IMF published its staff report and selected issues report in context of the 2019 Article IV consultation with Saudi Arabia. Directors welcomed the continued resilience of the financial sector and ongoing capital market reforms. They agreed that the development of agency banking and fintech could help broaden the channels of financial access. Directors agreed that improving financial access is important but emphasized that specific sector lending targets should be avoided.
The staff report highlights that banks are well-positioned to weather asset quality and liquidity shocks. SAMA explained that with credit and liquidity conditions improving and no evidence of financial imbalances emerging, it has kept macro-prudential policies unchanged over the past year. In line with recommendations from the 2017 Financial System Stability Assessment (FSSA), new bank licensing guidelines were issued in December 2018, the guidelines for rescheduled and restructured loans (to ensure consistency of treatment by banks) are being drafted, and MoUs are being discussed with several central banks. SAMA has also continued to develop its liquidity management framework—producing weekly and monthly liquidity forecasts. The report mentions that non-performing loans (NPLs) of banks edged up to 2% in the fourth quarter of 2018 but remain low, while bank capital and return on assets are strong. IFRS 9 has had no significant impact on bank balance sheets.
Mortgage lending is expanding rapidly against the backdrop of declining house prices, as highlighted in the report. The IMF staff encouraged SAMA to continue to closely monitor the quality of real estate lending and to reduce, if needed, the loan-to-value (LTV) ratio (which was increased to 90% in early 2018) for first-time buyers. SAMA explained that mortgage loans are a small share of bank credit, the average LTV is comfortably below the limit of SAMA, and that risks are reduced by the salary assignment of loans and government guarantees on a large share of new mortgages. SAMA indicated that it is closely monitoring mortgage lending and has recently fined a number of financial institutions for violating the responsible lending policies. The staff advised against setting lending targets for specific sectors and noted that mergers between large banks would increase market concentration while common ownership of banks could reduce incentives for competition and innovation. Additionally, the staff welcomed efforts to improve financial access under the Financial Sector Development Program (FSDP). The authorities said that they are exploring agency banking and fintech to help broaden the channels of access to financial services and increase market competition, particularly in areas outside the major cities, and noted that the entry of five new foreign banks over the past year will boost competition.
Keywords: Middle East and Africa, Saudi Arabia, Banking, Fintech, NPLs, IFRS 9, Macro-Prudential Policy, Mortgage Lending, LTV, SAMA, Credit Risk, IMF
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