. ket—which is driven by considerations of profit. ND-
What are the top three objectives that NDF plans F’s developmental role requires it to subsidize some
to achieve within the coming three years? operations on its own or through Government sup-
port. NDF’s mandate also requires it to take on more
The NDF aims to be an effective institution to help risk than other commercial institutions. But in doing
accomplish the Kingdom’s goals of Vision 2030. so, it will have to rigorously adhere to core principles
To do so, it will focus primarily on the institutional of financial viability and sustainability.
strengthening of the Funds it supervises and buil-
ding its own internal capacity and processes over As instruments to fulfill a country’s development as-
the next three years. pirations, institutions such as the NDF have to con-
sider investments in (i) activities with high risk and
First, the immediate challenge is to restore the fi- potentially high private and social returns such as
nancial health of the six Funds under its supervision (a) start-ups, (b) new technologies and innovative
and enhance the development impacts of their ope- approaches, and (c) sunrise industries with uncer-
rations. This requires (i) resolving impaired assets tain future but large potential benefits; (ii) strategic
in collaboration with the Ministry of Finance, and (ii) projects with the uncertainty of returns due to lum-
taking steps to build-up a better performing asset py size and long gestation lags; and (iii) infrastruc-
base by introducing greater financial and operatio- ture projects with substantial economy wide spill-
nal discipline, including more rigorous investment over benefits and low direct returns. For example,
criteria, better risk management, and catalyzing the German Development Bank, KfW, funded most
procedural and cultural changes within the Funds. of the initial investments (during 2007-2009) in the

100
Chapter V: Social and Development Finance

solar power sector which helped to crowd-in sub- its resources to guarantee the SME loan portfolio of
stantial private investment in subsequent years. commercial banks.
KfW was thus instrumental in raising the share of
renewables in Germany’s total energy production by NDF intends to emulate the successful practices
3.7 times in 15 years to 41% by 2015. followed by other DFIs to support SMEs and start-
ups. It aims to significantly enhance access of SMEs
4.What sort of strategic role could the NDF play to and start-ups to appropriate and adequate finances
nurture entrepreneurship and innovation in KSA? which is one of the key priorities of Vision 2030.

Though the Kingdom has a number of institutions to 5. Does fintech (including blockchain and internet
finance SMEs, enterprises still face serious challen- of things technologies) play a role in development
ges including limited access to bank credits (SMEs finance?
currently get only 6% of total bank credit). Access to
venture capital is also very limited. Banks place high The application of information technology in the fi-
collateral requirements and charge significant risk nancial sector provides a wide range of avenues to
premiums thus raising the effective cost of capital strengthen financial development, sector efficiency
for SMEs. and financial inclusion to expand access to oppor-
tunities and fight poverty. However, it needs to be
Promoting SMEs and entrepreneurship are comple- recognized that technology also brings new risks
mentary activities. All the NDF funds play a direct or to consumers and investors and, more broadly, to
indirect role in supporting SME development. ADF, financial stability and integrity. Accordingly, in 2018,
SDB and SIDF all provide loans that directly sup- the IMF and the World Bank developed a frame-
port SMEs, HRDF facilitates training and employee work—the so-called Bali Agenda—to guide deve-
support, and REDF and SFD can indirectly support lopment bankers and national governments to help
SME growth through procurement-related activity. shape their policies and approaches to deal with
SME promotion and entrepreneurship are globally Fintech development and related issues.
recognized as key to economic growth and are thus
high priority areas for most DFIs around the world The agenda has 12 elements: (i) embrace the promi-
including those in China, Germany, Japan, Korea se of Fintech; (ii) enable new technologies to enhan-
and India. ce financial service provision; (iii) reinforce competi-
tion and commitment to open, free, and contestable
At KfW, for example, financial inclusion, through its markets; (iv) foster Fintech to promote financial
support for start-ups, SMEs and related areas of inclusion and develop financial markets: (v) moni-
entrepreneurship development, innovation and skill tor developments closely to deepen understanding
development, have been of high priority. Its current of evolving financial systems: (vi) adapt regulatory
strategy aims to allocate more than 40 percent of its frameworks and supervisory practices for orderly
resources to support SMEs and start-ups. development and stability of the financial system;
(vii) safeguard the integrity of financial systems; (vii)
Like most other DFIs, KfW supports SMEs and start- modernize the legal frameworks to provide an ena-
ups indirectly through commercial banks and priva- bling legal landscape; (ix) ensure the stability of do-
te equity firms. Largely due to KfW’s efforts since mestic monetary and financial systems; (x) develop
its inception, SMEs form the backbone of the Ger- robust financial and data infrastructure to sustain
man economy and are responsible for much of the fintech benefits; (xi) encourage international coo-
country’s reputation for innovation. Mexico’s Nacio- peration and information-sharing; and (xii) enhance
nal Financiera’s (NAFIN) support to SMEs is another collective surveillance of the international monetary
successful example. NAFIN supports SMEs indi- and financial system.
rectly through commercial banks, allocating 65% of

101
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

These elements will guide NDF in its approach to the i. develop the digital and physical infrastructure
application of Fintech. An area where Fintech could and regulatory frame-work for sustainable, and
find immediate application in development banking inclusive technology-enabled economies
is in its capability to enhancing access to credit to
SMEs and start-ups. Traditionally commercial banks ii. get easy access to knowledge, on how they
have been hesitant to provide credit to SMEs due to could better respond to tech-enabled disrupti-
the difficulties in accessing information, cost of ad- ons. Access to new skills will allow Individuals to
ministering a large number of small loans, and the tap new opportunities. Firms can adapt to new
inability of SMEs to provide collaterals acceptable to market opportunities by improving their capabi-
banks. The new technologies (including distributed lities to absorb disruptive technologies. Govern-
ledger technology, cloud computing, and automa- ments can take advantage of these technologies
tion enabled by artificial intelligence) provide fast, to improve speed, reach and quality of public ser-
efficient and cost-effective solutions to overcome vices.
some of the challenges commercial banks face in
extending greater support to SMEs. Thus, Fintech iii. adapt and apply emerging technologies across
could alleviate two major impediments in suppor- sectors to enhance access to financial services,
ting SMEs—information asymmetry and high trans- health and education services etc. to ensure that
action costs. the poor also benefit from the disruptive techno-
logies.
6. How do you see the prospect of development fi-
nance in the era of technological disruption? What 7.What is the relationship between NDF and regi-
are the key lessons for the continued progress? onal or multilateral development institutions, like
the World Bank, Asian Development Bank, and the
Disruptive technologies (i) cause sharp changes in Islamic Development Bank? How to capitalize on
the cost or access to products or services, and (ii) these institutions to achieve your objectives?
dramatically change how information is gathered,
products are made, and services are provided. They Currently the relationship with the multilateral deve-
have expanded the access to global markets and lopment institutions (MDIs) is rather limited as NDF
changed business models. They also created enor- has only recently started its operations. This said
mous productivity gains and have enhanced access SFD has a long-standing relationship with many
to basic services. MDIs and has worked closely with major institutions
on development projects around the world.
On the flip side, however, these technologies can
also be a major source of inequality as they reshape While NDF’s overall engagement is still in the early
the nature of work, abruptly shift the demand for la- stages, it could benefit immensely by collaborating
bor/skills, favor those who have access to new tech- with MDIs by learning from their successes and
nology and have acquired new skills. If the enabling the challenges they have faced. As a start, the re-
environment does not allow firms to adapt quickly, lationship could focus on three areas (i) knowledge
they cannot pursue new opportunities giving the sharing, (ii) institutional development and (iii) lever-
first movers a major advantage. These technologies aging and risk sharing through co-financing of large
also disrupt workplace dynamics and challenge the projects.
role of governments as an intermediary.
DFIs could help countries reap the significant bene- NDF could tap into the extensive expertise and
fits of disruptive technologies but also manage the knowledge base of MDIs in areas of mutual interest.
associated risks by helping them to: Some such areas could include: (i) financial sector
reforms, (ii) capital markets development, (iii) rene-

102
Chapter V: Social and Development Finance

wable energy and climate change related areas, and


(iv) sector thematic knowledge in other areas of mu- Mr. Stephen Groff’s biographical sketch-up
tual interest such as human resource development,
regulatory environment to promote the private sec- Groff was appointed as Governor of the Na-
tor, etc. tional Development Fund (NDF) in February
2019. NDF is tasked with enhancing econo-
Institutional capacity of NDF could be enhanced mic diversification and increasing the sus-
through (i) secondment of staff to and from the tainability of development financing across
MDIs, (ii) participating in/collaboratively conducting Saudi Arabia. NDF supports public sector
training programs on various aspects of develop- spending by maximizing impact and so-
ment banking, and (iii) learning from the best prac- cio-economic development.
tices followed in MDIs in the areas of risk manage-
ment, project appraisal and implementation, good He was previously ranking vice-president
governance in procurement, management of social of the Asian Development Bank. Groff also
and environmental safeguards, and post evaluation served as Deputy Director for Development
of projects. Cooperation at the Paris-based Organization
for Economic Cooperation and Development
NDF could also explore leveraging its resources and and as Deputy Vice-President for Operations
sharing risks with MDIs by co-financing large priva- at the Washington-based Millennium Chal-
te sector projects including complex infrastructure lenge Corporation. He has also worked for
projects in the private sector. Such collaboration the U.S. Agency for International Develop-
would also benefit NDF by exposing NDF staff to the ment, the U.S. Refugee Program and as a
best practices in project appraisal and implementa- U.S. Peace Corps volunteer.
tion followed by MDIs.
Groff serves on a number of advisory boards,
including the Millennium Challenge Corpora-
tion, World Learning, Bretton Woods Com-
mittee, Marine Stewardship Council, Institute
for Sustainable Communities, and the Global
Footprint Network. He also writes regularly
on a variety of climate change and develop-
ment-related issues, including for Project
Syndicate, The Wall Street Journal, The Guar-
dian, and The Huffington Post. Groff is a
graduate of Yale University and the Kennedy
School at Harvard University.

103
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER VI:
ENTREPRENEURSHIP
AND
INNOVATION
104
Chapter VI: Entrepreneurship and Innovation

Overview
Islamic finance embraces risk sharing and value neurial ecosystem in the Kingdom, and how it can
creation. This makes entrepreneurship a key ena- contribute to the realization of Vision 2030. The
bler for realizing the objectives of Islamic finance. chapter also describes the main organizational and
With its large young population and vast natural financial supports that contribute to the framework
resources, Saudi Arabia has a great potential to be of the entrepreneurial ecosystem in KSA. In addition
a leader in minting creative entrepreneurs that can to depicting some innovation policies and incenti-
enable the Saudi economy to achieve the 2030 Vi- ves in the Kingdom, this chapter explicates the con-
sion. tribution of incubators to promote startups as well
as the main roles of venture capital (VC) and private
This chapter provides an overview of the entrepre- equity (PE) in KSA in providing financing to startups.

The Role of Entrepreneurship


in Realizing 2030 Vision
The Vision2030, launched in 2016, involves an eco- which 536,579 hold a bachelor’s degree (composed
nomic plan for national long-term economic growth of 57,394 males and 479,185 females). These sta-
that encourage entrepreneurship and private sec- tistics show that despite the efforts exerted by the
tor to take a leading role in economic development government and the private sector to recruit univer-
through job creation and competitiveness. The main sity graduates, it is difficult to employ them entirely.
targets of Vision 2030 are shown in Figure 6.1. As part of its strategic objectives, the Saudi Vision
2030 set out to control the growing unemployment
According to the General Authority for Statistics rate in Saudi society by reducing the unemployment
(2018 Q4), there were 970,229 Saudi job seekers, of rate from 11.6% to 7%.

Figure 6.1 Vision 2030 Targets73

Reduce Unemployment
from 11.6% to 7%

Raise proportion of non-oil exports


to a minimum of 50% of non-oil GDP

VISION
Raise private sector
GDP share to 65% 2030

Increase value of Public Investment Fund


assets to over USD 1.8 trillion (SAR 7 trillion)

Source: Towards Saudi Arabia’s Sustainable Tomorrow, 1st Voluntary National Review 2018 - 1439

105
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

To achieve higher levels of employment, Saudi Ara- The problem of employment of university graduates
bia needs more entrepreneurs. Entrepreneurship is not only specific to Saudi Arabia but common
is a powerful driver of economic growth and job worldwide. All countries in the world have establis-
creation.74 According to Small Medium Enterprises hed an ecosystem to facilitate entrepreneurship and
in Saudi Arabia Report (2016)75, SMEs account for encourage innovation, which is considered one of
90 percent (according to data from the Small and the most relevant factors for creating value-added.
Medium Enterprises General Authority “Monsha’at”, The Saudi Vision 2030 is built on three pillars: (1) a
around 481 thousand SMEs) of the total number of vibrant society, (2) a thriving economy, and (3) an
commercial and investment enterprises. The con- ambitious nation. Entrepreneurship and innovation
tribution of SMEs to GDP stands at 20%, and they are increasingly important in all areas of business
comprise nearly 25% of Saudi Arabia’s labor force. supporting a thriving economy. The vision 2030
Under Saudi Vision 2030, the Kingdom plans to rai- considers SMEs as important agents of economic
se the contribution of SMEs from the current 20 % of growth that create jobs, support innovation, and
GDP to 35 % by facilitating their access to funding. boost exports.

Entrepreneurial Ecosystem in KSA


Saudi Arabia’s economic growth and jobs depend enhance SMEs’ access to capital by investing in ven-
on its ability to support the growth of enterprises. ture capital and private equity funds, according to a
Saudi Arabia is facing a big transformation led by PIF statement. The PIF expects the investments to
the ambitious plan Vision 2030. This plan aims to create 2,600 jobs and contribute SAR 400 million to
foster entrepreneurship over the long term. In order GDP by the end of 2020. Moreover, the PIF expected
to contribute to the realization of Vision 2030, en- to rise to 58,000 jobs and SAR 8.6 billion to GDP by
trepreneurs need a robust ecosystem and respond the end of 202776.
quickly to their expectations. The Saudi government
began with stimulus plan and pledged in late 2017, The Wamda Research Lab (WRL) report (2017) on
to inject a total of SAR 72 billion (US$ 19.2 billion) KSA ecosystem, shows that support organizations
to implement the private sector stimulus plan from are located in Saudi Arabia’s in four major cities:
2018 to 2020. The majority of the budget will be allo- Riyadh (54%), Jeddah (29%), Eastern province (10%)
cated as follows: SAR 10 billion for Projects Support and Makkah and Thuwal (8%).
Fund (PSF), SAR 11.5 billion for SMEs, SAR 7 billion
government fees reimbursement and 1 billion riyals In 2018, the Executive Committee for Improving the
for distressed companies. Performance of Private Sector Businesses (Tay-
seer), launched a number of initiatives and reforms
In September 2018, the Ministry of Labor and Social that aim to improve its business environment and
Development in Saudi Arabia announced the launch enhance its competitiveness for the private sector.
of 68 initiatives that stimulate the private sector to Tayseer committee collaborates with more than 40
expand localization and raise the national labor for- government agencies as well as the private sector,
ce participation rates in the labor market, targeting represented by the Council of Saudi Chambers. Tay-
individuals, small and medium enterprises, and lar- seer committee has implemented Meras program
ge and mega enterprises. On the other hand, Saudi as part of Saudi Vision 2030, which provides all go-
Arabia’s Public Investment Fund (PIF) created “Fund vernment and private sector services that is needed
of Funds” and allocated SAR 4 billion (US$1.07 billi- to set up a business in one day through an online
on) to support the growth of small and medium-si- and physical One-Stop-Shop centers77.
zed enterprises (SMEs). The special fund will aim to

106
Chapter V: Social and Development Finance

Established in 2016, the Small and Medium Enterpri- All previous funds and institutions (private, public
ses General Authority “Monsha’at” focuses on sup- and third sectors) reflect the desire of government
porting, developing and sponsoring the SME sector to make profound change in Saudi Arabia economy
in accordance with international best practices. The by implementing developed entrepreneurship eco-
principal aim of Monsha’at is to raise the productivity system. The following graphic exhibits the main in-
of SMEs and increase their contribution to GDP from stitutions and stakeholders contributing to efficient
20% to 35% by 2030. Monsha’at has implemented Saudi Arabia ecosystem.
and supported programs and projects to promote
entrepreneurship, innovation, and diversification of
the sources of financial support for enterprises78.

Figure 6.2: A Model of Saudi Arabia Ecosystem

Source: Ashri, O, 201979

107
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Domains for Efficient Entrepreneurship Ecosystem


The Isenberg framework (2011)80, suggests that the sential for the success of the entrepreneurial eco-
entrepreneurship ecosystem should include six do- system.
mains:
• policy (leadership, government); This framework of the entrepreneurial ecosystem
• finance (financial capital); is an effective way to identify various stakeholder
• culture (success stories, societal norms); contributions such as government, private sector,
• support (infrastructure, support professions); investors, banks, entrepreneurs, universities, rese-
• human capital (labor, educational institutions); arch centers, students, accountants and lawyers.
• markets (early customers, networks). KSA’s entrepreneurship ecosystem is relatively new,
and most ecosystem support institutions were cre-
The Isenberg approach places entrepreneurship at ated between 2011 and 2015 (the number of en-
the center of the framework, recognizing the impor- trepreneurship support institutions increased from
tance that entrepreneurship plays as a key factor 4 during the period 2001-2005 to 36 during 2011-
and distinguishing the main elements that are es- 2015)81. The following table (see Table 6.1) shows

Figure 6.3: Isenberg’s Model of An Entrepreneurship Ecosystem

Leadership Government
· Unequivocal support · Institutions e.g. investment and support
· Social legitimacy · Financial support e.g. for R&D, jump start funds
· Open door for advocate · Regulatory framework incentives e.g. tax benefits
· Entrepreneurship strategy · Research institutes
· Urgency, crisis and challenge · Venture-friendly legislation, contract enforcement,
Early customers property rights and labor
· Early adopters for proof of concept
· Expertise in productizing
· Reference customer
· First reviewers POLICY
· Distribution channels Financial Capital
· Micro-loans
Networks · Angel investors, friends, family,
· Entrepreneur’s networks MARKETS FINANCE · Zero-stage venture capital
· Diaspora networks · Venture capital funds
· Multinational corporations · Private equity
· Public Capital markets
· Debt

Labor Societal Norms


· Skilled and Unskilled · Visible successes
· Serial entrepreneurs HUMAN · Wealth for funders
· Later generation family CAPITAL CULTURE · International Reputation
· General degrees · Tolerance of risk, mistakes, failure
(professional and academic) · Innovation, creativity, experimentation
· Specific entrepreneurship trainings · Social status of entrepreneur
· Wealth creation
SUPPORTS · Ambition, drive, hunger
Infrastructure
· Telecommunications
· Transportation & logistics
· Energy
· Zones, incubators, co-working, clusters

Support professions
· Legal
· Accounting
· Investment Bankers
· Technical experts, advisors,

Non-Governmental Institutions
· Entrepreneurship promotion in non-profits
· Business plan contests
· Conferences
· Entrepreneur-friendly associations
Source: Regh, Für, & GmbH, 2018

108
Chapter VI: Entrepreneurship and Innovation

the major contributors to the Saudi Arabia’s Entre- system. The following table describes the major
preneurial Ecosystem. KSA ecosystem (not exhaustive).

Many researchers and experts have tried to recount As mentioned in the table below, the government
entrepreneurship support institutions in KSA and of Saudi Arabia recently established an ecosystem
proposed a framework for the ecosystem that can where all institutions needed to support entrepre-
help entrepreneurs to make business. Ashri (2012), neurship exist. But what about the impact and effec-
Aloulou and Al-Othman (2019)82 propose a classifi- tiveness of the ecosystem and the comparison of
cation of the different contributors in the KSA eco- KSA with MENA countries and the rest of the world?

Table 6.1: Domains and Stakeholders of Entrepreneurship Ecosystem

Policy Government

Leadership

Markets Professional
Networks

Professional and
trade associa-
tions

Forums

Initiatives

Platforms

Associations

Human Capital Workforce

Entrepreneurship
education and
training
Higher education
entrepreneurship
ecosystem

Institutional & Institutional


infrastructure Support
Support

109
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Incubators &
accelerators

Science and
technology cities
and valleys

Entrepreneurship
centers & institu-
tes at universities

Co-working
spaces: (not
exhaustive 26)

Private sector

Culture Media

Entrepreneurship
Celebration

Forums

Finance Banks

Funds

Macro-loans

Private Equity/
Seed/ Venture
capital

Business Angels

Crowdfunding

110
Chapter VI: Entrepreneurship and Innovation

Saudi Arabia
The GEM reports compare five continents contai-
ning 54 economies:

Entrepreneurship • Africa (4 economies),


• Asia and Oceania (17),
Ecosystem Performance • Latin America and Caribbean (11),
• Europe (20), and
Using key indicators provided by (1) the Global En- • North America (2).
trepreneurship Monitor Reports (GEM (2017-2018)
and (2018-2019), (2) the World Bank’s Ease of Doing Figures 6.4 and 6.5 show 12 main entrepreneurial
Business Index (2018), and (3) the World Economic framework conditions and compare Saudi Arabia
Forum’s Global Competitiveness Index (2018-2019), with the sample of 54 economies selected by the
the following we may be able to capture the attracti- GEM. In 2017, all framework conditions are below
veness of Saudi Arabia’s entrepreneurial ecosystem. the average, but in 2018, three factors recorded a
marked improvement. Using a scale out of 9 points
(from 1, that means very inadequate insufficient sta-
tus to 9 that means very adequate sufficient status),
the ranks conditions of cultural and social norms,
Saudi Arabia Ecosystem physical infrastructure and government policies for

Valuation Vs 54 support and relevance have progressed to 16 (from


24), 34 (from 46), and 25 (from 33), respectively.
Economies Selected by The entrepreneurial finance and internal market
dynamics saw a decline during the year 2018 due
the GEM to the increase of interest rate and the low growth
rates in wholesale and retail sector (according to
On several occasions, the Saudi Arabia government Jadwa investment (2019), Wholesale and retail sec-
has expressed its strong commitment to the suc- tor grew by 0.8% in 2018 and 0.6% in 2017, after a
cess of entrepreneurship as one of the key options decline of 1.6 percent in 2016)83. The other seven
for creating jobs and solving part of the unemploy- criteria remained unchanged and below the overall
ment problem. Using annual reports of 2017 and average in 54 economies, particularly with respect
2018, the GEM ranked the performance of entrepre- to the transfer of R & D, commercial and professi-
neurship ecosystem of Saudi Arabia and compared onal infrastructure, taxes and regulations, and ma-
it with the most important economies in the world. nagement training.

111
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 6.4: 2017 Expert Ratings of the National Entrepreneurial Framework of KSA

Entrepreneurial Finance
4.69 I 3.86 I 38/54
Government Policies:
Cultural and Social Norms 9 Support and Relevance
5.277 I 4.97 I 24/54
4.66 I 3.88 I 33/54
7

Government Policies:
Physical Infrastructures 5 Taxes and Bureaucracy
6.57 I 5.72 I 46/54
4.05 I 3.56 I 32/54
3

Internal Market Burdens Government


or Entry Regulation 1 Entrepreneurship Programs
4.25 I 3.79 I 44/54 4.25 I 3.79 I 37/54

Entrepreneurial Education
Internal Market Dynamics
at School Stage
5.95 I 5.47 I 16/54 3.49 I 2.08 I 51/54

Commercial and Legal Entrepreneurial Education


Infrastructure at Post School Stage
4.65 I 3.24 I 53/54 R&D Transfer 4.61 I 3.53 I 53/54
3.99 I 2.93 I 49/54

GEM Saudi Arabia


EFCs scale: 1 = very inadequate insufficient status, 9 = very adequate sufficient status
Rank out of 54 recorded in brackets

Source: GEM Global Report 2017/18 84

Figure 6.5: 2018 Expert Ratings of the National Entrepreneurial Framework of KSA

Entrepreneurial Finance
3.21 I 45/54
Government Policies:
Cultural and Social Norms Support and Relevance
5.4 I 16/54 9
4.44 I 25/54
7

Government Policies:
Physical Infrastructures 5 Taxes and Bureaucracy
6.2 I 34/54 3.63 I 32/54
3

Internal Market Burdens Government


or Entry Regulation 1 Entrepreneurship Programs
3.65 I 43/54 3.99 I 35/54

Internal Market Dynamics Entrepreneurial Education


4.96 I 29/54 at School Stage
1.75 I 54/54

Commercial and Legal Entrepreneurial Education


Infrastructure at Post School Stage
3.78 I 50/54 R&D Transfer 3.11 I 53/54
2.78 I 49/54

GEM Saudi Arabia


EFCs scale: 1 = very inadequate insufficient status, 9 = very adequate sufficient status
Rank out of 54 recorded in brackets
Source: GEM Global Report 2018/19 85

112
Chapter VI: Entrepreneurship and Innovation

Impact of Ecosystem Facilities on Doing Business


he Ease of Doing Business is an index published by (2) Protecting minority investors: It supported mino-
the World Bank. The Doing Business project is an rity investor protections by providing clear rules
aggregate score that provides quantitative measu- for the liability of directors and increasing share-
res of business regulations and their enforcement holders’ role in key decisions.
across 190 economies. For each of the factors that (3) Trading across borders: Saudi Arabia reduced
form a part of the measurement ‘Ease of Doing the time required to export and import procedu-
Business,’ a distance to frontier score is computed res by launching a new electronic single window
and all the scores are aggregated. Using reports of and extending the hours of operation of customs
the World Bank’s Ease of Doing Business Index for at the Jeddah port. As a result, documentation
the years 201886 and 201987, they compare business processing time was reduced by 21 hours for ex-
regulation for domestic firms in 190 economies. ports and 32 hours for imports, and the time re-
The ease of doing business score captures the gap quired to comply with customs regulations and
between an economy’s performance and a measure procedures for export was reduced by 19 hours.
of best practice across the entire sample of 41 indi- (4) Enforcing contracts: Saudi Arabia made enfor-
cators for 10 Doing Business topics88. cing contracts easier through the introduction of
an electronic system that allows complainants
Saudi Arabia has competitive advantages in three of to file the initial complaint automatically and
the 41 indicators: amending the civil procedure rules to introduce
• The first indicator concerns the cost of regis- time standards for key court events.
tering property. The cost, measured by % of
property value, is the lowest (equal to zero) com- Comparing Saudi Arabia with MENA Region econo-
pared to other economies. mies, and Figure 6.6, Saudi Arabia conserved the
• The second indicator concerns minority investor same rank of 92 among 190 economies for the re-
protection. Saudi Arabia ranked seventh (over a cent two years 2018 and 2019. In 2019, Saudi Ara-
scale from 0 (the worst) to 10 (the best)) in the bia narrowed the gap with the top performers by
global rankings of minority investor protection, improving its ease of doing business to 63.5 points
and also earned a full score of 10 on the Cor- (from 62.5 in 2018 and 59.5 in 2017). Specifically,
porate Transparency Index (with other 6 econo- the Kingdom came close to achieving seven of the
mies). ten key indicators of doing business (ascending or-
• The third indicator concerns paying taxes der of improvement indicators from 2018 to 2019):
measured by the number of payments per year. protecting minority investors (+5 points), trading
The score of KSA is the lowest in the world. across borders (+4.72), enforcing contracts (+4.63),
registering property (+0.42), dealing with constructi-
As mentioned in report of the World Bank’s Ease on permits (+0.19), starting a business (+0.03), and
of Doing Business Index (2019), Saudi Arabia has getting electricity (+0.01). Contrariwise, the score
made four important reforms during the period of getting credit has decreased 5 points and the
2017-2018: rank has passed to 112 from 90. The two indicators
paying taxes and resolving insolvency remain un-
(1) Facilities to get electricity: Saudi Arabia improved changed (see figures 6.8 and 6.9). Note that a new
the quality of electricity supply by imposing a bankruptcy law came into force in August 2018. Ho-
new compensation system to motivate the uti- wever, the Saudi Arabia has not received any valua-
lity companies to improve service quality. Saudi tion in 2019 and is ranked 168th with zero score on
Arabia scored 6 out of 8 on the Electricity Sup- the resolving insolvency indicator.
ply Dependency and Tariff Transparency Index,
higher than the GCC average of 4.2.

113
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 6.6: Ranking on Ease of Doing Business of Saudi Arabia in 2019 and
Compared with Other Economies

DB 2019 Ease of Doing Business Score

0 100

81.28
58.30
Regional Average (Middle East & North Africa) United Arab Emirates
58.56
Egypt, Arab Rep.
60.98 67.19
Jordan Oman
63.50
Saudi Arabia

Source: Doing Business 2019

Figure 6.7: Ranking on Doing Business Topics in 2018 and 201990

Rank =1 is the best


168 168
161 158

138 141

112

90
83
76 78
64 59
59

38 36
24 24
10 7

Starting Dealing with Getting Registering Getting Protecting Paying Trading Enforcing Resolving
a Business Construction Electricity Property Credit Minority Taxes across Contracts Insolvency
Permits Investors Borders
2018 2019

114
Chapter VI: Entrepreneurship and Innovation

Saudi Arabia Competitiveness


The Global Competitiveness Index - measures nati- ture (75.5 and 40th) and the 17th largest market in
onal competitiveness - defined as the set of institu- the MENA region. The ambitious set of reforms in-
tions, policies and factors that determine the level of corporated in its Vision 2030 will enhance the pri-
productivity. The report covers 140 economies and vate sector’s dynamism and capacity for innovation
from a score of 100. In the 2018 Global Competiti- in the country, which is currently one of its relative
veness Report of the World Bank, Saudi Arabia ran- weaknesses.91
ked overall 39th out of 140 countries involved (United
Arab Emirates: 27th, Qatar: 30th, Kuwait: 54th, Egypt: Research institutes and formal education will need
94th). to improve to boost the country’s level of innovation.
Saudi Arabia should improve the quality of its edu-
Table 6.2 shows the classification of the five first cational programs with the needs of the economy to
economies and MENA countries. The KSA ranks ensure that graduates have the skills they need. In-
overall 39th (in 2017, the KSA ranked 30th among 137 solvency frameworks are currently penalizing busi-
countries) with a score of 67.5 and can count on ness dynamism (51.2, 114th), the KSA labor market
a favorable macroeconomic environment that has ranks 102nd, and the effectiveness is affected by a
withstood the upheavals of recent years, characte- number of constraints and regulations that reduce
rized by low oil prices. It has a modern infrastruc- the overall level of efficiency and use of talent.

Table 6.2. Global Competitiviness Ranking of Five First Economies and MENA Region, 2018

Diff. from 20172


Diff. from 20172

Rank Economy Score1 Rank Score Rank Economy Score1 Rank Score

United States 85.6 - +0.8 50 Bahrain 63.6 -4 -0.2


1

Singapore 83.5 - +0.5 54 Kuwait 62.1 +2 +0.5


2

Germany 82.8 - +0.2 73 Jordan 59.3 -2 +0.1


3

Switzerland 82.6 - +0.2 75 Morocco 58.5 +2 +0.8


4

Japan 82.5 +3 +0.9 80 Lebanon 57.7 -5 -0.1


5

Israel 76.6 - +0.4 87 Tunisia 55.6 -1 +1


20

United Arab Emirates 73.4 - +1.1 89 Iran, Islamic Rep. 54.9 -1 +0.4
27

Qatar 71.0 +2 +0.6 92 Algeria 53.8 - +0.3


30

Saudi Arabia 67.5 +2 +1.6 94 Egypt 53.6 - +0.4


39

Oman 64.4 +14 +3.4 139 Yemen 36.4 -4 +0.9


47

East Asia and the Pacific Middle East and North Africa Europe and North America

Source: Extract from the Global Competitiveness Index 2018 Rankings

115
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Innovation Policies and Incentives in KSA


Saudi Vision 2030 is a plan to reduce Saudi Arabia’s Bank, i2- the Institute for Imagination and Ingenuity,
dependence on oil and diversify its economy. Sci- Hayy: Creative Hub, Ithra, Accelerate Makkah, and
ence, technology and innovation are offering more Art Jameel.
solutions than ever to modern developmental chal-
lenges. The innovation policies concern three major The implementation of the first five-year plan for
indicators: science, technology and innovation was launched
1) planning for science, technology and innovation under the Eighth Development Plan (2005-09)92.
in the Kingdom, During the period 2005-2009, Saudi Arabia has wit-
2) coordination between research and scientific in- nessed significant progress in science, technology
stitutes in the Kingdom, and and innovation. The Ninth Development Plan (2010-
3) evaluation of scientific research and innovation 14)93 “aims at indigenization and development of ad-
outputs. vanced strategic technologies in all productive and
service sectors, as well as in all components of the
The goal of Saudi Arabia to diversify its economy science, technology and innovation system, with the
depends greatly on innovation and entrepreneur- aim of raising productivity and enhancing competi-
ship. Educational institutions play a key role of buil- tiveness”.
ding a culture of innovation and entrepreneurship.
Various institutions (not exhaustive) supporting The King Abdulaziz City for Science and Technology
creativity and innovation in Saudi Arabia include: set 8 targets (see Figure 6.8) in line with the Nati-
KAUST (King Abdullah University of Science and onal Transformation Program (NTP) 2020: Support
Technology), KACST (King Abdulaziz City for Scien- of research (2 targets), localization of technology (3
ce and Technology), Misk 500, Islamic Development targets), and innovation (3 targets).

Figure 6.8: The 8 Targets of King Abdul Aziz City for Science and Technology

350 3,600
jobs (cumulative) to be generated in stratup
experts (cumulative) qualified through companies emerging from the incubator
technical leaders’ preparation program and business acceletator program

13
enterprises (cumulative) required
800
TECHNOLOGY stratup technology companies (cumulative)
for content development TRANSFER AND INNOVATION
that will be set up and supported through
LOCALIZATION
the innovative research support program

125
technologies (cumulative) to be developed
200
RESEARCH service (cumulative) to be provided
and localized in targeted strategic sectors SUPPORT to government and private sector bodies

20,000
annual research papers issued
5,000
patents (cumulative) issued in the Kingdom
by scientific institutions in the Kingdom

Source: Towards Saudi Arabia’s Sustainable Tomorrow 94

116
Chapter VI: Entrepreneurship and Innovation

The following chart (Figure 6.9) shows the total tive data, such as enrollment rates and the use of
expenditure on scientific research, innovation and the Internet, and self-data are extracted from sur-
technology, in 2016. The R&D Support Program at veys of business leaders, government leaders and
universities was launched in 2017 as part of the executives. It considers the GII as it relates to GDP
National Transformation Program and was tasked per capita (UNCTAD, 2014).
with overseeing its implementation and monitoring
its progress to the Research and Development Offi- The GII measures the innovative performance of
ce at the Ministry of Education. A budget of 6 billion 126 countries representing the largest proportion
riyals has been allocated to the program until 2020. of global GDP. This year, the index bears the slogan
“Revitalizing the World with Innovation,” focusing on
Recognizing the key role that innovation plays as a innovation in the energy sector around the world.
driver of economic development, it will be necessary
for policymakers to have the capacity to measure The GII index includes 80 sub-indicators to provide a
and evaluate results. They will need innovation in- comprehensive view on various areas of innovation.
dicators to measure this capacity, that go beyond The index is based on detailed metrics in two main
traditional input measures, such as the level of R&D axes, including innovation inputs: (1) Institutions, (2)
funding. Indicators need to be available to support Human capital and research, (3) Infrastructure, (4)
policy development as an ongoing process. The Market sophistication, and (5) Business sophisti-
Global Innovation Index (GII) is a well-recognized cation and innovation outputs: (6) Knowledge and
composite index developed jointly by Cornell Uni- technology outputs and (7) Creative outputs. Figure
versity, the European Institute of Business Adminis- 6.11 presents the framework used by the Global In-
tration (INSEAD) and the World Intellectual Property novation Index.
Organization (WIPO). This indicator uses quantita-

Figure 6.9: Expenditure on Scientific Research, Innovation and Technology, in 2016

Scientific research expenditure


USD 45.71 million (SAR 171,428,559)

Institutional structures of science, technology and


innovation USD 8.18 million (SAR 30,668,773)

Support of inventors
USD 7.47 million (SAR 28,000,000)

Science and technology human resources


USD 13.64 million (SAR 51,146,223)

Science technology and community


USD 13.27 (SAR 47,777,600)

Advanced Strategic technologies


USD 31.73 million (SAR 119,201,715)

Science technology and innovative systems


USD 379.11 thousands (SAR 1,421,679)

Redearch and development capabilities


USD 23.00 million (SAR 86,277,807)

Diversification, development and strengthening of support


sources for activities: USD 5.68 million (SAR 21,291,284)

Technology transfer and development


USD 24.62 million (SAR 92,316,281)

Source: Towards Saudi Arabia’s Sustainable Tomorrow

117
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Framework
Figure of Framework
6.10: the Global Innovation
of The Index 2020
Global Innovation Index 2019

INSTITUTIONS
Political environment
Regulatory environment
Business environment

KNOWLEDGE AND
HUMAN CAPITAL AND RESEARCH
TECHNOLOGY OUTPUTS
Education
Tertiary education Knowledge creation
Research and development (R&D) Knowledge impact
Knowledge diffusion

INFRASTRUCTURE Innovation Innovation


Input Output
ICTs Sub-Index Sub-Index
General infrastructure
Ecological sustainability

MARKET SOPHISITCATION CREATIVE OUTPUTS


Credit Intangible assets
Investment Creative goods and services
Trade, competition, & market scale Online creativity

GLOBAL
INNOVATION
BUSINESS SOPHISITICATION INDEX

Knowledge workers
Innovation linkages
Knowledge absorption

Source: GII, 2019 95

The following Table 6.3 shows the progression of 49 in 2019, and less innovative in outputs with score
the GII for Saudi Arabia during the period 2017- 19.46 and ranked 85 among 129 countries.
2019. Saudi Arabia ranked 68th by the GII in 2019,
despite falling seven places from last year, it ranked All indicators (except business sophistication indi-
61st in the 2018 index (55th in the 2017 index). The cator) have declined during the last 3 years and Sau-
score also fell by 3.27 or 9% over a period of 2 years. di Arabia should take steps to improve its position
Saudi Arabia is more innovative in inputs, it is ranked globally.

Table 6.3: Global Innovation Index – Saudi Arabia (2017-2019)

Year (Number of Country) 2017 (126 Countries) 2018 (127 Countries) 2019 (129 Countries)

Score (0-100)/Rank (The best ranked 1) Score Rank Score Rank Score Rank

GII Index 36.2 55 34.43 61 32.93 68

Innovation Inputs 47.3 46 46.73 46 46.4 49

Institutions 52.4 88 51.9 94 51.3 104

Human capital and research 46.5 31 47.7 24 45.5 29

Infrastructure 53.3 40 49.4 51 48.9 55

Market sophistication 49.4 51 51.7 41 51.9 47

Business sophistication 35 54 33 52 34.3 48

Innovation Outputs 25 66 21.81 78 19.46 85

Knowledge and technology outputs 21.6 62 20.2 73 17 87

Creative outputs 28.4 74 23.4 83 21.9 86

Source: GII Reports

118
Chapter VI: Entrepreneurship and Innovation

An Interview with
Ms. Muna Abu Sulayman
A Leader on Entrepreneurship and
Humanitarian Development in KSA

1) Under the Kingdom’s Vision 2030, entrepre-


neurship licenses were introduced in 2017 to Biography of Muna Abu Sulayman
bolster the SMEs sector. How do you see this
breakthrough move in nurturing a new breed of Muna Abu Sulayman has had immense ex-
entrepreneurs in the Kingdom? perience in the field of development, women
The license is part of the initiatives that still require empowerment, and poverty alleviation. She
a huge uptake, which remains to be seen. However, was appointed by the UNDP as the first Saudi
recently, we saw a mandate as well as the ecosys- Arabian woman to become a Goodwill Am-
tem creation to increase local content and award bassador, as well as UNICEF’s Goodwill Am-
small and medium businesses 30% of government bassador. She also served as a Regional Ex-
contracts, that could encourage more local entre- pert for the UN World Humanitarian Summit.
preneurs to invest in more sectors (other than food In addition, Muna built the Alwaleed Bin Talal
and beverage). Tourism and entertainment sectors Foundation and served as the Secretary Ge-
have also been a boon to the small and medium en- neral and Executive Director. She focused on
terprise sectors as they have created new opportu- four areas: promoting East/West dialogue,
nities. women empowerment, poverty alleviation,
and disaster relief.
2) How aligned is the entrepreneurship strategy
with Vision 2030? What is meant by entrepreneur- Muna has been recently named one of the
ship strategy? “100 Most Powerful Arabs” by Gulf Business
An alignment of the strategy and Vision 2030 may Magazine for her work on Entrepreneurship
take some time to take place. Nevertheless, a lot of and Humanitarian Development. She is only
efforts have been made, such as creation of rele- the second Saudi woman to be included on
vant entities that would hopefully nurture the poten- this list, alongside 24 other Arab and Arab
tial of the entrepreneurship. Diaspora women. In addition, Muna’s role as
co-host of the Arab world’s #1 talk show has
3) As a prominent businesswoman, what additio- served as a public platform to discuss social
nal policies would you suggest promoting women issues. She has partnered on several socially
entrepreneurs? driven establishments, such as Niya, 3S, and
Within the allocation of opportunities, we have to re- Arab Digital Reform Institute.
serve some for female entrepreneurs. We also have
to increase educational resources to them, as many
start a small business and are unable to grow it to a
medium business due to the lack of access to finan-
cing, from formal and informal sources.

119
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Incubators and Startups


Startups and incubators are often lumped together, incubator for a longer support periods – months or
meaning confusion surrounds what differentiates even years. They are also more likely to be launched
them. However, there are some important differen- by non-profit organizations like universities, govern-
ces that are vital to know. A startup is a company ments or charities.
or project initiated by an entrepreneur to seek, ef-
fectively develop, and validate a scalable business Accelerators operate on the same principle as in-
model96. Entrepreneurship refers to all new busi- cubators, but they serve to accelerate the develop-
nesses, including self-employment and businesses ment of a company, and therefore propose a shor-
that never intend to grow big or become registered, ter support period (from 3 to 6 months). The work is
while startups refer to new businesses that intend more focused on the technical part and the growth
to grow beyond the solo founder, have employees, of the company. The income model is also different
and intend to grow large97. The key purpose of an because unlike a rent for an incubator, the accelera-
incubator is to support startups at a very early sta- tor takes shares in the start-up and therefore plays
ge to develop. Incubators are various programs the role of investor.
which help individuals solve difficulties associated
with launching a startup. Incubators offer material Saudi Arabia has 16 incubators and 4 accelerators
resources, personalized support or the connecti- distributed in 4 regions: central region (8 incubators
on with other entrepreneurs, investors or potential and 1 accelerator), East region (3 incubators), West
customers. These structures provide a workspace, region (3 incubators and 3 accelerators), and South
seed funding, mentoring, training and other bene- region (2 incubators).
fits for creators, scientists or engineers, wanting to
turn their “innovative” project into a real company. The size and maturity of the startup ecosystem is
The incubator approach is focused on intellectual where a startup is launched and where it develops
property and product development, while an acce- to have an effect on the volume and success of the
lerator is more pragmatic. Incubators tend to allow startups. Figure 6.11 provides the framework of
startups to physically base themselves within the startup ecosystem:

120
Chapter VI: Entrepreneurship and Innovation

Figure 6.11: Framework of Startup Ecosystem98

BIG
COMPANIES

SUPPORT UNIVERSITIES
ORGANIZATIONS

STARTUP ECOSYSTEM
ꞏ Ideas inventions and research
ꞏ Startups at various stages
ꞏ Entrepreneurs
ꞏ Startup team members
ꞏ Investors
ꞏ Mentors
ꞏ Advisors
ꞏ Other entrepreneurial people
ꞏ People from related organizations

FUNDING
RESEARCH
ORGANIZATIONS
ORGANIZATIONS

SERVICE
PROVIDES

Fundraising is an essential element during the star- Depending on the age and position of your compa-
ting and development phases. The startup needs ny in the market, different financing possibilities are
starting funds to build the company’s infrastructure. available. The following figure shows how startup
As the business grows, the startup needs to inject funding works in different stages of startup finan-
additional funds for the expansion of the business. cial cycle.

121
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Figure 6.12: How Startup Funding Works99

Source: Anna Vital, 2005

122
Chapter VI: Entrepreneurship and Innovation

The startup funding landscape in Saudi Arabia has According to Saudi Arabia Venture Capital, the
faster over the past years. Figure 6.13, the first half Kingdom ranks among the top three MENA coun-
of 2019 saw US$ 40 million invested in Saudi-based tries with US$ 40 million of total funding (after UAE:
startups and number of deals (26) in the Kingdom100. US$ 311 million, and Egypt: US$ 53 million), and
the fourth with 26 deals in H1 2019 (UAE: 68 deals,
Figure 6.13 shows the total funding increased by Egypt: 49, and Lebanon: 30). The e-commerce, de-
82% from the same period H1 2018 and H1 2019, livery & transport, data analytics, food & beverage
indicating increased desire from local and interna- and agriculture make the top 5 by total funding and/
tional investors in Saudi-based startups, in addition or number of deals in Saudi Arabia.
to startups that progress to later stages of deve-
lopment. The number of deals in Saudi Arabia in-
creased by 44% from H1 2018 to H1 2019. Saudi
Arabia expects that 2019 will surpass 2018 in terms
of number of deals and total funding.

Figure 6.13: Yearly Funding Evolution in KSA (US$ Million)

Yearly funding evolution in M$ in the Saudi Arabia


34

40M
41M 30
40M
35M 26
25
30M
32M
20
19
Funding in Million

25M
Number of Deals

20

16
20M
15
19M
15M

10
10M

5M
7M 8M 5
7M
1M
0M 0M
2015 2016 2017 2018 H1 2019

Disclosed KSA Funding MAGNiTT Undisclosed Funding Estimate (M) No. of Deals

123
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

The top 5 funding rounds are completed by (1) the AgriTech startup that spun out of KAUST and
Noon Academy, the Riyadh-based EdTech star- develops saltwater-tolerant crops and greenhouses;
tup, (2) Nana Direct, a grocery delivery startup; (3) and (5) GetMuv, a fitness education and facilitation
Foodics, a POS system start-up that offers food app. Figure 6.16 shows the various venture capital
order management solutions; (4) Red Sea Farms, contributors for funding startup.

Figure 6.14: Highest Disclosed Funding Rounds in Saudi Arabia in H1 2019

Source: Saudi Arabia Venture Capital

According to the report published by Saudi Arabia


Venture Capital (2019), twenty startups has recei-
ved funding from Venture Capital.

Figure 6.15. Saudi Arabia’s Top 5 Industries by Number of Deals in H1 2019

Source: Saudi Arabia Venture Capital Snapshot

124
Chapter VI: Entrepreneurship and Innovation

Figure 6.16. Saudi Arabia’s Top 5 Industries by Total Funding in H1 2019

Source: Saudi Arabia Venture Capital Snapshot

Venture Capital and Private Equity


in Saudi Arabia
The Council of Ministers of Saudi Arabia during its The following section discusses the difference and
session on 1 August 2016 licensed the Public In- the relationship between venture capital and the pri-
vestment Fund and Ministry of Commerce and the vate equity, the reality and experience of venture ca-
Industry to establish a holding fund called “Fund pital investments in Saudi Arabia, the infrastructure
of Funds” with a capital of SAR 4 billion. The esta- that should be available to ensure the success of
blishment of the fund comes within the framework venture capital funds, and the role of investment in
of Vision 2030 by activating the role of the private non-listed companies in supporting investment and
sector and increasing its contribution to GDP by creating value in the Saudi economy.
stimulating investments related to venture capi-
tal and private equity in non-listed companies. The
fund’s main objective is to support and stimulate Figure 6.17: Targets of “Fund of Funds” 101
investment opportunities for startups and SMEs. It
is expected that the achievements of the Fund will
be reflected in the contribution of GDP to about 400
million riyals by the end of 2020 and the creation of
more than 2,600 jobs. It is also expected that the
contribution to the GDP will reach about 8.6 billion
riyals and create approximately 58 thousand jobs
by the end of 2027. Figure 6.17 exhibits the targets
fixed by the “Fund of Funds”.

125
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Venture Capital Vs Private Equity and their Role in


Financing Startups and SMEs
Private equity and venture capital prefer different growth potential102. Private Equity firms will buy
types and sizes of companies, invest different 100% of the company and thus have total control.
amounts of money, and claim different percentages
of equity in the companies in which they invest. Ven- Partners in private equity companies are generally
ture capital is a type of investment in private equity classified into two categories: (1) Investors, called
for non-traded companies with the aim of advancing limited partners, representing financially full-fledged
early stages companies, startup companies and institutions and individuals who pay for that return
small businesses that are seen as having the poten- upon exit. (2) General Partners: Representing the
tial to break out. The investment doesn’t have to be management, usually their role is to seize the op-
just financial but can also be offered via technical or portunities of acquisition and then help the manage-
managerial expertise. The venture capital is taking a ment of the target company to improve the way it
risk that the newer company delivers and does not works and provide the necessary expertise and pre-
deteriorate. These companies are typically opera- pare the company to reach the highest market value
ting in non-traditional sectors or new technologies possible at the exit.
or developing innovative products with very high
risk and high profit opportunities. These types of Due to its non-disclosure nature, it is not possible
companies are difficult to be financed by traditional to establish accurate statistics on the operations
financial institutions, especially commercial banks, completed by private equity companies in the Saudi
whose main objective is to preserve the capital of market, but most sources and reports of research
depositors and make profits by providing a range of role in the GCC market indicate that the annual num-
financial services to small, medium and large com- ber of operations is very limited compared to what
panies operating in traditional low-risk areas and happens in mature or developed markets. In 2018,
generate cash flows capable of repaying financing only Jadwa investment had achieved four bolt-on
with adequate guarantees to the Bank. Commerci- acquisitions for three of its private equity portfolio
al banks cannot be blamed for these shortcomings companies in 2018. All four transactions were in
because they are not eligible to evaluate companies the healthcare sector, spanning medical supplies,
and principally innovative products. Hence, the im- dental services, and IVF fertility services, with an ag-
portance of venture capital funds to support the gregate value less than SAR 400 million. According
emergence of these companies in the early stages to Preqin data, the amount of funds raised by ME-
and then to achieve the Vision 2030, which focused NA-focused funds dropped by 65% in 2018103.
on the role of entrepreneurship.
The Saudi Council of Ministers has created the
Private equity firms mostly buy mature companies Saudi Arabia Venture Capital and Private Equity As-
that have already been established. Companies may sociation, mandated to develop the private equity
be deteriorating or not making profits that should and venture capital sector. The association aims to
be due to inefficiency. Private equity firms purcha- foster closer collaboration between innovative, high
se these companies and streamline operations to growth businesses and venture capital and private
increase revenue. Venture capital companies, on equity companies.
the other hand, mostly invest in startups with high

126
Chapter VI: Entrepreneurship and Innovation

Islamic finance can become an immense enabler


for the expansion of venture capital and
private equity Sharīʿah compliant investment in the Kingdom.

Figure 6.18: MENA-Focused Private Equity Funding104

Middle East & North Africa-Focused Private Equity Fundrausing


9
1.200

Aggregate Capital Raised ($mn)


8

7 1.000
No. of Funds Closed

6
800
5
600
4

3 400

2
200
1

2010 2011 2012 2013 2014 2015 2016 2017 2018

No. of Funds Closed

Aggregate Capital Raised ($mn)

Conclusion
There is no doubt that Saudi Arabia has done a lot Having said this, it is very likely that Islamic finance
and continues to offer entrepreneurship and innova- can become an immense enabler for the expansion
tion initiatives to achieve the Vision 2030. The KSA’s of venture capital and private equity Sharīʿah compli-
entrepreneurship ecosystem is relatively new, and ant investment in the Kingdom. As understood, the
most ecosystem support institutions were created core of Islamic finance focuses on the sharing of
between 2011 and 2015. profit and loss (risk sharing) from Islamic financing
or investment structure. Furthermore, venture capi-
Therefore, in addition to the government’s strong tal structure, in principle, can nurture entrepreneurs’
commitment to support entrepreneurship, there are creativity and innovative ideas to be put into practi-
aspects that need to follow before innovative en- ce; which fits well with the growing number of young
trepreneurial activity can have a strong economic entrepreneurs in the Kingdom.
impact on the country. Three major international in-
dicators should be improved in the coming period. We therefore believe that Saudi Arabia is moving
In 2018, the first indicator is the World Bank Ease of towards achieving Vision 2030 goals and we are
Doing Business Rating, Saudi Arabia saw a score of convinced that the entrepreneurial environment has
63.50/100 and Ranked 92/190. The second indica- made clear progress over a relatively short period.
tor is the World Bank Starting a Business Rating that The Kingdom however has a great potential which
saw a score of 80.07/100 and ranked141/190. And can be realized through continuous efforts and de-
finally, the World Economic Forum Global Competi- dication to lead the region in entrepreneurship and
tiveness ranked Saudi Arabia 39 among 140. innovation.
127
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER VII:
FINTECH
128
Chapter VII: FinTech

Islamic Finance has a foundation of trust,


therefore it is not difficult to see why and how FinTech
can be of great value to Islamic Finance.

Overview
Financial technology, or FinTech, is crucial for effi- This chapter provides an overview of FinTech in Sau-
cient, transparent, and reliable financial transacti- di Arabia. In addition to discussing the current Saudi
ons. Given the role of FinTech and blockchain tech- FinTech market, the chapter also describes the so-
nologies in transparency and verifiability of data, cial impact of FinTech in the Kingdom and how the
they are often described as “Trust Machines”. Isla- transient phase of reforms across various facets in
mic Finance has a foundation of trust, therefore it is the economy will pave the way for the promising pro-
not difficult to see why and how FinTech can be of gress of FinTech ecosystem in Saudi Arabia.
great value to Islamic Finance.

FinTech and Financial Industry


Financial Technology (in short FinTech) emerged as services and time required to execute a transaction
a concept around a decade ago, even though it exi- especially in the payments and lending space.
sted long ago in other forms, and became a major
force in modern business and Finance. The broad We can imagine a range of opportunities for FinTech
definition of FinTech is utilizing technology to create to make quantum leaps in the financial industry. For
better, more affordable, and more efficient financi- example, biometrics can be used to give consumers
al services. It includes companies operating in the the ability to pay using facial recognition. We may
payment industry, insurance, wealth management also use image quick response codes (QR) and near
and financial advisors, remittances, and all other field communication (NFC) to make payments faster
verticals of the financial industry. To make financial and easier. Or probably having a robo-advisor to help
services more efficient and cost-effective, FinTech consumers allocate resources in optimal investment
companies utilize a wide range of new technologies, decisions putting consideration pre-set constrains
including for example: like the level of risk, family situation, and career pro-
• Blockchain gression. Also, using rapid underwriting and ongoing
• Artificial Intelligence (AI) monitoring of vehicles and properties in the insuran-
• Machine Learning (ML) ce industry. It displays how FinTech is going to dis-
• Robo-Advising rupt many verticals in the financial industry like:
• Big Data • Payments
• Internet of Things (IoT) • Wealth Management (InvesTech)
• Data Analytics • Insurance (InsurTech)
• Biometrics • Lending and Financing
• Risk management
FinTech companies are disrupting the financial in- • Regulations and compliance (RegTech)
dustry because they showed great success in im- • Remittance and Transfer
proving customer experience, taking advantage of • Banking technology infrastructure, and much
economies of scale, and reducing costs of financial more

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Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

History of FinTech in
Regulators and incumbent financial institutions first
viewed those new FinTech disruptors as a threat
rather than an opportunity. Then they began to re-
alize that the growth of this industry is inevitable
Saudi Arabia
and that, in many cases, FinTech companies pro-
If we agree that the abstract definition of FinTech
vide great solutions for persisting problems. Banks
is the use of technology to execute financial trans-
and venture capital funds started investing in new
actions, then the birth of FinTech in Saudi Arabia
FinTech startups, and regulators started realizing
was in 1990, when Saudi banks introduced the first
the need to cope with this fast-paced industry, and
automated teller machines (ATMs) to serve custo-
many countries started competing in an attempt to
mers during out of office hours. Since then, the use
become the FinTech Hub in its region by developing
of technology in financial services has been incre-
ecosystems that would attract FinTech startups
asing. In 1990, SAMA introduced the Saudi Payment
and help them succeed and flourish.
Network (SPAN) to encourage the use of electronic
means of payments within the financial system. In
1997 SAMA introduced the interbank transfer sys-
What Makes FinTech tem to help digitize the remittance process between
local banks electronically. In 2004, another milesto-
Succeed and Flourish? ne was achieved by launching the Saudi payment
market (SADAD Billing System). In 2007, the Saudi
The success of FinTech in general depends mainly Stock Market Exchange Platforms was launched to
on six key factors: implement live electronic transactions in the stock
• Market size market. Moreover, a major milestone took place in
• Regulations 2015 when SPAN was rebranded to (MADA) and
• Talents became the Saudi local switch. Soon afterward,
• Funding and financing in 2018 QR payment digital wallets, crowdfunding
• Entrepreneurial ecosystem platforms, and MADA contactless mobile payments
• Tech savvy end-users were all introduced. It is believed that the launch of
This explains why when entering a new market, MADA as a local switch and establishing the Sau-
FinTech companies first look for economic, demo- di Payments Company is a sign that SAMA is pa-
graphic, and technology data for that specific regi- ving the way for huge digital transformation that is
on. Hence, later in this chapter, Saudi market data, expected to change the face of the Saudi financial
demographics, technology, and internet penetration market in the years to come.
data, along with other useful information will be dis-
cussed to examine to what extent “FinTech” could
be the new Saudi “crude oil”. The chapter will end
with a real-life market case-study and recommen-
dations to the way forward.

130
Chapter VII: FinTech

Figure 7.1 Evolution of Fintech

1990 Introduction of ATMs

Introduction of SPAN network 1990


(POS machines)

Introduction of the Saudi Interbank Express


1997
Electronic Transfer system (SARIE)

Introduction of 2004
SADAD billing system

2007 Introduction of Tadawul platform

Introduction of 2015
MADA local switch

Introduction of digital wallets


2018 and QR payments

Introduction of
2018
crowdfunding platforms

Introduction of MADA
2018 mobile payments

Understanding the Current Saudi FinTech Market


We can describe the Saudi FinTech ecosystem (ex- • Equity/Crowdfunding companies: This includes
cluding banks and other financial institutions) by a few crowd-funding platforms recently regula-
breaking it down into five main categories, as follows: ted by the Capital Market Authority (CMA)’s Fin-
Tech Lab.
• Banking electronic services and infrastructure • Business tools: This includes aggregators and
companies: This category includes companies financial information providers.
that offer cash management services, ATM ma- • Others: This category includes companies that
chines, and banking security services. provide electronic financial services or support
• Digital payment companies: This includes pay- services for FinTech companies. e.g. healthcare
ment gateways, point of sale service providers, financing, individual and corporate credit reports,
remittance, and the newly licensed digital wallets identity verification services and KYC (Know
Your Customer) services.

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Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Major Trends in the Swarming Saudi


Financial Sector & Major Reforms
Saudi Arabia is witnessing a major transformation aggregators of Point of sale (POS) devices, SA-
and is moving steadily towards achieving the ambi- DAD bills, SADAD account and MADA online.107
tious 2030 Vision. Below are highlights of some of • The launch of “ABER”: Central banks of Saudi
these achievements: Arabia and the United Arab Emirates announced
• The launch of FinTech Lab: In December 2017, the successful launch of cross-border settle-
the Capital Market Authority (CMA) launched ments between the two countries over a block-
FinTech Lab, a new initiative aimed at supporting chain network using a jointly developed digital
innovation and the development of new products currency called (ABER).108
in the financial technology (FinTech ) sector. The
Lab aims to create a regulatory framework de- • Enhancing Financial Inclusion: SAMA issued in
signed to enhance and support innovation in the March 2019 the rules regulating “Agent Banking”.
financial market, the regulator said in a state- The regulation aims to expand the scope of ban-
ment. Participants can use the FinTech Lab to king services and products; enhance financial
run a trial of their products and services in an en- inclusion for the unbanked or underbanked po-
vironment with more lenient regulations.105 As of pulation while maintaining the soundness and
end-2018, the CMA granted the FinTech permits stability of the banking sector; encourage banks
to total 8 applicants to create equity crowdfun- to contract with agents when offering banking
ding as well as robo-advisory platforms.106 services to reduce the cost of banking servi-
ces.109
• The launch of the regulatory sandbox: In Febru-
ary 2019, SAMA announced that it had designed • Issuing the e-Commerce Law: In October 2019,
and implemented a sandbox regulatory environ- the Ministry of Commerce and Investment in-
ment to understand and evaluate the impact of troduced a new Electronic Commerce Law (the
new technologies in the financial services mar- “E-Commerce Law”), as part of the Saudi Vision
ket in the Kingdom. This step aims at achieving 2030 to achieve the Kingdom’s digital transfor-
a several of strategic objectives of linking the mation journey. The Law applies to all those pro-
sandbox environment with the Kingdom’s vision viding goods or services via an electronic store
2030 that aims at promoting economic growth within the KSA or any electronic platform or store
and boosting investment activities by moving that can be accessed by consumers in the KSA.
into a cashless society and by promoting the The E-Commerce Law allows service providers,
principle of financial inclusion. SAMA granted whether having a commercial registration in KSA
permission to work in the sandbox environment or not, to sell their goods and services to con-
to 11 local and international banks to open and sumers online. By opening up the E-Commerce
update accounts without the need to visit the sector in this manner, the E-Commerce Law
branches, as well as the permission to 7 com- aims to stimulate and develop E-Commerce ac-
panies to provide various services in the field of tivity whilst regulating the relationship between
digital payments. Services and products being all types of service providers and consumers. as
tested currently include E-wallet services, P2P well to improve overall consumer confidence in
transfers and purchases through QR Codes as e-commerce transactions. It includes provisions
well as direct international transfers through fi- intended to protect consumers against fraud, de-
nancial technology companies in addition to the ception and misrepresentation of information.110

132
Chapter VII: FinTech

• Launching “FinTech Saudi”: In May 2018, SAMA nesses and consumers, with instant credit trans-
initiated “FinTech Saudi” as a catalyst to deve- fers, e-invoicing and billing, real-time payment
lop the FinTech ecosystem as part of the Saudi acknowledgement, remittances, bulk payments
Financial Sector Development Program 2020.111 and peer-to-peer money transfers. According to
The initiative aims to promote the Kingdom as Saudi Payments, transforming the Kingdom into
a FinTech Hub embracing a thriving, responsi- a cashless society is at the heart of the compa-
ble ecosystem of banks, investors, companies, ny’s strategy and in line with the Kingdom’s Visi-
colleges, and state institutions, thereby contri- on 2030.115
buting to the support of financial inclusion and
the rise of digital transactions. Subsequently, in • Saudi Payments has other FinTech initiatives in-
April 2019, SAMA and the CMA signed a memo- cluding:
randum of understanding (MoU) to establish the o Naqdi, an app that allows person-to-person
FinTech Saudi Center in partnership with King transactions in real-time using mobile phones
Abdullah Financial Center.112 only.
o Esal, a national electronic platform for e-invoi-
• Establishing the Saudi Federation for Cyber Se- cing for government entities and businesses
curity: Established in 2017, the Saudi Federation in the Kingdom.116
for Cyber Security and Programming (SAFCSP) o The Company also is working on unifying
is a national institution under the umbrella of the the technical and commercial standards for
Saudi Arabian Olympic Committee, which seeks payments based on QR codes technology.
to build national and professional capabilities in A move that is intended to develop existing
the fields of cybersecurity and programming in services and to facilitate the implementation
line with the established and internationally re- of the technology via a platform that will be
cognized practices and standards, to expedite serving all stakeholders in the most efficient
the ascent of the Kingdom of Saudi Arabia to the manner, i.e. e-wallet providers, merchants,
ranks of developed countries in the domain of and consumers.117
technology innovation.113 • Updating the requirements to open a bank ac-
count by making it possible in any Saudi bank
• Establishing the Saudi Authority for Data and Ar- online and without the need to visit a branch for
tificial Intelligence: The Authority will contribute ID authentication. Authentication is done by inte-
to the realization of Vision 2030 and enhancing grating with the Ministry of Interior system (AB-
the efficiency of performance of the public and SHER).
private sectors through utilizing the application
of Artificial Intelligence (AI) and Big Data.114 All this shows that the Kingdom is committed to de-
velop the financial sector and to build an ecosystem
• Launch of instant real-time payment: In April to make Saudi Arabia a FinTech friendly business
2019, Saudi Payments, a fully owned subsidiary environment to attract FinTech companies from
of SAMA, has teamed up with Mastercard com- around the world and also to help local FinTech to
pany, Vocalink, intending to upgrade the coun- grow. For those who believe in the butterfly effect,
try’s payments infrastructure and boost the digi- the aftermath of all these changes is going to be
tal economy. The partnership will enable instant huge. The Saudi financial market is moving towards
payments between financial institutions, busi- an exceptionally new era.

133
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Social Impact of FinTech in Saudi Arabia


Saudi Banking and
Some of the main goals of FinTech is to make fi-
nancial services faster, cheaper, easier, more effi-
cient, and to make financial services accessible to
underserved segments. Soon after the adoption of
Payments Market
FinTech in Saudi Arabia, Saudis started witnessing
Saudi banking sector consists of 12 licensed local
an impact on a social level. Thanks to the integrati-
banks and 13 foreign banks 4 of which are licensed
on with the Ministry of Interior’s database “ABSHER”,
but not in operation yet. With SAMA as the regula-
Saudis can now open a bank account without the
ting body which is one of the most firm and strict
need to travel to a branch to authenticate identity.
central banks in the region, recently became one of
This resulted in many Saudis opening new bank ac-
the most agile and willing to embrace new financial
counts and get included in the financial system. All
technologies, while maintaining the same reputable
they need is a smartphone and a valid Saudi ID. This
image. As well as MADA acting as the payment arm
will result in higher financial inclusion rates in the
and local switch that works on all ATM machines,
future and an increase in the percentage of Saudi
POS, payment gateways. And SADAD as a national
banks.
electronic billing & payment system which is unique
Another example of FinTech’s social impact that
to Saudi Arabia.
became the talk of the Saudi society is the smart
utilization of Crowdfunding technology by the Mi-
According to the 55th annual report of SAMA, MADA
nistry of Interior to launch “Furijat” Crowd-donation
card penetration in the Saudi society reached almost
platform in Ramadhan 2019.118 This platform lists
88% with 28.5 million MADA cards issued which can
amounts due for individuals jailed for financial char-
be used both as a debit card for online purchases
ges, and gives the public the chance to make do-
within the borders and as a credit card beyond.
nations to pay their indebtedness . This resulted in
many prisoners –with financial charges only- to be
Also, Saudi Arabia is considered to have one of the
released and achieving community solidarity.
largest if not the largest rates of outflow remittan-

Table 7.1: Saudi Arabia ATM Debit Cards

Year # ATMs Debit Cards Bank Branches


2013 13,883 17,810,653 1,749

2014 15,516 20,550,274 1,912

2015 17,223 22,459,275 1,989

2016 17,887 26,537,349 2,038

2017 18,333 28,402,914 2,079

2018 18,685 28,559,828 2,083

Source: SAMA 55th Annual Report

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Chapter VII: FinTech

ces due to the large number of foreign expats wor- Despite the FinTech revolution taking place as part
king in the Kingdom (38% of the population) with of the Saudi Financial Sector Development Program
outflow remittances volume of 132 billion Saudi Ri- (FSDP) that should shift Saudi Arabia to a cashless
yals in 2017 with an average of 11% of the private society. Cash circulation outside banks have been
sector’s GDP. And a huge number of money trans- increasing for the past few years from 2014-2018,
fers within the system of 103 million transactions in and have reached more than 180 billion riyals in
2017 with an astonishing volume of 62 trillion Saudi 2018, as follows:
Riyals ($16.5 trillion)

Table 7.2: Expatriates’ Outflow Remittance

Year SAR Million Private Sector GDP (millions) % of GDP


2013 127,768 1,050,987 12.2%

2014 134,995 1,149,636 11.7%

2015 141,785 1,213,542 11.7%

2016 138,745 1,227,534 11.3%

2017 132,518 1,247,459 10.6%

2018 122,629 1,294,671 9.5%

Source: SAMA 55th Annual Report

Figure 7.2: Cash Circulation Outside Banks

180,132

172,046
170,323
168,492

153,750

2014 2015 2016 2017 2018

Source: SAMA Annual Statistics, 2018

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Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Despite the consecutive increase in volume of cash banks in 2015 was 9.6%, whereas in 2016 and 2017
circulation, the growth rates of cash circulating out- was 1% only. This clearly shows a shift in the gene-
side banks have been decreasing dramatically. For ral Saudi behavior and a tendency to move towards
example, the growth rate of cash circulation outside digital means of payments.

Figure 7.3 Cash Circulation Growth

10%

7%

7.70%

1% 1.02%

2014 2015 2016 2017 2018

Source: SAMA 55th Annual Report

Speaking about the low growth rates of cash circu- volume of sales increased to 232 billion riyals. The
lating outside banks in Saudi Arabia, it is worthwhi- significant increase in the number of payment trans-
le reviewing the growth rates of digital payments actions is due to the change in payment behavior
especially through POS machines. Central bank’s towards POS machines, especially after the launch
data suggest that POS payments have grown dra- of Atheer service and MADA-Pay/Apple pay e-wal-
matically over the past five years. The number of lets through which contactless payments are done
POS terminals in the Kingdom was approximate- on POS machines using NFC technology without
ly 139 thousand in 2014, during which 327 million the need for a PIN code for purchases below 100
payments were made with sales volume of 160 bil- Riyals. This has encouraged MADA cardholders
lion riyals. In 2018 on the other hand, the number and users of these applications to use digital pay-
of POS devices more than doubled to 351 million ment methods instead of cash, which translated as
POS machines and the number of transactions tri- shown below to a large increase in the number of
pled to about one billion POS transactions, and the transactions but a slight increase in sales volume.

Table 7.3: Volume of Transactions via POS Terminals

Year Sales (Million SAR) No. of transaction (Million) No. of POS terminals
2014 159,970 327 138,779

2015 172,835 395 225,372

2016 182,749 525 267,827

2017 200,468 708 303,646

2018 232,306 1,032 351,645

Source: SAMA 55th Annual Report

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Chapter VII: FinTech

Mobile and Internet Penetration


Data from the Saudi Communication & Information readiness of the Saudi society to embrace new tech-
Technology Commission (CITC) revealed that the nologies like FinTech.
Saudi population have 125% mobile subscription
rate and that almost 90% of the population have In addition, other than mobile internet access, sta-
mobile internet access by the end of 2017. Further- tistics from CITC shows that broadband internet
more, a study conducted by the General Commissi- penetration of Saudi households reached 33.6% in
on for Audiovisual Media revealed very interesting 2017, which could offer internet access to those
result that around 73% of Saudis are active users of without mobile internet subscription. This only con-
social media platforms. The study shows that more firms the high internet usage rates in the Kingdom,
than 24 million Saudis are active WhatsApp users which is an essential success factor for any FinTech
and more than 23.5 watch materials on YouTube. solution.
This is very important to give an impression of the

Table 7.4: Mobile Connections Penetration in 2018

Population Mobile Connections Prepaid Postpaid


33,413,660 41,399,00 123.9% 28,482,512 68.8% 12,916,488 31.2%

Source: Saudi Communication & Information Technology Commission (CITC)

Table 7.5: Smartphone Penetration in 2017

Population Mobile Connections Prepaid Postpaid


33,413,660 29,700,000 88.9% 26,000,000 78% 2,500,000 33.6%

Source: Saudi Communication & Information Technology Commission (CITC)

137
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Case Study
In 2015, UniGulf119 realized that there is a great poten- and regulators understood the fact that behind the
tial to launch a digital wallet that uses both dynamic scene; a system aggregates all funds into a single
and static QR code as an alternative method of pay- account run by “TAHSEEL” and all funds are then set-
ment to the local switch (MADA). The main goal was tled to merchant IBANs overnight. Which was a risky
to take advantage of the high smartphone/internet task with an obvious chance of a human error occur-
penetration along with the Saudi government intenti- ring along the manual process, especially that banks
on to move towards the digital economy by providing also refused to offer APIs that would help TAHSEEL
a convenient payment solution by smartphone that is automate this whole process. In addition to that, ag-
accessible to all kinds of people regardless of age or gregating funds into a single account was a risky
geographic location. And also, to contribute in boos- operation in the eyes of the regulator specially when
ting financial inclusion in the Kingdom by “banking the dealing with a (limited liability company) that could
unbanked” and making financial services accessible possibly misuse those huge amounts of aggregated
to underserved resident of rural areas, young Saudis, funds which belongs to other merchants. Regulators
even Low-income citizens who may not trigger the around the world were overwhelmed by the challen-
appetite of financial institutions. A team was formed ges they have to deal with and had to act quickly to
consisting of top Saudi entrepreneurs, experts in re- embrace the inevitable new FinTech tide.
tail banking technology, experts in compliance, and
a team of top tier software developers, and decided It was important at that time to approach Saudi Ara-
to call it (TAHSEEL) which means in Arabic (fund col- bia Monetary Authority (SAMA) to regulate those new
lection). FinTech activities. But SAMA, like many other central
banks, had to be very cautious regulating any new fi-
Unlike many startups around the world, establishing nancial activity, studying both benefits to the econo-
a legal entity and securing enough funding is not a my and risks associated with it.
problem in Saudi Arabia. Thanks to the seamless pro-
cess by the Ministry of Commerce and Investment TAHSEEL team realized that at the best scenario re-
that made establishing a company in Saudi Arabia as gulating FinTech activities in Saudi Arabia will take at
easy as possible, with its famous slogan.120 least 18 months, which means that bringing the digi-
tal wallet to Saudi Arabia as soon as possible will not
Nevertheless, at the time banks and regulators were be an easy task.
the main obstacles. Banks were a bit suspicious
about the new concept of FinTech whether it is a In mid-2017, the team decided to approach other
threat or a success catalyst. Banks were reluctant neighboring GCC countries hoping that central banks
that they made it very hard to open a bank account. there would be a little more flexible and willing to
Other banks that approved opening a bank account consider regulating FinTech faster than Saudi Ara-
for “TAHSEEL” during 2015-2018 continuously refu- bia. “TAHSEEL” team went to Kuwait, Bahrain, and the
sed to offer services or potential collaboration due to UAE (both Dubai International Financial Center & Abu
3 main reasons: Dhabi Global Market) and realized that the chance in
• Absence of physical location for the virtual busi- Kuwait to launch the business would be easier due
ness (store). to the lenient approach adopted by the Central Bank
• Absence of license from the regulator to practice of Kuwait (CBK) towards disruptive technologies and
this specific business model the fact that Kuwaiti market is not as congested as
• Difficulty understanding the business model and other GCC markets. The team started developing and
the legal entity type that best fits the case.121 testing the solution in a closed environment prepa-
ring for a soft launch. The goal was not to operate
For both merchants and customers “TAHSEEL” was in Kuwait, but rather to have a successful proof of
a digital wallet that facilitates payments. Only banks concept (POC) and then go back to the Saudi central

138
Chapter VII: FinTech

bank hoping that it would then regulate it. It is impor- was a trusted alternative method of payment speci-
tant to note that for most successful GCC entrepre- ally that it is known to be a state-backed local switch.
neurs, it always a dream to scale up in Saudi Arabia Soon MADA started taking all the lights especially
because of the huge market. that it is accepted on all point of sale machines in al-
most every shop in Saudi Arabia. Obviously, people
Around that time, SAMA realized the need to esta- choose options that solves the problem better and
blish the regulatory sandbox and accepted 3 digital easier.
wallet companies with the same QR pay business
model but (fortunately and unfortunately) “TAHSEEL” When comparing e-Wallets to digital wallets in Sau-
was not among them. SAMA promised “TAHSEEL” to di Arabia, we notice an challenge that digital wallets
be accepted in the second cohort of the sandbox, or face in the absence of open banking APIs. Using di-
to comply with the regulatory framework for QRPay gital wallets with QR payment requires topping up
digital wallets which will be drafted after completing the digital wallet using debit or credit cards, or direct
the testing process of those 3 new companies. bank transfer to the wallet before the user can start
scanning QR codes to make payments, which is an
“TAHSEEL” team realized that the chance to take a unnecessary extra step that favors e-Wallets (like
first mover advantage in Saudi Arabia is almost im- MADAPay) which deducts money directly from users
possible under current circumstances. Hence, they bank account. Topping up the digital wallet is a pure-
decided to look for other untapped chances within ly e-Commerce transaction that has to go through a
the digital payments market while continuing the tes- payment gateway, which will charge a fee to make
ting and development in Kuwait, and closely obser- the transaction. This puts digital wallet companies
ving the results of the official launch of the 3 digital against a tough choice. Either to take the burden of
wallets in Saudi Arabia for possible market share. paying those fees for a better user experience hoping
“TAHSEEL” team started immediately diversifying to be able to compete with eWallets. Or to charge the
their portfolio –in case things go wrong with digital payment gateway fees on users and risk losing custo-
wallets- by adding three other digital payment soluti- mers who will obviously see no reason for paying a
ons to the portfolio. The first is an e-Commerce mobi- fee to enjoy the service; especially when MADA -the
le payment solution targeting SMEs. The second was trusted brand- offers a “FREE” alternative that is also
a digital payment platform that aggregates SADAD accepted in all shopping outlets all over the Kingdom.
bills for school tuition fees. The third was a digital
payment platform targeting social media influencers. Digital wallets have a great chance to bridge the fi-
nancial inclusion gap in Saudi Arabia and offer a
By the 3rd quarter of 2018, the launch of digital wal- good digital payment alternative. Saudi Payments
lets was on the headlines. Staring by a digital wallet company in conjunction with SAMA are currently
by a leading Saudi telecom company and two other working on the unified QR standard and a new inter-
digital wallets developed by Saudi startups. Saudis bank payment system that would make the user ex-
were so excited for this new payment method, but perience of digital wallets more seamless. But only
soon those three startups faced a great challenge the introduction of open banking APIs will remove the
to onboard customers, and to work on striking deals unnecessary “top-up” step for a truly seamless expe-
with local shops to provide their payment solution in rience and better competition between e-Wallets and
their outlets to gain visibility and spread. digital wallets as a payment method.

Around that time, (MADA) -which at the time was “TAHSEEL” was fortunate to be delayed to the second
owned and operated by the Saudi central bank- was cohort to be able to observe the market, maintain
preparing to launch its e-Wallet (MADAPay). Even the company image and to enjoy the benefit of the
though MADA pay e-Wallet had a different business “second mover advantage” which will be discussed
model which acts as a virtual debit card uploaded to later in this study. And to focus on other more profi-
the MADAPay application and uses NFC technology table segments in the “young” promising Saudi Fin-
to execute payments on point of sale machines. It Tech market.
139
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Saudi Arabia is blessed with


the right recipe to make it a global FinTech Hub.

Lessons Learnt
tions that solve the same problem in similar ways.
But only innovative ideas that are uniquely built to
solve an existing problem in a totally different, easy,
Regulations and smart way will stand out.
Technology is like time, it is unstoppable. It develops
quickly and crosses geographical boundaries inde-
finitely that regulators oftentimes cannot cope. On Second mover advantage
the other hand, Central Banks as regulating bodies
responsible for protecting the financial system have in disruptive innovation
to thoroughly study and understand the new techno-
logy before it can approve it. It is the dream of any Startups fight for a first-mover advantage in any mar-
entrepreneur to deal with a dynamic regulator who is ket to increase the chance of dominating the biggest
willing to embrace change. SAMA’s sandbox is built share in the market. In new technologies, second
to serve that purpose and to keep up with entrepre- mover advantage is often as good as the first mover
neurs before they lose their spark. if not better. The Second mover advantage can also
guarantee some market share and the advantage of
testing real customer impression about the solution
Saudi market is expected with a chance to modify the offering without dama-

to continue
ging the brand, while first-mover continues to pave
the way for followers. In some scenarios, when first
movers could not absorb the market shock, second
Many entrepreneurs carefully observe the Saudi and third movers will be lucky to quickly adjust and
FinTech market thinking that it has already reached penetrate or exit with minimum loss.
its peak after the official launch of few FinTech so-

Conclusion
lutions not knowing that this is only the beginning.
The Saudi market is big enough to absorb many
other FinTech companies even those with similar
solutions. Also, many supporting services that can
be successfully built around existing FinTech s have When studying the data discussed in this report al-
not yet emerged. Another promising aspect that will together, we realize that Saudi Arabia is blessed with
bring FinTech in Saudi Arabia to a new level is the the right recipe to make it a global FinTech Hub. Sau-
regulation of open banking, which have not yet taken di Arabia is considered a high-income country with
place and will definitely bring FinTech solutions to a a huge economy, solid financial system, with high
new level and open the opportunity to new FinTech s internet and mobile penetration rates. Entrepreneurs
to be built around it. in the Middle East often look for scaling up in Sau-
di Arabia after making some local success becau-
se Saudi Arabia is one of the largest economies in
Being ahead of the tide the world and the largest economies in the region.

(innovation) Furthermore, being a tech savvy society with ma-


jority of the population under the age of 35 makes
embracing new technologies faster and easier than
The world is becoming a small village and it is es-
many other parts of the world. It is evident that Sau-
sential to observe the world’s FinTech market to
di Arabia is taking digital transformation seriously,
anticipate where the market is heading in order to
and from the data above there are definitely many
build a unique solution that solves a current or future
promising opportunities awaiting innovative FinTech
problem. The world is saturated with copies of solu-
disruption.
140
Chapter VII: FinTech

An Interview with
Ms. Nejoud Al-Mulaik,
Director, Saudi FinTech
1. What has been the greatest achievement of Fin- Over the last 2 years, we have also focused on
Tech in Saudi as a key part of the Financial Sector spreading FinTech awareness which is now driving
Development Program sponsored by SAMA? interest in FinTech, particularly from students. We,
The industry has been active as a whole ecosystem therefore, expect this awareness building to result in
over the last 18 months and it will take several years more entrepreneurs starting FinTech companies in
of continuous efforts to keep the momentum. Fin- the future.
Tech Saudi developed more than 55 partnerships
with stakeholders and launched the spreading of 3. How can young people be developed into pro-
knowledge programs such as FinTech tour which is ductive entrepreneurs?
the largest cluster of events across the Middle East. o Providing them with Start-Up Experience: We
Moreover, as we move forward FinTech Saudi will have initiatives that provide young people with
launch its physical hub by Q3 to support FinTech work experience and internships in FinTech com-
start-ups and industry acceleration. panies. As young people gain experience working
in a FinTech startup environment, some of these
However, there have been a number of notable con- may look to start their own FinTech companies in
tributions from FinTech to FSDP. These include: the future
o The development of several FinTech compa- o Guidance and Mentorship: Young people can be
nies that are supporting entrepreneurship and supported as entrepreneurs through guidance
job creation in financial services. and mentorship. We have developed a frame-
o Development of innovative FinTech soluti- work for anyone with an idea on how to deve-
ons particularly supporting SMEs and other lop it into a FinTech startup. We then provide
groups that are underbanked. FinTech startups with support at every stage of
o Development of innovative solutions contribu- their development
ting to the development of a cashless society o Accepting Failure: There is a culture change re-
quired to help young people develop into produc-
2. How has the evolution of FinTech in KSA been tive entrepreneurs and that is accepting failure.
over the last 2 years? Please consider the variety Failure should not be considered a bad thing in in-
of platforms and products. novation. It is an opportunity to learn and to grow.
We have seen significant growth in FinTech activity
in Saudi Arabia over the last two years. When we 4. How instrumental are educational institutions in
started FinTech Saudi we identified 14 FinTech s nurturing talent and entrepreneurship skills?
operating in the Kingdom. Currently, we have 42 Fin- o Educational institutions are important in nurtu-
Tech s operating a number of other entrepreneurs ring talent and entrepreneurship skills. They are
at pre-commercial and idea stage. the first point of call in supporting young peop-
le in making choices. It is important for them to
The Regulatory testing environments setup by SAMA collaborate with the private sector to provide stu-
and CMA have contributed to the acceleration in Fin- dents the right balance between education and
Tech activity as they have allowed FinTech s to ope- experience.
rate in Saudi Arabia under a testing license. This has o We work closely with a number of university
supported the development of innovative FinTech partners to support them with collaborating with
solutions in areas such as crowdfunding e-wallets / FinTech companies, spreading FinTech aware-
e-payments and robo-advisory and lending platforms ness and inspiring students to consider careers
in FinTech or start FinTech companies.
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Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

o It is also important for educational institutions 7. What are the major drivers and challenges for
to support the development of skills required growth of startup companies in KSA?
by the FinTech Industry such as data analytics, Drivers:
software development, coding etc. • Strong government support and initiatives for
start-up development.
5. What are the top three priorities to develop Fin- • Demographics that support start-up companies
Tech in KSA forward? (large population, young tech savvy population
o Physical Hub: We are currently in the process of etc.)
developing a physical hub that will become the • Lots of opportunities created by limited competi-
home for FinTech development. We have seen tion and social and cultural changes.
in other markets that a physical presence dedi-
cated to FinTech will support the progression in Challenges
innovation in financial services • Stigma attached to failure.
o Innovation Programs: We are looking to develop • A pool of talent with the skills required by start-
innovation programs such as competitions and up companies.
accelerator programs that support the develop- • Active role models / mentors / angel investors to
ment of FinTech entrepreneurship support and guide FinTech companies.
o FinTech Adoption: We are developing initiati-
ves to support the growth of FinTech adoption
amongst consumers. This is to support FinTech
s in Saudi to scale quickly Biography of Ms. Nejoud Al-Mulaik
Nejoud has worked for 10 years at JPMor-
6. Do you think FinTech in KSA is different from gan Chase Bank in the corporate investment
other countries? What value proposition sets itself banking space. She has vast experience in
apart from the rest building client relationships and portfolios
o Every country has different characteristics and across Finance, industry, and the public sec-
is developing FinTech for different reasons. It is tor, managing corporate sales portfolio for
therefore difficult to compare what we are doing large corporates in Saudi Arabia. She has
with other countries. also played vital roles in logistics, office ma-
o Our focus is to develop FinTech activity from nagement, human resource development,
grassroots level. We have a very focused long- and event management, as well as business
term roadmap that we are currently executing. management and core banking services In
This has started with a strong focus on FinTech early 2018, Al-Mulaik joined Small & Medium
awareness over the last 18 months to ensure Size Enterprises General Authority (SMEA/
everyone has the opportunity to start a FinTech Monshaat) as International Strategic Part-
company / career in FinTech. Going forward we nership Director where she managed inter-
will be developing initiatives to focus more on national relationships for SMEs including
FinTech entrepreneurship. startups and entrepreneurs to attract and
o It is too early to tell what our value proposition in design the desired partnerships, as well as to
Saudi Arabia will be. As we develop the FinTech achieve growth and economic contribution
ecosystem, we expect specialisms and focus across industries.
areas to emerge which we will then support.
o Investments, as for Saudi & MENA region most In October 2018, she was appointed as Direc-
of FinTech s VC/investments are at seed/series tor of FinTech Saudi, a government initiative
A stages and that would indicate an opportuni- to serve as a catalyst for the development of
ty for FinTech industry to thrive as it caters to the financial service technology industry in
specific areas in demand for each local market Saudi Arabia.
in the region including Islamic focused solution.

142
Banks have gained increasing importance over the years until they became a measure for
economic progress of any country. Whenever banks’ capabilities and financial activities
increased, this would reflect on the economic growth of the country. Hence countries are
striving for monitoring their financial institutions by placing policies and regulations which
guarantee their protection so that, the overall banking system will not be affected.

Due to high demand for Islamic Banking in the Islamic World, banks are competing to pro-
vide such services to their customers, to meet their expectations and aspirations for their
financial transactions and commercial activities in compliance with Sharīʿah principles.

Among the banks which offer these services is the Saudi British Bank (SABB). In 2001,
SABB opened a new department to provide services and products compatible with Sharīʿah
standards under the supervision of independent Sharīʿah Board.

All SABB branches provide Islamic financial services. For retail and corporate customers,
as well as treasury services.

At a retail customer’s level:


• Tawarruq Product.
• Home Finance.
• Islamic Credit cards.
• Muḍārabah saving accounts.

At a retail and corporate level:


• Islamic current accounts.
• Murābaḥah Commodity Investment Account.

At a corporate level:
• Islamic cash line (over draft).
• Tawarruq.
• Trade and receivable finance solutions.
• Ijārah.
• Mushārakah Finance.

Treasury Products Include:


• Islamic Rate Hedging against fluctuation of finance / currency cost.
• Promise as alternative of options

All Islamic products are approved by Sharīʿah Board. IFS department arrange submissions
to seek Sharīʿah approval. IFS also monitor and supervise the practical application of pro-
ducts. By conducting periodic review on marketing and Islamic financial products, to ensure
compliance with the decisions and Sharīʿah guidelines. After that, reports are submitted to
SB periodically to review application of the Sharīʿah products and obtain directions regarding
the reported issues.

143
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

CHAPTER VIII:
KSA
LEADING THE WAY

144
Chapter VIII: KSA Leading The Way

Being the largest economy in the Middle East


and a member of the G20, Saudi Arabia has a great potential
to lead Islamic Finance in the 21st century.

Major Hub
The global Islamic Finance Industry has evidently By becoming a major hub for Islamic Finance, Saudi
been in an upward trajectory, as demonstrated by Arabia will be able to attract foreign capital to invest
its assets’ steady double-digit compound annual in the multitude of opportunities of the country. The
growth rate. mega-projects such as Neom, The Red Sea Project,
Qiddiya entertainment city, among others, can be
Being the largest economy in the Middle East and funded through various modes of Islamic Finance.
a member of the G20, Saudi Arabia has a great po- For example, they can be funded through equity ca-
tential to lead Islamic Finance in the 21st century. pital, ṣukūk, istiṣnāʿ, murābaḥah, among others. The
Our calculation shows that by the end of 2018, in Islamic Finance Industry can offer sophisticated
total, Islamic Finance assets in Saudi Arabia mark a solutions to Finance such mega-projects with the
staggering US$ 563 billion, which makes the coun- best, fair outcomes in terms of societal contribution
try the largest Islamic Finance market globally. This to the Saudi economy.
serves the economic and financial aspirations of Vi-
sion 2030 that will allow the Kingdom to diversify its
economy and enhance the non-oil GDP.

Comparative Advantages
Saudi Arabia enjoys a unique set of advantages that, • It is the largest economy in the Middle East, and
collectively, allow the country to become a global also the largest country in terms of area.
hub of Islamic Finance. These include: • It possesses one of the largest proven reserves
of oil and natural gas.
• It is the guardian of the Two Holy Mosques, the • It has the largest mineral deposits in the Middle
spiritual destination of 1.8 billion Muslims world- East;123
wide; • About 38% of the population are youth (age 24 or
• It has the largest market for Islamic Finance in less);124
the world;122 • It scores High on e-Government Development
• It hosts the largest Sharīʿah-compliant develop- Index;125
ment bank in the world, and the only AAA-rated • About 60 percent of the Saudi population is online
Islamic bank, namely the Islamic Development today.126
Bank.

145
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

Saudi Arabia is taking digital transformation seriously


and that there are definitely many
untapped digitization opportunities awaiting
innovative FinTech contribution.

Collectively, these advantages enable Saudi Ara- given the high level of education and digital liter-
bia to lead the Islamic financial industry on several acy, there is a great potential for entrepreneuri-
fronts. In particular, the Kingdom can lead in two al activities. Among 137 nations, Saudi Arabia
major areas: ranks 40 on the Global Entrepreneurship Index.128
The SME sector can be an ideal investment
• Awqāf- As a spiritual destination for Muslims channel for awqāf. Mobilizing resources for the
worldwide who seek to visit the Holy Mosques SMEs through, e.g., ṣukūk, equity, crowdfunding,
every year, there are favorable incentives for venture capital, inter alia, would provide Islamic
them not only to spend but also to invest in the Finance industry an edge in innovation, diversity,
Kingdom in the form of waqf.127 Attracting global and economic impact. Since SMEs are the engi-
capital into the Kingdom, however, requires the ne of job creation, investing in the SME sector is
availability of sustainable investment channels essential for sustainable economic growth.
that can generate acceptable returns to inves-
tors and avoid creating bubbles. This takes us to Taking these two fronts together, both the non-pro-
the second front: fit and the for-profit domains of the economy may
prosper in tandem. This can be particularly rewar-
• Small and Medium Enterprises (SMEs)- Given ding if innovative financial technologies (FinTech)
the large proportion of youth in the country and are taken into consideration.

FinTech
In the area of FinTech, we realize that Saudi Arabia majority of the population under the age of 35 ma-
is endowed with the right recipe to make it a global kes embracing new technologies faster and easier
FinTech hub. Saudi Arabia is considered a high-in- than many other parts of the world. Saudi Arabia
come country with a huge economy, solid financial also established “FinTech Saudi” to act as a catalyst
system, with high internet and mobile penetration to develop the FinTech ecosystem alongside with
rates. Entrepreneurs in the Middle East often look vibrant regulatory sandbox team in SAMA.129 It is
for scaling up in Saudi Arabia after making some evident that Saudi Arabia is taking digital transfor-
local success because it is one of the largest eco- mation seriously and that there are definitely many
nomies in the world and the largest economy in the untapped digitization opportunities awaiting innova-
region. Furthermore, being a tech-savvy society with tive FinTech contribution.

146
Chapter VIII: KSA Leading The Way

FinTech fits perfectly the Islamic Finance sector: • Artificial intelligence can be used to quantify “re-
• It provides an ideal environment for transpa- putation capital” or “reputation equity” necessary
rency, which is essential for Islamic financial to discipline enterprises and align incentives bet-
instruments, particularly participatory financing. ween the SMEs and investors.
Participatory financing is suitable for small en- • FinTech can be used to design peer-to-peer insu-
terprises much more than debt-based financing. rance, which is in line with Islamic principles of
But it requires a higher level of transparency and cooperative or mutual insurance. P2P insurance
good governance. Blockchain technology provi- in turn can be used to offer additional protection
des a perfect environment to achieve these ob- to investors (and awqāf contributors) to invest in
jectives. the SME sector.
• It enhances the governance of Islamic financial
institutions and provides a conducive environ- With the joint combination of FinTech with entrepre-
ment for proper Sharīʿah audit and control to pro- neurial SMEs and Islamic Finance, the Kingdom can
tect the reputation and credibility of the industry. become a game-changer for the Islamic Finance
industry.

The Way Forward


Without a doubt, the future of Islamic Finance in and a visionary leadership, the Kingdom has all the
Saudi Arabia is promising, especially considering necessary ingredients to tap into the immense value
the country’s position in the global Islamic financi- that Islamic finance can bring to economic progress
al landscape. With its vast natural resources, large and social prosperity. This is not to say that it will
young and creative population, the Two Holy Mos- be an easy journey. But it is a journey that is worth
ques, an advanced and resilient financial system, travelling.

147
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

148
Chapter VII: FinTech

149
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

LIST OF CONTRIBUTORS
IRTI TEAM
Sami Al-Suwailem, PhD
Dr. Sami Al-Suwailem is one of the influential thought leaders in Islamic economics and
finance. He currently serves as the Acting Director General of the Islamic Research and
Training Institute (IRTI), IsDB Group, Jeddah, Saudi Arabia. Before joining IRTI in 2004, Dr.
Al-Suwailem managed the Research and Development Center at Al-Rajhi Bank, Riyadh,
Saudi Arabia. He has contributed to numerous professional committees, including the
Technical Committee of the IFSB; Economic Committee of Awqaf at the Ministry of Is-
lamic Affairs in Riyadh; and Academic Committee in Islamic Fiqh Academy of Muslim
World League. Dr. Al-Suwailem obtained his M.A. from Southern Illinois University and
Ph.D. from Washington University, St. Louis, Missouri, USA.

Hylmun Izhar, PhD


Dr. Hylmun Izhar is a Senior Economist at IRTI. He was a lecturer at the Markfield Institute
of Higher Education (MIHE), Leicester, UK, following a research fellowship at the Oxford
Centre for Islamic Studies (OXCIS), Oxford, United Kingdom. He has been honored with the
‘2017 Upcoming Personality in Global Islamic Finance’ during the annual Global Islamic
Finance Awards. He is the co-author of “I for Impact: Blending Islamic Finance and Impact
Investing for the Global Goals” (UNDP - IsDB), and textbook titled ‘Islamic Capital Markets:
Principles and Practices’, published by ISRA and Securities Commission Malaysia.

Dr. Turkhan Ali Abdul Manap


Dr. Turkhan Ali Abdul Manap is a Senior Economist at IRTI. Prior to joining IRTI, he was an
Associate Professor of Economics at the International Islamic University Malaysia (IIUM),
where he taught courses at bachelor’s, master’s and PhD levels. He obtained his PhD in
Economics from IIUM in 2007, MBA in Finance from National University Malaysia in 1999,
and Bachelor’s degree (Engineering) from Dalian University of Technology, China in 1993.
His research interests include macroeconomics, Islamic capital market, financial stability
and stress-testing for Islamic financial institutions.

Mr. Aziz Gulomov


Mr. Aziz Gulomov is a Financial Analyst at IRTI. He holds a Master of Business Administra-
tion from Waseda University, Tokyo, Japan. Prior to joining IRTI in June 2017, he worked
as Senior Financial Analyst at Central Asia Trans Gas (CATG), Tashkent, Uzbekistan, and
Assistant Finance Manager at Al Ghurair Foods, Dubai, UAE. He was a visiting scholar at
Goizueta Business School, Emory University, Atlanta, USA. His expertise is in financial
analysis, business valuation models and database building on Islamic banks.

Mr. Salah Al-Sherbini


Mr. Salah Al-Sherbini is a Business Development Specialist at IRTI. He holds a Bachelor of
Arts in Law from King Saud University, Riyadh, Kingdom of Saudi Arabia. Prior to joining
IRTI in 2016, he worked as Technical Assistant in charge of the Front Office of the Presi-
dent’s Office at the Islamic Development Bank.

150
EXTERNAL CONTRIBUTORS

Dr. Slim Mseddi


Dr. Slim Mseddi is Assistant Professor in Finance, Finance and Investment Department,
College of Economics and Administrative Sciences, Imam Muhammad Ibn Saud Islamic
University (IMSIU), Saudi Arabia. He is a former Sahabat Alimam incubator consultant.
He holds a PhD in Finance from University of Cergy-Pontoise, Paris, France. He is certified
Balanced Scorecard from the George Washington University. He won the award for excel-
lence in world publishing. He is a reviewer for different chairs and journals.

Mr. Abdulelah Al-Sayegh


Mr. Abdulelah Al-Sayegh is a Saudi FinTech expert and entrepreneur. He also serves as
FinTech Director at UniGulf, founder of “Paylink”. He also a FinTech mentor at the General
Authority for Small & Medium Enterprises (Monshaat).

Dr. Abdul Qayoom AM Al-Hendi


Dr. Abdul Qayoom AM Al-Hendi is a researcher and lecturer in endowment economics,
philanthropy, and behavioral economics. He obtained a Doctorate in Islamic Economics.
He used to work as a part-time consultant at the General Authority of Awqāf in Saudi
Arabia, and former adviser of Awqāf in the Personal Status Court. Dr. Abdul Qayoom
currently works as an assistant professor at the Department of Islamic Economics at
the Islamic University in Medina.

151
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

152
Chapter I: Economic And Financial Landscape

153
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

ENDNOTES
1 IMF, World Economic Outlook Database, October 19 The holding of local equity was SAR15.6 billion at
2019. Saudi Riyal (SAR) is fixed at 1 U.S. Dollar = the end of 2018, as per the Saudi Capital Market
3.75 riyals, which translates to approximately 1 Authority Annual Report (2018), which accounted
Riyal = 0.266667 Dollar. for 10% of the total Asset under Management. The
size of AUM shown in the chart (SAR 89.5 billion)
2 Global Competitiveness Index Report issued by the includes both local and international equity, as
World Economic Forum (2018 - 2019) well as ṣukūk. We note that there might be double
3 https://www.ic.gov.sa/en/invest-in-saudi-arabia/ accounting concerning local equities and ṣukūk, but
natural-resources/ its size should be relatively insiginificant.
4 Stated in http://www.sama.gov.sa/en-US/Indices/ 20 Financial Sector Development Program Charter,
Pages/GrossDomesticIncome.aspx, retrieved on 4 Delivery Plan 2020, p. 9. https://vision2030.gov.
March 2020 sa/sites/default/files/attachments/170719%20
FSDP%20Program%20Book%2010%20May%20
5 Vision 2030 Kingdom of Saudi Arabia, p. 61 2018%20English%20V3.pdf.
6 Vision 2030 Kingdom of Saudi Arabia, p. 53. 21 Bank account ownership rates among the King-
7 In a nutshell, Industry 4.0 is the trend towards auto- dom’s adult population are estimated at 72% and
mation and data exchange in manufacturing tech- the target is to reach 80% according to the objecti-
nologies and processes which include cyber-physi- ves of the Financial Sector Development Program,
cal systems (CPS), the internet of things (IoT), according to the Financial Inclusion in Saudi Report,
industrial internet of things (IIOT), cloud computing, https://kkf.org.sa/media/ipuh5olx/2-financial-inclu-
cognitive computing and artificial intelligence. sion-in-saudi-arabia-2018.pdf.

8 Ministry of Finance Saudi Arabia, as quoted in Sam- 22 Zulkifli Hasan, ‘Regulatory Framework of Sharīʿah
ba Report Series, “Saudi Arabia: Macroeconomic Governance System in Malaysia, GCC Countries and
Forecast 2019-2023”, 2019, p. 6. the UK’, Kyoto Bulletin of Islamic Area Studies (2010
3 (2) 97.
9 Alotaibi, Abdullah R and Mishra, Anil V. “Determi-
nants of International Financial Integration of GCC 23 IMF World Economic Outlook 2020.
Markets”, in Emerging Markets and the Global Eco- 24 For instance, on 27 Feb. 2020, Saudi Arabia
nomy, 2014, p. 749-771. suspended Umrah pilgrimage and visits to the
10 Huchet‐Bourdon, Marilyne., Le Mouël, Chantal., Vijil, Prophet’s Mosque in Madinah over concerns of the
Mariana. “The Relationship Between Trade Open- spread of Covid-19, two weeks before the World
ness and Economic Growth: Some New Insights on Health Organization (WHO) declared the corona-
the Openness Measurement Issue”, The World Eco- virus outbreak as a pandemic. On 16 March, the
nomy, 2017. https://doi.org/10.1111/twec.12586 government also suspended attendance at all
government entities’ workplaces for 16 days; 20
11 https://unctad.org/en/PublicationsLibrary/wir2020_ March, suspended all internal flights, buses, cabs
en.pdf and trains. Subsequently, the government put a
12 www.stats.gov.sa; the calculation is based on con- 24-hour lockdown on big cities to curb the spread of
stant prices (2010 = 100). the pandemic.

13 UNDP Human Development Report 2019, “Briefing 25 https://www.mof.gov.sa/en/MediaCenter/news/Pa-


Note for Countries: Saudi Arabia”, p. 2 ges/News_20032020.aspx

14 Towards Saudi Arabia’s Sustainable Tomorrow, First 26 The interview questions were sent to SAMA, addres-
Voluntary National Review 2018 -1439, Page 25. sed to its Governor, Dr. Ahmed Abdulkarim Alkho-
https://www.sa.undp.org/content/saudi_arabia/en/ lifey. The answer to IRTI’s interview questions was
home/library/SDGs/VNR.html received on 11 November 2019, sent by Internatio-
nal Affairs of SAMA.
15 SAMA 55th Annual Report, IFSB Prudential and
Structural Islamic Financial Indicators (PSIFIs) 27 SABB and Al Awwal Bank merged in June 2019. The
size of the new bank is estimated based on 2018
16 SAMA Saudi Insurance Market Report 2018 data.
17 Values of outstanding ṣukūk as stated in IIFM Annu- 28 https://www.ifsb.org/psifi_03.php. Retrieved on 1
al Ṣukūk Report 2019. March 2020.
18 SAMA 55th Annual Report 2019 29 For overall banking sector; IRTI’s estimation is
based on banks’ reports; while for Islamic banks; it
is based on IFSB report.
30 IFSB Report, AlBilad Capital: Saudi Banking Sector
2015 & 2017, Al Jazira Capital: Saudi Banking Sec-
tor 2018.

154
Chapter I: Economic And Financial Landscape

31 IFSB Report 2019, Al Bilad Capital: Saudi Banking 50 Swiss Re 2019.


Sector Reports for 2014-2017, for 2018: https://
www.maaal.com/archives/20190226/119374, 51 Swiss Re 2019.
retrieval date: 15 March 2020 52 SAMA 55th Annual Report.
32 We could not do the same exercise for other 53 22 Sha’ban 1438, 18 May 2017 ‫التنموية‬-‫إلى‬-‫الرعوية‬-‫من‬
countries under consideration due to absence of https://mlsd.gov.sa/ar/news/.
required data.
54 For more information, see http://mci.gov.sa/Laws-
33 For Saudi Arabia, IRTI’s calculation was based on Regulations/Projects/Pages/npc.aspx#0.
Islamic Banks’ reports. For Qatar and Oman, IFSB
reports’ data was used. 55 “Minister of Labor and Social Development Laun-
ches Makeen platform to serve the not-for-profit
34 The National Plan for Telecommunication and IT sector,” Ministry of Labor and Social Development,
was approved in 2007. According to the 9th Natio- https://mlsd.gov.sa/node/147130.
nal Plan 2010), the scheme aims at closing the gap
between Saudi Arabia and other states in terms of 56 An excerpt from Saudi Arabia Philanthropy Law Re-
digital technology. The scheme also incorporates port, by International Center for Not-for-Profit Law,
programs featuring the implementation of IT in are- 2017, p.7-13.
as such as e-trade, e-government, e-education etc. 57 Quoted from Al-Naggar, Ahmed Hassan. “Waqf
The main objectives of the scheme are as follows: Investment Funds in GCC Countries: A Case Study
(i) Improving the performance of the technology on Saudi Arabia”, Islamic Finance News, 4 December
and telecommunication sector to include all gover- 2019, p. 35.
nment services, the social and health services; (ii)
Establish a reliable telecommunication and informa- 58 This part is an excerpt from IsDB-APIF Report on
tion sector up to international standards, capable “The Development Impact of the Awqāf Properties
of attracting investment; (iii) Provide a chance for Investment Fund: A Model for Sustainable Develop-
all social sectors to benefit effectively from the ment”, 2019.
telecommunication and information technology 59 Ibid, p. 15
services; (iv) Provide a trained human cadre from
both genders in all areas of information technology. 60 IRTI extends its appreciation to Br. Yoseph Al Sawa-
dy and Dr. Ali Chatti from Islamic Financial Sector
35 CMA Annual Report, 2009. Development Department, IsDB for generously
36 The number of Sharīʿah compliant shares varies providing the information about APIF’s projects in
due to different screening bodies. There are five (5) Saudi Arabia.
different screening bodies in Saudi Arabia (https:// 61 http://www.alriyadh.com/315101.
www.argaam.com/en/company/shariahcompa-
nies). 62 Saudi Press Agency https://www.spa.gov.sa/
2053745.
37 Based on Tadawul website.
63 https://www.moh.gov.sa/Ministry/MediaCenter/
38 CMA Annual Statistical Report. News/Pages/News-2020-03-26-002.aspx.
39 See figure 3.5 64 https://twitter.com/rajhicf/status/
40 Data, as of 31 December 2019, was not available for 1242499034973167616?s=12.
all top 10 markets except for Saudi Arabia. There- 65 https://aawsat.com/english/home/article/
fore, value as of December 12, 2019 was used for 2205641/saudi-banks-increase-contribution-health-
all markets except Saudi Arabia. For Saudi Arabia, fund-amid-virus-crisis.
value is as of 31 December 2019.
66 https://trading-secrets.guru.
41 Retrieval date: 09.03.2020
67 https://www.maaal.com/archives/
42 Ṣukūk are frequently referred to as an Islamic bond, 20200402/138590.
but a more accurate translation of the Arabic word
would be “Islamic Investment Certificate”. 68 http://live.saudigazette.com.sa/article/591465/SAU-
DI-ARABIA/Al-Rajhi-launches-SR500m-Communi-
43 CMA Report 2018 ty-Fund-to-mitigate-effects-of-corona.
44 Numbers of investment funds in the bracket 69 https://twitter.com/alrajhiinv/status/
45 CMA Report 2018 1242510831075692544?s=12.
46 https://www.zawya.com/mena/en/wealth/story/ 70 The interview questions were addressed to the
GCC_funds_see_net_inflows_of_25bln_in_H1_Refini- Governor of General Authority for Awqāf (GAA), Mr.
tiv_report-SNG_155415441/. Retrieved on 5 January Emad bin Saleh Al-Kharashi. GAA’s answers were
2020. originally in Arabic which were subsequently trans-
lated into English by IRTI.
47 Swiss Re (2019).
71 See SAMA Financial Stability Report 2015, p. 29.
48 Defined as Gross Written Premiums divided by the
total GDP. 72 More detailed activities about NDF and what it
attempts to achieve can be read in the interview
49 Defined as average expenditure by an individual on with the Governor of NDF in the later section of this
insurance products. chapter.
155
Islamic Finance in Saudi Arabia: Leading the Way to Vision 2030

73 Sustainable Development Goals1st Voluntary Natio- 88 The 10 topics cover: starting a business, dealing
nal Review Kingdom of Saudi Arabia UN High-Level with construction permits, getting electricity, regis-
Political Forum 2018 “Transformation towards tering property, getting credit, protecting minority
sustainable and resilient societies” July 9-18, 2018 investors, paying taxes, trading across borders,
New York. enforcing contracts, and resolving insolvency.
74 For the job creation potential of entrepreneurship, 89 World Bank
see the Communication from the European Com-
mission “Towards a job-rich recovery”, 18.4.2012, 90 Datasets are retrieved from two reports on doing
COM (2012) 173 final. business in 2018 and 2019.

75 Small Medium Enterprises in Saudi Arabia Report 91 The Global Competitiveness Report (2018). http://
(2016) https://www.jeg.org.sa/sites/default/files/ www3.weforum.org/docs/GCR2018/05FullReport/
library/files/SME-EN.pdf TheGlobalCompetitivenessReport2018.pdf p.33

76 Reuters (October 9, 2017), https://www.reuters. 92 Eighth Development plan (2005-09). https://www.


com/article/saudi-fund-funds/saudi-sovereign- mep.gov.sa/
fund-creates-1-07-bln-fund-of-funds-to-back-smes- 93 Ninth Development Plan (2010-14). https://www.
idUSL8N1MK3XH mep.gov.sa/
77 Arab News (January 11, 2019), https://www.arab- 94 1st Voluntary National Review 2018, p. 97, https://
news.com/node/1434056/saudi-arabia sustainabledevelopment.un.org/content/docu-
78 See page 3 (25,26,27 March 2019), https://fsa. ments/20230SDGs_English_Report972018_FINAL.
monshaat.gov.sa/finalFSAbrochureenglishupdated. pdf.
pdf 95 www.globalinnovationindex.org/about-gii
79 On the Fast Track: Saudi Arabia’s Entrepreneurship 96 R Katila, EL Chen, H Piezunka (2012). All the right
Ecosystem https://www.entrepreneur.com/article/ moves: How entrepreneurial firms compete effecti-
336766 vely. Strategic Entrepreneurship JNL. 6 (2): 116–132.
80 Isenberg, D.J. (2011). The Entrepreneurship Eco- 97 “The Differences between Entrepreneurs and Startup
system Strategy as a New Paradigm for Economic Founders”. www.linkedin.com
Policy: Principles for Cultivating Entrepreneurships,
The Babson Entrepreneurship Ecosystem Project, 98 https://www.startupcommons.org/what-is-star-
1(781), pp. 1–13. DOI: 10.1093/rfs/hhr098. tup-ecosystem.html
99 http://paulgraham.com/startupfunding.html

81 See Wamda Research Report (June 2017), The 100 Saudi Arabia Venture Capital (H1 2019). https://
Kingdom of Saudi Arabia: Status of the entrepre- d2p9i44hnkrmkx.cloudfront.net/files/MAGNiTT_
neurship ecosystem, https://backend.wamda.com/ SVC_H1_2019_EN.pdf
api/v1/downloads/publications/kingdom-saudi-ara- 101 Source: https://www.spa.gov.sa/1675372
bia-status-entrepreneurship-ecosystem
82 Aloulou, W., Al-Othman, N. (2019), “Entrepreneurship
in the Kingdom of Saudi Arabia: Challenges and 102 For more details see Private Equity vs. Venture Ca-
prospects”, in Dana, L-P, RaMADAni, V., Palalic, R., pital: What’s the Difference? https://www.investope-
Entrepreneurship in GCC, World Scientific Publis- dia.com/ask/answers/020415/what-difference-bet-
hing. ween-private-equity-and-venture-capital.asp
83 See the report: The Saudi Arabia Economy 2019. 103 http://www.fundsglobalmena.com/news/mena-pri-
http://www.jadwa.com/en/researchsection/rese- vate-equity-funds-face-tough-2019.
arch/economic-research/macroeconomic-reports 104 https://www.zawya.com/mena/en/business/
84 GEM Global Report 2017/18 (2018). https://www. story/MENA_private_equity_set_for_another_
c4e.org.cy/reports/2018/gem-2017-2018-global-re- slow_year_despite_positive_longterm_outlook-ZA-
port.pdf WYA20190121083606/
85 GEM Global Report 2018/19 (2019). https://www. 105 https://cma.org.sa/en/Market/fintech/Pages/de-
babson.edu/media/babson/site-assets/content-as- fault.aspx.
sets/academics/centers-and-institutes/the-art- 106 https://cma.org.sa/en/Market/NEWS/Pages/
hur-m-blank-center-for-entrepreneurship/global-re- CMA_N_2665.aspx.
search/gem-2018-2019-global-report.pdf
107 http://www.sama.gov.sa/en-US/News/Pages/
86 World Bank’s Ease of Doing Business Index (2018). news11022019.aspx.
https://www.doingbusiness.org/ content/dam/
doingBusiness/media/Annual-Reports/English/ 108 http://www.sama.gov.sa/en-US/News/Pages/
DB2018-Full-Report.pdf news29012019.aspx.
87 World Bank’s Ease of Doing Business Index (2019). 109 http://www.sama.gov.sa/en-us/news/pages/
https://www.doingbusiness.org/ content/dam/ news05032019.aspx.
doingBusiness/media/Annual-Reports/English/
DB2019-report_web-version.pdf

156
Chapter I: Economic And Financial Landscape

110 https://www.cms-lawnow.com/ealerts/2019/10/
saudi-arabia-implements-its-new-e-commerce-law.
111 http://www.sama.gov.sa/en-US/News/Pages/
news30042018.aspx.
112 http://www.sama.gov.sa/en-US/News/Pages/
news24042019.aspx
113 https://safcsp.org.sa.
114 https://www.mcit.gov.sa/en/media-center/
news/176239.
115 https://newsroom.mastercard.com/mea/press-re-
leases/vocalink-and-saudi-payments-to-introdu-
ce-real-time-payments-to-saudi-arabia/.
116 https://www.saudipayments.com.
117 https://www.zawya.com/saudi-arabia/en/
press-releases/story/Saudi_Payments_Introdu-
ces_A_Standardized_QR_Payments_System_
Through_A_National_Platform_to_Support_Pay-
ment_Services_Providers_And_Digital_Wallets_in_
KSA-ZAWYA20190515030739/.
118 https://najiz.moj.gov.sa/Inquiry/Home/FurijatVerify.
119 UniGulf is a Saudi Fintech startup with a focus on
developing digital payment solutions.
120 Try the coffee we offer at the Ministry of Commerce
service centers and get your Commercial Certificate
before your coffee gets cold.
121 Business model in the appendix
122 See Chapter 1 of this Report.
123 https://www.ic.gov.sa/en/invest-in-saudi-arabia/
natural-resources/.
124 https://www.worldometers.info/world-population/
saudi-arabia-population/#population-pyramid.
125 UN e-Government Survey 2018. https://publicad-
ministration.un.org/en/Research/UN-e-Govern-
ment-Surveys.
126 https://www.mcit.gov.sa/en/media-center/
news/90326.
127 See Chapter 5 of this Report.
128 https://thegedi.org/global-entrepreneurship-and-de-
velopment-index/, and Chapter 6 of the Report.
129 See Chapter 7 of this Report.

157
ISLAMIC FINANCE
IN SAUDI ARABIA:
Leading the Way to Vision 2030

Published by:
Islamic Research and Training Institute
[A Member of the Islamic Development Bank Group]
8111 King Khalid St. Al Nuzlah Al Yamania Dist.
Jeddah 22332-2444
Kingdom of Saudi Arabia
Tel: +966126361400 · Fax: +966126378927
Email: irti@isdb.org · Website: www.irti.org

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