ISLAMIC BANKING PROGRESS IN

SAUDI ARABIA
Quantitative Method – QM5023
Masters in Islamic Finance Practice
20th December 2020

Mariyam Rafaa Abdul Latheef

Student ID: 2100181 1
 INTRODUCTION
● In order to analyze the Islamic banking progress, data was collected from both
conventional and islamic banks of Saudi Arabia
● Data was collected from Fitch Connect for the years 2016, 2017, 2018, 2019 and 2020.
● According to Saudi Central Bank, in Saudi Arabia there are;
○ 11 local banks
○ 2 digital banks
○ 21 foreign banks
○ 44 finance entities (Real estate finance, financial leasing and etc)
○ 216 entities related to insurance and takaful

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 BANKING IN SAUDI ARABIA
● Until the mid-twentieth century, there was no formal money & banking system.
● As of now, Saudi Arabia has a matured and developed an islamic finance industry. About
35% share of the global islamic banking assets is represented by Islamic banking assets.
And two thirds of the country’s total bank financing is represented by Islamic banking
assets.
● World’s largest islamic bank (outside Iran), Al Rajhi Bank, is located in Saudi.
● According to a report by Islamic Research & Training Institute, by the end of 2018, Saudi
Arabia’s islamic finance assets reached a remarkable USD 879.2 billion.
● This makes Saudi Arabia the largest islamic finance market globally in economies which
has dual financial systems sectors; conventional & islamic financial.
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 BANKS FROM WHICH DATA WAS COLLECTED

Conventional Banks Islamic Banks

● SAMBA Financial Group ● The International Islamic Trade Finance
● The Arab Investment Company Corporation
● Arab National Bank ● Bank Albilad
● Riyad Bank ● Alinma Bank
● The Saudi Investment Bank ● Al Rajhi Banking & Investment Corporation
● The Saudi British Bank ● Bank Aljazira
● The Saudi National Bank ● Islamic Development Bank
● Banque Saudi Fransi

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 OBJECTIVES & PROXY INDICATORS
● The main objective is to analyze the progress of Islamic banking in Saudi Arabia.
● The progress of Islamic banking is explored by checking the size and the profitability of
the Islamic banks.
● In order to find the size and profitability of the banks, proxy indicators are used. For size
the proxy used is Return on Average Asset (ROAA) and for profitability the proxy used is
Return on Average Equity (ROAE).
● ROAA is a ratio which shows how well a firm’s assets are being used to generate profits.
ROAA = Net Income / Average Total Assets
● ROAE is a ratio that measures the performance of a company based on its average
shareholders equity outstanding. ROAE = Net Income / Shareholders Equity

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 HIGHLIGHTS FROM THE DATA
TOTAL ASSETS 2016 2017 2018 2019 2020

Conventional Bank 1,545,992.10 1,536,355.20 1,552,972.60 1,758,349.90 1,959,059.90

Islamic Bank 583,581.94 609,978.85 655,284.11 713,086.47 839,100.39

TOTAL ROAA (%) 2016 2017 2018 2019 2020

Conventional Bank 14.23 15.68 12.62 14.11 8.2

Islamic Bank 9.12 9.84 8.95 11.49 6.81

TOTAL ROAE (%) 2016 2017 2018 2019 2020

Conventional Bank 87.96 89.99 68.54 74.87 52.63

Islamic Bank 51.73 53.94 43.36 60.23 44.44

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 COMPARISON OF CONVENTIONAL & ISLAMIC BANKS
Figure 1

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 Figure 3

Figure 2

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 CONVENTIONAL BANKS

● Figure 1 shows a bar graph of the total assets (millions) of conventional banks increasing
throughout the 5 years.
● We can observe that the increase in the total asset throughout 2016, 2017 and 2018 is
relatively small.
● In the years, 2019 and 2020 there is a significant increase in the total assets.
● Figure 2 shows the ROAA and figure 3 shows the ROAE.
● While we look in to ROAA of conventional bank, even though there was an increase in
2017, there was a decrease in 2018. In 2019, ROAA increases and then there is a significant
drop in 2020.
● ROAE also shows similar pattern through out the 5 years.
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 ISLAMIC BANKS
● The total assets of Islamic banks has increased throughout the 5 years.
● ROAA of Islamic banks had a small increase between 2016 - 2018. In the year 2019, there
was a significant increase in the ROAA. And a significant decrease in the year 2020. ROAE
also has similar pattern throughout the 5 years.
● When conventional & islamic banks are compared, the increase in total assets, ROAA and
ROAE of islamic banks is small compared to the increase in conventional banks in the 5
years.
* Constructed charts allow to visualize the data and see the fluctuations within the time period.
Also helps to easily compare the data such as total asset of the two banking system in one glance.

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 SUMMARY OF ACADEMIC PAPER
● Title: Measuring the performance of islamic banks in Saudi Arabia
● Journal: International Journal of Economics and Management
● Authors: Mehboob-Ul Hassan, Fouad Bin Amin & Nauman Khan
● The paper highlights what islamic banking is and shed some light into the islamic banking
industry of Saudi. Also, the paper includes data & graphical representations which shows
the growth in Saudi Banking industry. The literature review includes comparison on islamic
& conventional bank based on existing literatures. For the data & methodology, a
nonparametric method was used.
● The paper gives evidence that there is Islamic banking is progressing in Saudi Arabia. The
data included in the paper supports the theory of growth in Saudi Arabia’s Islamic banking
industry.
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 CONCLUSION & LIMITATIONS

● From this research, we can see that Islamic banking is progressing in Saudi Arabia.
● I would like to highlight that the progress of Islamic banking may have been affected due
to the pandemic of COVID-19 in 2019 and 2020. Therefore, when we read this data it is
important to take that into consideration.
● Even though Saudi Arabia has many banks, the relevant data was not available from
Fitch Connect. Therefore, the graphs presented might not be 100% accurate.

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