Saudi Islamic Banking Gains Ground in Transparency with SAMA Regulations

Fitch Ratings, a leading credit rating agency, commends the Saudi Arabian Monetary Agency (SAMA) for its recent regulatory efforts aimed at bolstering transparency and Sharia governance within the kingdom's Islamic banking sector.

These Islamic finance-specific regulations, implemented between 2020 and the first half of 2024, have demonstrably improved the clarity and standardization of Islamic banking practices in Saudi Arabia. This, in turn, is expected to boost consumer confidence in the Sharia-compliance of Islamic banking products.

Fitch highlights Saudi Arabia's position as the world's largest Islamic banking market. However, the agency acknowledges lingering challenges, including a lack of complete standardization and fragmented disclosures by Islamic banks. Additionally, the absence of a centralized Sharia board is seen as a potential hurdle to further harmonizing industry practices.

The regulations specifically address profit-sharing investment accounts (PSIAs), aiming to strengthen Sharia adherence, increase transparency, and establish minimum regulatory requirements. Since the end of 2023, Saudi Islamic banks have been incorporating PSIA-related details within their financial statements.

A key aspect of the new regulations involves ensuring that losses incurred due to the bank's negligence or violation of PSIA agreements are borne by the bank itself, not the investors. This aligns with practices observed in Islamic banks of other jurisdictions, and Fitch views any losses sustained by PSIAs as a default event.

Fitch's report acknowledges the positive impact of SAMA's regulations but emphasizes the need for further advancements. The agency suggests that establishing a centralized Sharia board could significantly contribute to the ongoing efforts to streamline industry practices and enhance transparency within Saudi Arabia's Islamic banking sector.

The Saudi government's commitment to strengthening Sharia governance and transparency in the financial sector aligns with the goals outlined in the Financial Sector Development Program Charter 2021. By implementing these crucial reforms, Saudi Arabia positions itself to become a global leader in Islamic finance, fostering a more robust and trustworthy Islamic banking environment.

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