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RIYADH: The Saudi Central Bank, known as SAMA, has released its Financial Stability Report for 2024, highlighting the strength of the financial system amid global banking challenges in 2023.

The report underscores the crucial role of SAMA’s regulatory oversight in maintaining stability, with the banking and financial sectors demonstrating robust liquidity, capitalization, and lending capacity.

These factors have bolstered ¶¶Òõ¶ÌÊÓƵ’s economic reforms and addressed the increasing demand for credit. The report credits the development of an advanced payment infrastructure and financial system as key components in supporting the sector’s resilience.

In 2023, ¶¶Òõ¶ÌÊÓƵ’s non-oil gross domestic product grew by 4.4 percent year over year, even as oil activities contracted by 9 percent. This trend highlights the rising influence of the non-oil sector, which now constitutes 49.9 percent of the Kingdom’s total GDP, marking a significant achievement for Saudi Vision 2030 in diversifying the economy.

While global inflation eased in 2023 due to recovering supply chains, economic stability faced challenges from persistently high interest rates, geopolitical tensions, and increasing global debt, particularly in non-financial sectors. In response, SAMA raised policy rates four times, reaching 5.5 percent–6 percent to curb inflation, prompting a shift in depositor behavior toward time and savings deposits. The apex bank’s measure mirrored the US Federal Reserve’s monetary policy to curb inflation.

The banking sector recorded a notable increase in profitability, driven by strong private sector credit demand and a higher interest rate environment, with the return on equity rising to 12.8 percent from 12.5 percent in 2022.

Corporate lending trends

By the end of 2023, corporate credit emerged as the primary driver of bank loans, increasing by 13.2 percent to SR1.33 trillion. This growth was predominantly fueled by utilities, which saw a 27.8 percent increase, and real estate activities, which grew by 19.6 percent. Retail credit rose by 6.7 percent, mainly due to mortgages, which accounted for 48.8 percent of the lending share.

The real estate sector’s share in banking loans rose to 29.7 percent in 2023, up from 16.5 percent in 2018, reflecting government initiatives to promote homeownership, which reached 63.7 percent by the end of 2023. Effective prudential measures have minimized risks associated with retail mortgages, with most loans issued with full recourse and standardized contracts.

Asset quality and risk management

The report notes a steady decline in the non-performing loans ratio within the Saudi banking sector, dropping to 1.5 percent in 2023 from 1.8 percent in 2022. This decline is attributed to higher write-offs, indicating banks are maintaining asset quality while achieving strong profitability. The NPL provision coverage ratio rose to 151 percent, reflecting a robust prudential stance.

Improved asset quality was noted across all sectors, although construction, manufacturing, and wholesale/retail trade reported the highest NPL ratios. Notably, the construction sector saw its NPL ratio decrease from 7.6 percent in 2022, signifying a recovery in its financial position.

The average and median capital adequacy ratios in the banking system increased to 20.1 percent in 2023, up from 19.9 percent in 2022, indicating enhanced ability to absorb potential losses. Tier 1 capital constituted 92.2 percent of total banking capital, driven by improved profitability and capital issuances.

Growth of finance companies

Lending by finance companies increased by 12.3 percent in 2023, reaching SR84.7 billion, with retail credit making up 76.7 percent of the lending portfolio. However, these companies saw a rise in liabilities to SR40.3 billion, a 16.4 percent increase from the previous year.

Impaired loans in finance companies were concentrated in the individual sector, accounting for 59.6 percent of total NPLs. The default rate in finance companies is notably higher than in traditional banks, primarily due to their focus on higher-risk market segments.

Regulatory developments

SAMA implemented key regulatory changes in 2023, including lowering minimum capital requirements for finance companies serving micro, small, and medium enterprises. Additionally, the introduction of standards for consumer protection and the establishment of regulations for Buy-Now-Pay-Later services reflected SAMA’s commitment to advancing the finance and fintech sectors.

By the end of 2023, the number of licensed finance companies rose to 58, a 34.9 percent increase from 2022, with total capital reaching SR15.5 billion. SAMA’s ongoing support for the fintech industry, through its Regulatory Sandbox, has facilitated innovation, with 33 fintech companies participating by year’s end.

In summary, SAMA’s 2024 Financial Stability Report underscores a resilient banking sector, capable of navigating global challenges while contributing to ¶¶Òõ¶ÌÊÓƵ’s ongoing economic transformation.