Fitch says Saudi Islamic lenders face tougher market

Saudi Arabia’s Islamic lenders are likely to face economic headwinds and lower profitability because of the prolonged low oil prices and curtailed government investment, credit rating agency Fitch said yesterday.

“Asset-quality metrics are therefore likely to deteriorate from their current strong position, especially in light of slowing Islamic financing growth, and their high exposure to cyclical sectors, such as contracting and retail, which seasons more quickly,” Fitch said in a report.

Saudi Arabia had delayed payments to contractors as it grapples with a fiscal deficit, which is expected to reach 13 per cent of GDP this year, according to IMF estimates. But the issuance of a US$17.5 billion bond in October, the largest from an emerging-market nation, has eased the cash shortage, which was also felt by lenders who have extended loans to contractors and other private businesses.

Saudi Arabia’s Council of Economic and Development Affairs approved last month a plan to disburse delayed payments to the private sector in a step that is expected to resolve the liquidity squeeze.

“Liquidity has now stabilised with the recent government injection of liquidity and slower demand for financing,” said Fitch. “However, profitability is likely to come under pressure due to slower financing growth.”

Islamic finance represented two thirds of total bank financing in the first half of this year, according to Fitch.

Out of the 12 commercial banks in the kingdom, four are fully Sharia-compliant and the remainder offer a variety of Islamic and conventional products and services.

Islamic banks represented about 43 per cent of the banking sector in the first half of this year, up from 36.6 per cent a year ­earlier. The biggest Islamic lender in the world is Al Rajhi Bank.

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