August 24, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Saudi Arabia. Directors agreed that increasing small and medium enterprise finance, improving financial sector access, and developing the debt market are priorities. They welcomed the efforts of Saudi Arabian Monetary Authority (SAMA) to strengthen liquidity management and encouraged the authorities to continue to strengthen the effectiveness of their Anti-Money Laundering/Countering the Financing of Terrorism framework.

The staff report states that increasing financial development and inclusion while maintaining financial stability are key policy priorities. Reforms to strengthen liquidity management should continue, while macro-prudential policies can be used countercyclically within a well-defined framework. Moreover, legal reforms have advanced considerably over the past year. The new insolvency law is expected to go into effect in August. The authorities explained that all government licensing and regulatory requirements are being reviewed, streamlined, and automated, including enabling online, rather than in person, applications. Staff welcomed the authorities’ focus on financial development and inclusion as set out in the recent Financial Sector Development Program. Significant equity market reforms have been implemented by the Capital Market Authority (CMA) and the authorities are now working to develop the domestic debt market. SAMA noted the progress made in implementing the recommendations from the 2017 financial system stability assessment (FSSA). Additionally, Appendix V to the report summarizes the progress in implementing the key 2017 Financial Sector Assessment Program (FSAP) recommendations.

Staff agreed with SAMA that banks are well-positioned to weather negative asset quality and liquidity shocks. Reported nonperforming loans increased only modestly during 2017 to reach 1.6% of loans (1.4% at end-2016), the risk-weighted capital ratio increased to over 20%, and returns on assets and equity increased as interest margins rose. The introduction of IFRS 9 will result in a manageable increase in provisions for banks and SAMA will need to continue to carefully monitor banks’ approach to loan classification. SAMA has actively employed macro-prudential tools. SAMA explained that it has used the loan-to-deposit ratio, the loan-to-value (LTV) ratio and the risk-weight on mortgage loans to avoid what it viewed as an unnecessary tightening of credit conditions. Staff agreed that macro-prudential instruments should be used countercyclically within a clear framework, but raised some questions about the recent increase in the LTV ratio for first-time home owners to 90% (from 85%), which is quite high by international standards, at a time when retail mortgage lending is growing strongly. SAMA responded that the risks to financial stability from this change are extremely limited given the low average LTV ratio, the small share of mortgage lending in banks’ portfolios, and very low mortgage default rates. 

The selected Issues report highlights that the banking sector dominates the financial system. The commercial banks include 12 domestic banks (four of which have large public-sector ownership) and 12 foreign banks (1% of total assets), with the four largest banks representing 55% of banking system assets. SAMA has developed guidelines for mapping the risk profile of Islamic products to the Basel framework and the guidelines are being consulted upon with banks. Bank cross-border exposures in funding and lending are limited and regionally diversified. The report also goes on to discuss the capital market reforms and fintech initiatives in Saudi Arabia. 

 

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Keywords: Middle East and Africa, Saudi Arabia, Banking, Securities, Article IV, FSAP, FSSA, IMF

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